Aligning the Dots: The New Paradigm to Grow Any Business

By Philippe Bouissou

It's eight o'clock Monday morning.

What do you do to outpace the market and grow faster than your competitors?

Aligning the Dots provides a clear answer to that deceptively simple question.

Although many how-to-grow business books have been published, none offer a pragmatic and reliable blueprint for top-line growth that is built on deep data analysis and a universal framework that leads to revealing insights. Without a clear roadmap to growth, a CEO's demands for innovative product development, better marketing, and increased customer acquisition and conversion often fail to produce desired outcomes. An effective leader understands that without clear direction and guidance, teams will revert to business as usual and no amount of inspirational taglines will help the business grow faster.

Aligning the Dots introduces a new paradigm. It's a universal, data-driven and prescriptive methodology, called A4 Precision Alignment™, designed to accelerate any business. Based on the profound insight that the maximum top-line growth rate can only be achieved when a business and its target market are perfectly aligned, this methodology reveals how quantitative measurements of alignment form the base for the development a Growth Playbook. 

That blueprint will guide any business to align the dots to outperform its target market and fly past its competitors.

• Language: English
• Publisher: Onward Business Press
• Release date: Feb 26, 2020
• ISBN: 9781734208719

Book preview

CHAPTER 1

THE GROWTH IMPERATIVE

The thing about growth

Growth is at the core of our very existence. It is deeply embedded in our DNA. Can you imagine the world with children never growing into adulthood? A plant that never grew? What if our knowledge remained stagnant? Our planet and world would be quite different. It would not have any life on it.

Our own universe is growing. In fact, recent data from the Hubble Space Telescope shows that the universe is expanding faster than we thought. Using the space telescope, astrophysicists measure distances to other galaxies by examining a certain type of star, called a Cepheid variable, that varies in brightness. Imagine if the Big Bang had not existed. That’s obviously hard, since we would not exist and would not be reading these words.

In the business world where markets are rapidly changing, top-line growth is also imperative for survival. New contenders are relentlessly entering the race, innovation and technology shakes the status quo, and new business models are invented. Savvier consumers demand more value from the goods and services they consume and want to enjoy exciting new user experiences. In this environment, a company that is not growing is on a slow decline to irrelevancy. Growth becomes a practical matter of life and death¹.

The dilemma of the status quo

For most businesses, growth is the engine of shareholder value creation. Mathematically, a business that is not growing faster than the market in which it operates is losing market share and is letting its competition seize revenue. Market-leading companies command a much larger share of value compared to their share of market and are therefore disproportionately rewarded. The largest companies in the world by market value could not have reached their leading positions if they had not grown faster than their respective market. That’s the only way to get to the top. Chris Zook and James Allen in their well-researched book Profit from the Core rightfully so observe:

"The average sustained value creator in our database grew twice as rapidly as its industry in revenue...

Conversely, shareholder value decreases when companies lose market share. According to Bain and Company, only one out of ten companies are able to maintain profitable growth, even at a modest level, over a period of ten years. The winners are the ones that exhibit consistent, sustainable steady growth relative to their markets. They provide greater returns in the long run than precipitous hyper-growth examples. These are the 10X companies Jim Collins describes so well in his book Great by Choice.

If you were to read the death certificate of a company, you would see something along these lines: Company ran out of money and had to cease operations. I have heard many times from my VC colleagues and others that companies die because they run out of cash. I don’t subscribe to this way of thinking. It’s a little like saying people die because their heart stopped. Surely at some point their heart stopped beating, but this is not the cause of death in medical terms. The real question is: Why did their heart stop? Did they succumb to lung cancer? Were they hit by a car and suffered massive head trauma that caused uncontrollable bleeding in their brain? Was it a pulmonary embolism? Lack of top-line growth is really what should be written on the company’s death certificate, not cash deprivation. The problem is loss of revenue momentum. When expenses are managed and revenue is there, a mature company will reach profitability and generate cash. As long as cash is generated, the company goes on and can live for a long time.

You may wonder, What about profits? The temptation of a newly appointed CEO might be to cut costs or, put in more euphemistic terms, manage expenses. Most of the time, it creates shareholder value as the earnings per share (EPS) goes up. But it’s not sustainable. Once Wall Street has considered the increase in EPS and factored it into the company’s valuation, additional shareholder value will need to be generated from somewhere else. From where, then? The answer is to grow the top line faster than the market, gaining market share to build a more dominant position.

High revenue growth generates higher valuation than the growth of profits. The fundamental reason is that there is an inherent limit to the level of profitability that can be achieved and therefore a limit to its growth. A company cannot exceed its top-line revenue in profits. In an ultimate and unrealistic scenario, a company generating $100 million in revenue with zero expenses would generate $100 million in profit. Of course, this is a hypothetical case assuming a business with 100% gross margins and no fixed expenses, no cost of sales, no marketing or R&D or administrative expenses, and no cost of management and support. This scenario does not exist. The point is that profitability is always capped; it cannot be larger than the top line. In that sense, the bottom line is always the slave to the top line. Even if the gross margin percentage stays constant or even decreases slightly, if the top-line growth is significant, then there is still more and more money to cover fixed costs and investments. It also covers a lot of the sins of operational misses.

