When you have a growing business and you are pushing hard, you look for every advantage, shortcut, and resource that can help you keep growing. Grow or die!
Some revenue-accelerating tactics create immediate results and can be repeated at will. Unfortunately, many of these tactics are very addictive and can create problems quickly. Growth-stage software businesses are notorious for bad habits such as chronic discounting, reliance on paid advertising, overpromising new customers, ignoring important metrics and hiring too quickly.
These tactics can seem useful at first because they get you out of a hole and on to the next month, but they can become entrenched habits that continue to expand and cause deeper problems. Left unchecked, the high brought on by these easy and effective “growth drugs” masks the deeper issues that can stop growth altogether down the road.
Here are the top 10 growth drugs I see misused by software companies:
- Too much paid advertising
- Price discounting (or free services) to close deals
- Underinvesting in the core product
- Overpromising by aggressive salespeople
- Saying yes to bad-fit customers (or partners)
- Overestimating new leads, pipeline deals, channel partners and customers
- Underestimating lost customers, churn rates and software bugs
- Hiring key leaders and employees too quickly
- Holding on to employees that don’t fit your culture
- Custom development to close deals
Most VC-funded software companies are guilty of overusing these habits to meet their aggressive growth goals year after year. Ironically, the same experienced investors will discount for any of the factors listed above when they look at new companies. More bad habits mean less sustainable revenue and therefore a lower valuation.
It’s not just smaller software companies that get addicted to these growth drugs. Big companies also have entrenched bad habits. And the bigger the company, the harder it is to break bad habits.
I know one fast-growing software company very well that doesn’t have any of these bad habits. They deliberately never got addicted to any of these drugs. After years of discipline, sacrifice, investment, and effort, their growth flywheel spins faster every month. The founder is now concerned about growing too fast. He fanatically keeps the company “drug-free” to preserve their special culture and keep customer service levels impeccably high.
Another company I know was addicted to most of these drugs. They worked well in small doses but became persistent habits and grew harder to break every quarter. Working through the eventual “detox” burned through several leadership teams and most of the employees. Now growth is flat.
When you are desperate for cash to make payroll, numbers to please investors, and anything that will make life easier, it’s easy to get started on these bad habits. Unfortunately, it’s hard to keep these from getting out of hand once you start.