If your employees expect raises greater than inflation (like say 3%), or you're giving out any kind of healthcare benefits (that cost grows 10% annually on avg), or your rent goes up, etc etc, then you need to be growing in order to be steady-state.
Costs always increase -- staying the same size costs more next year.
Growth isn't just exclusive to startups. It's a health indicator for a majority of businesses. Just the same, a tech company does not equate to a startup. There is a priced in expectation for growth in nearly all capital seeking companies. Yes, there are sectors and utilities where full saturation prevents growth, however population as a constraint is hardly common.
I thought the most important characteristic of a successful business was that it was profitable.
If growth is so important and defines success then eventually is will plateau due to limited resources and no longer be successful which is obviously not true.
To place both of those ideas into one, the most important characteristic of a successful business is a positive return on investment. Profits and growth can account for a positive return on investment.
When a tech company demonstrates declining growth, there are usually negative murmurs that seem to get amplified in the news. It's still positive growth... but the growth derivative is negative. A flat, zero derivative seems to be as concerning to those in the press as a negative one.
They are steady-state right up until a growth business intrudes on their peace and disrupts their industry.
Like our local taxi company basically has a monopoly on the city, and has no real reason to grow. But here comes UberX, a growth startup, throwing around free rides and cheap rates. If the local company loses market share or profits to UberX, they have nowhere else to pick it up.
In the early 2000s I was living in Minnesota during the much-hyped arrival of Krispy Kreme. There were long lines at new stores and lots of doughnuts in the office every day. The hype prompted new franchises and an overabundance of doughnut shops, but unfortunately the demand dropped as the novelty wore off, and they ended up closing several stores and production facilities in the area.
Obviously Krispy Kreme weathered its over-expansion and is doing well today. I think the question for Groupon and Herbalife is if they have a business plan (and the financial reserves) to make the shift from exponential growth to more measured success.
There is actually a local chain in Southern California called Bruxie that sells waffles after failing to impress high-end restaurants with their product. It is very popular and placed strategically around hip places, e.g. colleges. I was tied heavily with its inception and I know just how unsustainable the owner wants it to be. At this point, he only makes money by opening stores. He fully intends to Krispie Kreme his way through the state or country, if he can, and then let it collapse. It happened to KK, it happened to ToGos, it'll happen again.
Food-chain fads are pretty common. Some persist (McDonalds), some muddle along (TCBY), some collapse spectacularly, such as Boston Market (though I find it's still going).
The similarities with tech startups exist, including overambitious growth plans.
The article clearly makes the case that tracking churn is critical to analyzing the overall health of a business.
And the reason why churn is so critical for cash-strapped startups is that new customers are so expensive. In many cases it is an order of magnitude more expensive to sell to new customers than existing customers.
I do appreciate the analysis and the message of the post that the total sales can mask problems, however neither of the examples are failures. Herbalife may expand to other products instead of additional companies. Amway, probably the most successful implementer of Herbalife's multi level marketing scheme, is over 50 years old and worth $11+ billion. Even the fictitious waffle shop can adjust by selling other products.
In short, creating a large distribution chain and reaching to many customers is tremendously valuable. The company can leverage that base and move to a sustainable model. If you're as successful as Groupon, you'll have plenty of runway to try different things.
This reminds me of FBs ad business - they keep introducing new ad spaces, expanding their offering to more platforms, introducing logout ads, video ads, scrollable install ads, an ad platform, etc. With all of that they are just masking the fact that a large portion of their advertisers stop using them and that most of their products start losing popularity relatively quickly.
"...a large portion of their advertisers stop using them and that most of their products start losing popularity relatively quickly."
Facebook recently posted a 72% year-over-year gain in Q1 revenue, is stealing share of the online ad market from Google at a slow but increasing rate, and is growing mobile ad revenue by 30% year-over-year.[1]
It's not doing that just by introducing new ad space and new ad formats. It's not doing that by bleeding out existing advertisers. As much as we might not want to admit it, Facebook is becoming a pretty compelling advertising platform. This was not always the case. But the company's ad platform is maturing significantly. It's got a long ways to go, and it's not perfect by any means. But there's a lot of potential yet to be tapped, and by all accounts, the company is making progress in tapping it.
News of Facebook's supposedly declining popularity is also premature and exaggerated.
> Note: the graphs included in this article were sourced from Pershing Square Capital Management’s initial presentation on Herbalife, available here.