On the other hand, there is no limit to the top line. Amazon is a stunning example of a company going through the roof: it grew from $0 to $233 billion in 25 years.

Top-line growth is also critical for mid- to late-stage venture capital (VC) and most private equity (PE)–backed companies². At the moment the first share of a company is sold to an investor, the job of the CEO has been irreversibly altered. That transaction fundamentally redefines the game. It’s a subtle, sometimes unnoticed, but profound effect. It puts the company on a different trajectory. The quid pro quo for taking money now forces the CEO to run and lead the company to build sustainable shareholder value, and that can only happen if and when the company grows faster than its target market. Lack of revenue growth is really how the death certificates should read for most VC- and many PE-backed companies, as opposed to cash deprivation. This is because revenue growth enables CEOs to raise more capital, hire talented people, acquire other companies and ultimately generate cash flow.

There is little doubt that a company that is struggling to grow would have a hard time attracting VC or PE investors. In its Annual Global PE Deal Multiples report for 2018, PitchBook shared the results of its quarterly survey of PE respondents who completed at least one financial transaction during the quarter the survey was conducted. One of the most interesting takeaways is that PE firms tend not to invest in companies with decreased trailing 12-month revenue. In fact, in 2018, 68% of the investments were made in companies with projected revenue growth above 10% in the next 12 months.

Percentage of PE investment in companies with decreasing revenue over 12 months prior to deal

The number of cases where the PE firms invested in companies with revenue decreasing 12 months prior to making the investment averaged 12%. In other words, if your company is not growing its top line, it is very hard to convince a PE firm to invest in it.

In April 2014, McKinsey published an article entitled Grow Fast or Die Slow based on research on 3,000 software and online services companies and their business cycles between 1980 and 2012. Key insights from the article shed light on the following:

•High growth generates significantly better shareholder value (five times more) compared to medium-growth companies.

•Success can be predicted by growth: companies with growth over 60% at the time they reached $100 million in revenue were eight times more likely to reach $1 billion in revenue compared to those growing at less than 20%.

•Growth matters more than margin or cost structure in terms of shareholder value creation.

•Sustaining growth is hard: 85% of the high-growth companies did not maintain their growth rate of at least 60%.

From seed to maturity: the five stages of business growth

A while ago, a woman in a park asked me, How old is your dog? I answered tongue-in-cheek, Thirty-five years. The dubious woman said, laughing, He does not look that old! Of course, I was talking human years. Our dog, Rio, a lovely Havanese, was five years old at the time.

What about the age of a company? If you multiply the age of a dog by seven to find the equivalent age in human years, what do you use for a company? I found out that multiplying by three, determining the age of a company works well. It typically takes somewhere around seven years for a startup to enjoy a liquidity event as we say in the VC business, i.e. be acquired or go public. That’s like being 21 years old. Going public at that age is like being legally allowed to drink alcohol. If you drink too much and don’t follow the rules, you pay a high price. Same for a company that misses its first-quarter estimate after going public.

Human beings move from birth to end of life through different phases of growth. It is well established that there are five phases to this process:

1.Infancy (birth to about one year old/walking)

2.Early childhood (two to five years)

3.Middle childhood, also known as prepubescence (six to 11 years)

4.Adolescence (12 to 18 years)

5.Adulthood

In a similar way, companies also go through five different stages of growth throughout their business lifecycle:

1.SEED: The company is at a concept and development phase of the product: no revenue is generated. This is the phase where ideas are turned into a product.

2.NURTURING OR STARTUP PHASE: First revenue/sales to customers; usually driven by the founders or CEO. The goal is to see if the market responds and to keep going and live another month. The company earns the right to go to the next phase. It should be noted that the choice of these initial customers is also important. Emphasis should to be put on market segmentation. Focus on customers who will positively influence the next version of the product and will be solid reference customers and advocates. Some call them Shaping Customers.³

3.ADOLESCENCE: This is the market insertion stage, when revenue starts to grow in a more predictable way. In this phase, market resonance happens, and discipline is brought to the sales process. Skilled employees are hired, and a support infrastructure for sales, marketing and customer care is put in place. This is about survival and living another year. The owner or CEO continues to be synonymous with the business at that stage; he/she is the business.

