The Elephant in the room: The myth of exponential hypergrowth

The Elephant in the room: The myth of exponential hypergrowth

In the world of business and startups, there is often an obsession with exponential growth. The idea of a company growing exponentially, doubling its size every year, is an enticing one. However, this notion of exponential hypergrowth is nothing more than a myth.

High-growth companies do experience significant growth, but it is not exponential. In fact, growth as a percentage naturally declines with scale, even when there is nothing wrong with the company. This phenomenon has been given a name: Growth Decay or Growth Persistence. Benjamin Brewster aptly stated, "In theory, theory and practice are the same. In practice, they're not."

The difference between "word-of-mouth" and "viral" products is crucial to understanding the limits of exponential growth. Viral products are unusable unless you invite others to become users, thus enforcing exponential growth. On the other hand, word-of-mouth products encourage sharing but do not rely on exponential growth. Even if exponential growth is the correct model for the core growth mechanism of a product, it cannot continue growing exponentially because it eventually runs out of market.

To better understand this concept, we can look at the logistic curve, which is exponential in the early days when the product is far away from its natural limit. As the product reaches around 25% market penetration, the curve flattens into linear growth. This is due to the tension between the exponential force of growth and the fewer and more demanding remaining targets. Eventually, the curve levels out at what is called the "carrying capacity," which represents the fully-saturated market.

This model can also be applied to biological viruses infecting a population. Just like at-scale companies, viruses need to find new ways to create growth when they reach their carrying capacity. This is why companies are willing to spend billions of dollars increasing the size of the market. It becomes one of the few ways to continue growth, other than raising prices.

One interesting concept that emerges when plotting growth as market share is the Elephant Curve. This curve takes into account the idea that the carrying capacity of the underlying market can itself be a moving target. In the early stages, a company should focus on winning market share in one space, creating the first Elephant Curve. However, as the product matures, something more drastic is required, such as developing wholly new products or significant updates to address new markets.

When it comes to growth, word-of-mouth-driven growth is far more effective than marketing-driven growth. It is not only more cost-effective but also grows automatically as the company grows. Therefore, it is worth investing a great deal of time and effort into figuring out how to build word-of-mouth into the product itself, rather than relying solely on the marketing team.

John Wanamaker's famous quote, "Half my advertising is wasted. I just don't know which half," highlights the inefficiency of traditional marketing methods. By focusing on word-of-mouth and creating a product that naturally encourages sharing, companies can eliminate this waste and maximize their growth potential.

In conclusion, the myth of exponential hypergrowth is just that, a myth. High-growth companies do not experience exponential growth but rather quadratic growth. Understanding the concept of Growth Decay or Growth Persistence is crucial for realistic growth expectations. By focusing on word-of-mouth-driven growth, developing new products or updates to address new markets, and investing in expanding the size of the market, companies can achieve sustainable and meaningful growth.