Bit of a submarine there, eh? Anyway, this doesn't make a case against Herbalife. In fact, it suggests that their data is saying the opposite. Look at the part where they talk about popping:
> Along with Japan and Israel, this same pattern shows up in Spain, France, Germany and several other countries that Herbalife has entered.
Now look at their chart of # of countries against revenue. Herbalife is apparently up to almost 80 countries. Even back in the '90s, they were in 20-50 countries. Let's be generous and say that 'several other' is 5 (I don't have the patience to go through Ackman's propaganda), and note that this will be an exhaustive list since it's being assembled by people with literally hundreds of millions of dollars of incentive to make the picture look as ugly as possible; that's 10 countries that 'popped'. Out of 80. If the other 70 have not popped, that does not seem like Herbalife will have problems in the future.
(There's also the problem that if each country can only be soaked for a short period before 'popping', revenue should not be regularly going up! It should be flattish as Herbalife desperately opens up ever more countries to replace disappearing revenue from the popping countries.)
I've found a good rule of thumb in business is that you can only be successful in the long run if your value proposition is a win-win-win for you, your suppliers, and your customers.
When a majority of your customers are being unknowingly screwed over as you reap a huge amount of unnecessary producer surplus, it's a losing proposition in the end. Companies like Herbalife can just do it on a scale where it takes a long time to fizzle out.
I don't know why you're getting downvoted. I noticed that as well. I do believe Herbalife is a pyramid scheme, but the data doesn't support that it's popping. If it were, revenue by country would stay relatively flat, or the relationship would be sublinear.
I think there are other countries that had problems and they did not listed them all.
For example I live in Brazil, I saw Herbalife going all the rage some years ago, then I saw people getting fat all the rage (ignoring whatever health claims Herbalife makes, when you take MORE food, whatever food it is, even if it is lean food, you still get MORE calories... eating your food + herbalife will make you fatter...), then people got upset with Herbalife results and dumped it.
Also I remmber very clearly that the most strong users were also the strongest sellers, the "end-buyers" usually bought only once.
I think Groupon is a slightly different case to Herbalife. Herbalife had/has a pretty substantial pyramid scheme component to it.
Groupon, IMO was a trend. Trends have a ballistic trajectory. The reports of hard selling and unhappy customers confuse the issue, but I think the heart of the problem was that Groupon was popular for a while and now it's less popular.
Our default business systems don't know how to deal with that kind of a thing. A company with a 2 year half life. All our financial systems and our valuation of companies are built around companies that are lang lived, practically immortal (in the sense that impacts net present value). But, not everything is like that. A film or a computer game is often produced by a firm that forms and the disbands to create a single thing. It has all the things a normal company has: employees (including some highly paid stars), investors, assets, liabilities, etc. It only exists for a short time.
Crocs was like that too. A product that made a splash, sold a lot of brightly colored shoes at a great margin and then contracted.
I think the problem with Groupon wasn't Groupon. The problem was the whole system trying to treat it like Strabucks when it was more like Star Wars. Star Wars wasn't a failure because it stopped making money.. ..wait. Bad example. Exceptions prove the rule.
Financially, a company is the NPV of all its future cash flows. In practice, the system assumes those cash flows will continue steadily forever, growing if the company is healthy. If they try to swallow a company that will exist for just 4, they choke.
I think we need to be on the lookout for things like this. The world is getting fast paced. Maybe we need to be able to deal with 4 year companies.
In the retail space investors look at same store sales[0] (or comps) to see if a company's growth is coming existing stores, or just from opening new ones.
Agree though that there is a difference between a pyramid scheme (Herbalife imo) and a fad (Groupon) though they have similar growth trajectories.
There are lots of startups that could arguably be considered fads e.g. snapchat, it's yet to be seen whether or not it's a novelty or solving a basic human interaction problem as Facebook did.
For startups, growth is important. Yet everyone downplays the true indicator of a company's value: cash flow.
It makes sense, given that VCs are often betting on big buyouts. This is the "castle in the air" theory. At some point, I think the pendulum will shift into investing in companies, that while they may not have cashflow here and now, at least have the potential to generate cash.
Yeah this was recently in the news in Massachusetts. It appears he persuaded a Mass. Senator to ask for investigations, in order to hurt the stock price and support Ackerman's short gamble:
> In Washington, Mr. Ackman’s efforts bore fruit on Jan. 23, when Mr. Markey’s office, which Mr. Ackman had lobbied himself and which had been provided with detailed information about Herbalife by Mr. Ackman’s team, sent letters to the S.E.C. and F.T.C., calling for investigations of the company. A little more than a half-hour after the stock began trading that day its value fell by 14 percent.
