Take an organization, A, that grows exponentially every day and compare it to an organization, B, that grows a factor of 100 slower. All else unknown, which would you rather invest in?
I’m guessing most people would answer A. Growth is good. More growth is great. It resembles validation. It demonstrates network effects. All things that are great in our brave new networked world.
Would you change your answer if I picked up a microsope and showed you A is a newly emerging avian flu virus and B is an amoeba colony with a million-year old genome?
There’s something about our modern world that exacerbates growth and hits. That something skews the music world towards one-time hits and sustained rockstars at the expense of everyone else.
In the question I posed earlier, I supposed that “all else [was] unknown”, which is the case for many investors looking into a business. How often do you have enough information? But all else unknown isn’t the same as all else equal. The less you know about a business, the riskier its profile relative to you. How much do “monthly active users” and “twitter retweets” and “facebook shares” tell you? Bumblebees are active even till the point they die from colony collapse disorder. Earthworms are boringly slow, but they will predictably churn vast quantities of garbage into useful earth.
I’m not claiming that steady, predictable businesses are better than fast-growing businesses. That doesn’t make sense. Bumblebees are at least as useful as earthworms. What I am saying is that growth is a side-effect of something that either works or is broken. Which is not saying much about growth.
I’ve seen a decent business undervalued because it didn’t demonstrate the growth pace set by the new kid on the block. But while the latter was out chasing “millenials”, the former had built an affluent subscriber base set in its ways. It lent the company that acquired it, a foundation to build a growth strategy. Why? Because of churn or the lack of it.
I’ve seen another business throw money at its salespeople to pick up customers. In the sales business, you should “always be closing” and ignoring the “bad leads”. But what happens when you apply that to a subscription business? All else unknown, “closing” can still leave you with plenty of bad leads. In other words, you never end up closing. A subscription business demands an entirely new cradle to grave sales process. Why? Because of the probability of churn.
How many people in your business understand churn? I suspect many people like to claim they understand churn, but fewer take the effort to dig deeper. There’s a reason why my team looks closely at second bill month churn to evaluate a business. It tells you a lot of the quality of its sales process and customer acquisition strategy. But data on cohort-based churn is hard to come by. You can triangulate to it in other ways. But directly measured data is sparse.
In case you think this doesn’t apply to your transaction-based business, I want to highlight one fact about churn: it is the inverse of brand loyalty and need fulfillment. Adopting a transaction-based model doesn’t inoculate you from the fact that a customer can walk away from you forever or close to forever. So if you aren’t thinking about time till second sale when evaluating a business, then think again. The exception to this rule are businesses that focus on single lifetime transactions (how often are you going to buy a house?).
In brain science textbooks, there are diagrams of how the brain is neatly divided between the hypocampus (characterized as the primitive) and the cerebellum (characterized as the decision-making) because these parts of the brain evolved in different ways in different organisms. To our knowledge, our cerebellums are, as a proportion of total brain mass, the biggest in the animal kingdom. But in our brave new world, it is taking a back seat.
Facebook is getting a bad rep these days because teens are avoiding it. If new sign-ups are a leading indicator of growth, then pundits are worried that Facebook may be heading towards a decline. But I suspect the story isn’t so simple. Social media companies may be like other companies that sell products – they target audiences based on their age profile. They may also be like companies that fade and die on the backs of a community. It depends on the degree to which the social network is a product independent of its network. Does that sound confusing? I suspect Facebook knows itself better than its investors. And that may explain the Whatsapp acquisition.
I hate using personal anecdotes to extrapolate broader conclusions. So I’m going to prefix the following thoughts with the warning that I don’t know that which I am talking about.
Between a world without Facebook but with Whatsapp and a world without Whatsapp but with Facebook, I prefer to be in the former. Why? Because my interactions on Whatsapp are more personal. Because Whatsapp straddles that fine line between a social network and a messaging platform without seeming to sacrifice something significant for it. Because Whatsapp was built for the mobile platform. Because, counter-intuitively the fact that Whatsapp images are stored on my phone’s limited memory, forces me to set a high bar on my interactions. Ok, that last one was a bit of a stretch. But I hope you get my gist.
So I hope Facebook dug deep into Whatsapp’s engagement metrics and retention rates and saw something valuable there. The promise of a sustained customer base. The promise of low churn.
Growth is an easy by-product in our increasingly-networked world. Don’t fall into the growth trap. Dig deeper.