The Elephant in the room: The myth of exponential hypergrowth

The Elephant in the room: The myth of exponential hypergrowth

It is a widely held belief that high-growth companies experience exponential growth. However, this belief is actually a myth. In reality, high-growth companies grow quadratically, not exponentially. This phenomenon, known as Growth Decay or Growth Persistence, is a natural law of nature. Even when there is nothing wrong with the company, growth naturally declines as a percentage with scale.

The difference between "word-of-mouth" and "viral" products is significant. 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 the exponential growth model. Even if a product experiences exponential growth in its early days, it cannot continue growing exponentially indefinitely because it eventually runs out of market.

The logistic curve provides a more accurate representation of growth patterns. In the early stages, when a product is far from reaching its natural limit, the growth curve is exponential. 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 fewer and more demanding remaining targets. Eventually, the growth levels out at what is known as the "carrying capacity," which represents a fully saturated market. Interestingly, this model holds true not only for products but also for biological viruses infecting a population.

At-scale companies understand the concept of carrying capacity and are willing to invest billions of dollars to increase the size of the market. By expanding the market, they can create growth opportunities beyond simply raising prices. This is one of the few ways to sustain growth in a market that is already saturated.

One interesting observation is that Elephant Curves, which depict growth as market share, highlight the fact that the carrying capacity of the underlying market can be a moving target. Early on, companies should focus on winning market share in a specific space, creating the first Elephant Curve. However, as the product matures, more drastic measures are required. This may involve developing wholly new products or significant updates to address new markets.

When it comes to driving growth, word-of-mouth-driven growth is far more effective than marketing-driven growth. Not only does it have a lower cost per customer, but it also grows automatically as the company grows. This is in contrast to direct advertising, which requires continuous investment. Therefore, it is worth investing significant time and effort into building word-of-mouth into the product itself, rather than solely relying on the marketing team.

In conclusion, the myth of exponential hypergrowth in high-growth companies is debunked. Growth follows a quadratic pattern, with growth declining as a percentage with scale. The logistic curve accurately represents this growth pattern, with exponential growth in the early stages and eventual leveling off at the carrying capacity. Understanding the concept of carrying capacity and investing in expanding the market can help sustain growth. Additionally, focusing on word-of-mouth-driven growth can be a highly effective strategy, as it grows automatically with the company and has a lower cost per customer.