You could say that Ackerman sincerely believes the company is bad and is pursuing this for the greater good. The $1 billion is just putting his money where his mouth is. And his mouth just happens to be near a Senator's ear....
I love talking about business models (I run a bootcamp in SF helping people to visualize them), so I figured I'd chime in here...
>Eventually they’re going to run out of countries to enter, and that will be the end of Herbalife if they don’t figure out a more long-term, sustainable business model.
This statement is pure speculation. Why hasn't any of the same analysis been done on Groupon? I'm not sure why the article conflated the two stories of Groupon and Herbalife, when their data sets and underlying assumptions are clearly very different.
> You should be able to demonstrate sustained growth in a single market segment, whether it's a geographic region, a certain type of customer, or something else.
Isn't this why diversification exists? Why companies like GE, P&G, and now Google, have a massive portfolios of companies, as opposed to one single product that drives all growth? I'm having a hard time understanding what the takeaway is here...
They did the emerging markets growth strategy and it worked to help juice their numbers for a few years until Android and iOS totally destroyed all but their core customer base.
The real danger in this strategy is not that it grows an unsustainable business, just that the sustainable portion is much smaller than the peak and if you forecast up and to the right growth forever, it eventually doesn't happen and you have budget shortfalls and layoffs.
Hyper growth is exciting and gets you headlines, but sustainable, steady growth is probably a happier long term situation for moth businesses.
Actually, your opinion is not only wrong but also the opposite of what happened with Blackberry. Unlike fried waffles or Groupon, Blackberry never lost its core business -- that of enterprise sales. Blackberry was never a fad -- it was a genuine productivity tool. There were not much of entertainment apps on BB. In fact RIM never took Iphone or android seriously until it was too late. They thought third party developers were a bother. They had repeat business from government, enterprises and telecoms; even now a large chunk of their core customer base is still with them ; however the momentum has swung towards consumer oriented devices. I remember running in Jim Balsille at a fund raiser and I told him how atrocious the developer support was for blackberry compared to Android and I left with a sense that third party developers were not a priority for them.
There is a lesson to be had from Blackberry's decline but its not the same as Groupon /HerbalLife /Fried waffles.
I don't know if Blackberry is quite the same. They were more than a fad or a novelty. Blackberry was the first mobile device that really solved problems for business users: seamless integration with office email and documents (caveat, I have never owned one, but that's my observation).
The Herbalife graphs seem to indicate that in the countries they enter there definitely is an initial temporary pop but business doesn't go down all the way to zero after that - it seems to settle down at a residual steady state. That could be sustainable if the 2 graphs provided (Israel, Japan) are representative of all the countries they enter. After they enter all available markets, their revenue will settle down to the sum total of all those steady states.
I see a significance in that Herbalife, Groupon, and LikeAlittle seem to be selling sales vs. other businesses using salesmanship as a medium. It's a fine line, but a distinct one nonetheless.
Does anyone have examples of similar businesses to the aforementioned? Curious how much of a trend this actually is.
[+] [-] tapp|12 years ago|reply
I hope this doesn't come across as nitpicking, but the lead sentence of the article is incorrect. It should be:
One of the most important characteristics of a successful STARTUP is that it's growing.
Businesses which successfully serve their owners, employees, customers and larger surrounding community, can easily be steady-state.
I realize HN is startup-focused, but I think in the interest of productive conversation it's important to make the distinction and use precise terms.
[+] [-] jbooth|12 years ago|reply
Costs always increase -- staying the same size costs more next year.
[+] [-] austengary|12 years ago|reply
[+] [-] jrs235|12 years ago|reply
If growth is so important and defines success then eventually is will plateau due to limited resources and no longer be successful which is obviously not true.
To place both of those ideas into one, the most important characteristic of a successful business is a positive return on investment. Profits and growth can account for a positive return on investment.
[+] [-] raviparikh|12 years ago|reply
[+] [-] karmelapple|12 years ago|reply
When a tech company demonstrates declining growth, there are usually negative murmurs that seem to get amplified in the news. It's still positive growth... but the growth derivative is negative. A flat, zero derivative seems to be as concerning to those in the press as a negative one.