4.EXPANSION: At this stage, running the business is well understood and the sales flywheel is turning with a decent level of predictability. The company ventures into new and unknown territories such as geographic expansion, new product lines, establishing distribution and channel partners, first acquisition and upgraded board of directors. It is the transition from a single product, channel and market to multiple products, channels and markets. This is the phase where the notion of granularity (business units) is introduced to support the rapid growth. The owner, founder or CEO may not be the best person to drive that expansion anymore. VCs often consider bringing an adult CEO and an experienced CFO during that phase, with founders focusing on what they were best at during the early stage of the company (product development, technology, marketing or sales). Attention moves to the future of the business rather than its current state.

5.MATURITY: Profits and cash flow are now generated by a well-oiled machine. Growth rates typically slow down at this phase. Controls, strategic and operations planning, and processes have to be in place to be successful during this phase of the business. Systems (finance, HR, IT, CRM, client success, ticketing for support, product development and product release and just as importantly, talent management) are now well established. Executives understand and apply operational and strategic planning in a decentralized organization. Delegation is not an afterthought, but a must-do. Now company size, financial well-being and management talent can be leveraged for a great exit or a take no prisoners acquisitive approach. This is a dangerous phase, where innovation and entrepreneurship can easily get squashed and politics moves into high gear. The company must engineer its second act and find the next S-curve that will bring a new wave of growth beyond the original business.

Arie de Geus’s work on the living company suggested that the average life expectancy of corporations in the Northern Hemisphere is well under 20 years. Only those who are able to expand after surviving high-risk infancy continue to live another 20 to 30 years. (Source: Harvard Business Review, March–April 1997, 23.)

Here is a rough attempt to map the five phases of company growth to a revenue number:

Growth phases of human beings and companies

As the company goes from birth to adulthood, revenue typically follows an S-curve:

The revenue S-curve from birth to maturity

For a company to grow from no revenue to billions of dollars of revenue, it will have to travel through these five stages in its lifecycle.

Growing is like drinking: it needs to be done responsibly

I believe that the venture capital industry, particularly in Silicon Valley, has been doing a disservice to many entrepreneurs lately. Investors have been aggressively pushing their CEOs and management teams to grow at unsustainable rates to attract new investors so that they can pour in more and more capital, hoping that the company continues to sustain an unreasonable growth rate. This vicious cycle has been detrimental and continues to hurt entrepreneurs, forcing them to grow for the sake of growth or grow at all costs, in order to justify unreasonably higher and higher valuations. Additional capital dilutes employee ownership and raises the bar for employees to make money from their stock options because of artificially inflated valuations and punishing liquidation preferences. It is not unusual now to see rounds of financing in the hundreds of millions of dollars and even in the billion-dollar range. Uber and SoftBank are the poster children for this exuberance.

In order to sustain these growth rates, management teams have to cut too many corners. Unit economics are forgotten, and the line-of-sight to profitability is so blurry that no one pays attention to it. It is certainly not top-of-mind, and in many cases, not even in the picture. Profitability has become exceedingly rare for companies going public, in the name of insane growth to win the horse race. Lyft’s IPO prospectus is telling. It reads: We have a history of net losses and we may not be able to achieve or maintain profitability in the future. Recruiting, training and retaining hundreds of new employees in a very short period of time is a massive challenge that threatens the wellness of the culture and the very DNA of the company. During hyper-growth, it is very difficult to onboard the right talent fast enough to support demand. This leads to dilution of tribal knowledge and raises the likelihood that old mistakes will be repeated, but with much greater impact. Business infrastructure, fiscal responsibility, business planning, processes, progress tracking and disciplined execution become an afterthought. This is unreasonable growth that only works in some very rare, but unfortunately well publicized, cases.

For most companies, it is very difficult to maintain a high growth rate. Growth does not last forever. A 2012 study done by Andy Vitus, partner at Scale Venture Partners, shows that next year’s growth rate is likely to be 85% of this year’s growth rate for recurring-revenue companies. In other words, growth rates tend to naturally decay. The dataset covers more than 60 companies ranging from $1 million to $1 billion in sales with growth rates between 10% and 120% (very few rules seem to apply outside these parameters).

Some VC-backed companies, in order to maintain a high growth rate, waste a lot of money on marketing and sales and hiring the wrong people. Reed Taussig, a successful CEO with a great track record, explained to me that throwing salespeople at the problem is rarely the answer. The issue is not the supply, it’s demand. He was asked by some of his investors to look at the effect of additional revenue when the sales and marketing budget is increased by 50%. It turned out that only 22% of companies saw a large increase, 10% saw a modest one, 33% saw their revenue decline and the rest were essentially flat. Instead, the CEO should focus on truly understanding the CAC (customer acquisition cost) and find the right go-to-market strategy that supports a low enough CAC to reach profitability. It is fine to stay on the edge of growth, but don’t get ahead of yourself in terms of spending and recruiting. This will give you freedom and sustainable power. It also forces you to be focused. Once you see the opportunity to grow, then you can scale at a responsible rate.

High growth cannot and should not be