The Elephant in the room: The myth of exponential hypergrowth

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Hatched by Glasp

Aug 05, 2023

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The Elephant in the room: The myth of exponential hypergrowth

In the world of business, there is a common misconception that high-growth companies experience exponential hypergrowth. However, this notion is far from the truth. In reality, these companies grow quadratically, not exponentially. This phenomenon, known as Growth Decay or Growth Persistence, is a law of nature that dictates that growth, as a percentage, naturally declines with scale, even when there is nothing wrong with the company.

The difference between "word-of-mouth" and "viral" products lies in their growth mechanisms. Viral products are unusable unless others are invited to become users, thus enforcing exponential growth. On the other hand, word-of-mouth products encourage sharing organically. However, even if a product's core growth mechanism follows an exponential model, it cannot sustain exponential growth indefinitely. Eventually, it runs out of market to penetrate.

To better understand this concept, let's consider the logistic curve, which is exponential in the early stages when the product is far from reaching its natural limit. However, as the product approaches around 25% market penetration, the curve flattens into linear growth. This is due to the tension between the exponential force of growth and the decreasing number of remaining targets. Eventually, the curve levels out at what is known as the "carrying capacity," representing a fully-saturated market. Interestingly, this model holds true not only for products but also for biological viruses infecting a population.

This is why at-scale companies are willing to invest billions of dollars in expanding the size of the market. It is one of the few ways to create growth aside from raising prices. By increasing the market, companies can continue their growth trajectory before hitting the plateau of the carrying capacity.

One interesting way to visualize growth as market share is through the concept of Elephant Curves. These curves illustrate how the carrying capacity of the underlying market can be a moving target. In the early stages, companies should focus on winning market share in a specific space, creating the first Elephant Curve. However, as the product matures, a more drastic approach is required. This may involve developing wholly new products or significant updates to address new markets.

One crucial insight to remember is that word-of-mouth-driven growth is much more effective than marketing-driven growth. Not only is it more cost-efficient, but it also grows automatically as the company expands. Therefore, it is worth investing time and effort in building word-of-mouth into the product itself, rather than relying solely on marketing strategies.

John Wanamaker once famously said, "Half my advertising is wasted. I just don't know which half." This quote highlights the uncertainty and inefficiency of traditional advertising methods. By focusing on word-of-mouth and creating a product that naturally encourages sharing, companies can avoid wasting resources on ineffective marketing campaigns.

Now, let's shift our focus to the concept of compounding knowledge. Curiosity is one of the fundamental drivers of humans, and it plays a crucial role in acquiring knowledge. Take Warren Buffett and Charlie Munger as examples. They have spent their lives reading, consuming vast amounts of information about business, and building an immense vertical filing cabinet in their brains. This accumulation of knowledge allows them to draw on more than 70 years worth of data when making decisions.

However, it is important to note that not all information is valuable knowledge. Expiring information may be intriguing, but it does not contribute to long-term understanding. True knowledge comes from consuming detailed information that does not expire quickly and spending time thinking about it. This process allows us to match patterns and see what others might be missing.

Retrieving information is different from having it already stored in your head. While the internet provides a wealth of information that can be accessed at any time, the true advantage lies in having that information readily available in your mind. Warren Buffett and Charlie Munger seldom rely on googling information because they have internalized it through years of learning. This highlights the importance of continuous learning and making oneself as knowledgeable as possible.

In the age of information overload, it is crucial to filter out the noise and focus on acquiring knowledge that will be valuable in the long run. Ask yourself, will you still care about what you're reading in a month, a year, or five years? To build cumulative knowledge, it is essential to maintain focus and avoid spreading yourself too thin.

The concept of compounding applies not only to financial investments but also to knowledge. The more you learn and accumulate knowledge, the more advantageous it becomes. Just as compounding interest can lead to exponential growth in investments, compounding knowledge can lead to exponential growth in understanding and decision-making capabilities.

In conclusion, the myth of exponential hypergrowth in high-growth companies is debunked by the concept of Growth Decay or Growth Persistence. Understanding the natural decline of growth as a percentage with scale is crucial for companies looking to sustain long-term success. Additionally, incorporating word-of-mouth-driven growth into the product itself can significantly enhance growth and reduce reliance on traditional marketing methods.

Furthermore, the power of compounding knowledge cannot be overstated. By actively seeking valuable, non-expiring information and continuously learning, individuals can develop a knowledge base that becomes increasingly productive over time. Focus, curiosity, and lifelong learning are the keys to unlocking the compounding effect of knowledge.

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