Growth

Paul Graham has penned a longish and excellent essay in which he postulates that growth is the single defining characteristic of startups and the thing that all entrepreneurs must focus on. Paul is slowly but surely building a body of writing on startups that is as good as anything that has ever been written on the topic. And this essay on growth is one of the gems. This is another gem. There are quite a few of them.

I don't always agree with Paul and I see the world a bit differently than he does. But on the topic of growth, I could not agree more. Once we determine that a company fits into our investment thesis, we then turn to the team and traction to figure out if it's something we want to invest in. Traction is another way of saying growth. 

One thing that Paul did not touch on is the difference between organic and sustainable growth and temporary stimulated growth. Things like gaming Facebook's open graph can temporarily stimulate growth that is not sustainable long term. Investors can be faked out by things like that. Gaming Google's search algorithms is another way that has been done in the past. When we look at growth, we look for authentic, organic, and sustainable growth that is not overly dependent on a single source, particularly a source the startup doesn't control. That takes some experience to detect. We've messed up there as have most investors.

Sustainable and organic growth that can continue for five or ten years unabated will produce extraordinary returns. I look back at Etsy when we invested in it in the spring of 2006, about a year after they had launched. The company had just crossed $200,000 a month of gross merchandise value (GMV), up from $1000 of GMV in the month they launched in June 2005. They had grown 200x in less than a year after their launch. I am not going to reveal Etsy's current financials but it is safe to say that they have grown more than 200x again since our initial investment. And at the rate they are growing, they could grow another 10x in the next five years. Those are some big numbers and that is how investor generate spectacular returns investing startups. 

And that is how entrepreneurs and the founding team and the management team can generate significant value for themselves as well. When thinking about startups, growth is good.