Hockey Stick Growth

How we report our results says a lot.

Sometimes we focus on actual values (size):

We made a net profit of $15m

We manufactured 25,000 widgets this quarter

Sometimes we focus on the first derivative (growth):

Revenue increased 9% compared to last year

We hired 18 new team members

On rare occassions we can focus on the second derivative (acceleration):

We added 100,000 new customers in the last year, 70,000 of these in the last quarter

The number of medals won has increased at each of the last three Olympics

There is a time and a place for each of these types of measures. But, the one we choose does hint to the spin we want to give to the results. There is often no right or wrong answer. But the temptation to hide is most obvious when one or two of the derivatives are negative - e.g. when we are no longer accelerating and don’t really want the headline to be “growth slows” or where we are no longer growing and prefer to focus just on how big we got.

To see the full picture we really want to understand all three.

Going Exponential

The ideal for any early-stage startup is the special case where all three are positive - i.e. good numbers, growing fast and accelerating over time.

Often, incorrectly, startups will refer to this as exponential growth, or “hockey stick” growth.

This makes much more sense once you realise that this expression is imported from North America where “hockey” means “ice hockey” not “field hockey” - the sticks make a very different shape when projected onto a graph!

Unfortunately I’ve seen that terminology mislead a number of people who are working on new things over the years. They hear it and mistakenly think that growth is either a hockey stick or a pool cue, and that you can’t tell one from the other until the very last moment. So they flail away, with numbers that are not growing let alone accelerating, and hope that the inevitable up-tick is just around the corner.

But, when we look closer at those things that have grown to become large, that is not typically what happens at all.

It’s true that those ventures that eventually get described as overnight successess often take five or even ten years to get to that point. But, the mistake is thinking that they are not growing from the beginning.

Some examples…

In 2006 I was privileged to speak about Trade Me at the very first Webstock in Wellington.¹

I showed two graphs to demonstrate the growth in new listings on the site:

The first showed the results from the first two years of operations. You can see it took a few months to get going then the number of listings accelerated from there, giving the graph a familiar “up and to the right” shape.

The second graph showed the full period of time up until the point I was speaking (so ~7 years worth of data). The blue box outlines the area that was shown in the first graph. You can see that the growth that followed had made that initial two-year period look very flat by comparison.

(The big dips each year are Christmas, when people took a break from the internet to spend time with family and friends, where they would tell them all about Trade Me helping to fuel next years growth!)

My access to that particular data set ended a couple of years after that, but it would be fascinating to see the shape of this continued over the years since then. As Tim O’Reilly has noted, what people assume to be exponential growth is nearly always sigmoidal, given enough time, and sinusoidal, given even more. But that’s a story for another day, for now let’s focus on the take-off phase rather than the cruise and landing.²

The important thing to note is that the shape of these graphs is remarkably similar. The numbers in the first graph are much smaller, and when we look at that same time period retrospectively it looks flat, but when we zoom in, or more importantly when we are living in that moment it’s not flat at all.

Trade Me grew from 10,000 members when I first started to around 100,000 in the first year I worked there and kept growing. The key numbers - listings, completed listings, unique visitors, unique sellers, etc - were all growing through that time period, even though we look back later and think that the actual numbers then were small.

Likewise, consider the growth in Xero’s subscriber base…

When we plot this over different time periods we see a very similar pattern: ³

The growth in the first five years looks amazing - from 950 subscribers in 2008 to 78,000 in 2012.

When we expand that to include the first eight years, those first five years suddenly look much less impressive. By then they had reached 475,000 subscribers.

And when we consider in the context of the FY20 results … by now those early years are nearly rounding errors.

Again, the numbers in the beginning are small, so looks flat in retrospect, but are actually significant in real-time - e.g. growing from 950 to 6000 subscribers in the second year, and then nearly tripling again the following year to 17,000.

And, as with the Trade Me results, the shape of the growth is pretty consistent, no matter what time period we are looking at.

So, what’s the lesson here?

Firstly, when we’re working on something that needs to grow in order to be successful then it’s really important to have some measure that is actually growing right away. I’m not sure that it even matters what that thing is, especially at the very beginning. But if all of our numbers are flat then we’re not on a growth path.

Secondly, we need to balance patience with milestones along the way. As we’ve seen, even the companies that eventually achieve remarkable growth,⁴ all start off with relatively modest actual numbers. But they constantly grow, and compound that growth. So, while it’s great to dream big, it’s necessary to break those ambitions down into smaller more digestible chunks, so we can understand where we need to be next year, next month and next week in order to still be on track to where we want to be at the end (however we define “the end”).

If we get this right then we can eventually look back and sarcastically describe our venture as an overnight success.

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