[+] [-] smackfu|12 years ago|reply
Like our local taxi company basically has a monopoly on the city, and has no real reason to grow. But here comes UberX, a growth startup, throwing around free rides and cheap rates. If the local company loses market share or profits to UberX, they have nowhere else to pick it up.
[+] [-] lukasm|12 years ago|reply
[+] [-] IvyMike|12 years ago|reply
http://www.cockeyed.com/workfromhome/workfromhome.html
[+] [-] phpnode|12 years ago|reply
[+] [-] MartinCron|12 years ago|reply
[+] [-] jobu|12 years ago|reply
In the early 2000s I was living in Minnesota during the much-hyped arrival of Krispy Kreme. There were long lines at new stores and lots of doughnuts in the office every day. The hype prompted new franchises and an overabundance of doughnut shops, but unfortunately the demand dropped as the novelty wore off, and they ended up closing several stores and production facilities in the area.
Obviously Krispy Kreme weathered its over-expansion and is doing well today. I think the question for Groupon and Herbalife is if they have a business plan (and the financial reserves) to make the shift from exponential growth to more measured success.
[+] [-] Einstalbert|12 years ago|reply
[+] [-] dredmorbius|12 years ago|reply
The similarities with tech startups exist, including overambitious growth plans.
[+] [-] brianbreslin|12 years ago|reply
[+] [-] malvosenior|12 years ago|reply
[+] [-] powera|12 years ago|reply
(summary: lots of people have lots of money invested in whether Herbalife is a pyramid scheme or not, and are lobbying hard on that.)
[+] [-] digitalengineer|12 years ago|reply
[+] [-] paul_f|12 years ago|reply
And the reason why churn is so critical for cash-strapped startups is that new customers are so expensive. In many cases it is an order of magnitude more expensive to sell to new customers than existing customers.
[+] [-] berkay|12 years ago|reply
Even the ficticious waffel
[+] [-] stoev|12 years ago|reply
[+] [-] jonnathanson|12 years ago|reply
Facebook recently posted a 72% year-over-year gain in Q1 revenue, is stealing share of the online ad market from Google at a slow but increasing rate, and is growing mobile ad revenue by 30% year-over-year.[1]
It's not doing that just by introducing new ad space and new ad formats. It's not doing that by bleeding out existing advertisers. As much as we might not want to admit it, Facebook is becoming a pretty compelling advertising platform. This was not always the case. But the company's ad platform is maturing significantly. It's got a long ways to go, and it's not perfect by any means. But there's a lot of potential yet to be tapped, and by all accounts, the company is making progress in tapping it.
News of Facebook's supposedly declining popularity is also premature and exaggerated.
[1]http://online.wsj.com/news/articles/SB1000142405270230338000...
[+] [-] gwern|12 years ago|reply
Bit of a submarine there, eh? Anyway, this doesn't make a case against Herbalife. In fact, it suggests that their data is saying the opposite. Look at the part where they talk about popping:
> Along with Japan and Israel, this same pattern shows up in Spain, France, Germany and several other countries that Herbalife has entered.
Now look at their chart of # of countries against revenue. Herbalife is apparently up to almost 80 countries. Even back in the '90s, they were in 20-50 countries. Let's be generous and say that 'several other' is 5 (I don't have the patience to go through Ackman's propaganda), and note that this will be an exhaustive list since it's being assembled by people with literally hundreds of millions of dollars of incentive to make the picture look as ugly as possible; that's 10 countries that 'popped'. Out of 80. If the other 70 have not popped, that does not seem like Herbalife will have problems in the future.
(There's also the problem that if each country can only be soaked for a short period before 'popping', revenue should not be regularly going up! It should be flattish as Herbalife desperately opens up ever more countries to replace disappearing revenue from the popping countries.)
[+] [-] maxprogram|12 years ago|reply
When a majority of your customers are being unknowingly screwed over as you reap a huge amount of unnecessary producer surplus, it's a losing proposition in the end. Companies like Herbalife can just do it on a scale where it takes a long time to fizzle out.
[+] [-] StavrosK|12 years ago|reply
[+] [-] speeder|12 years ago|reply
For example I live in Brazil, I saw Herbalife going all the rage some years ago, then I saw people getting fat all the rage (ignoring whatever health claims Herbalife makes, when you take MORE food, whatever food it is, even if it is lean food, you still get MORE calories... eating your food + herbalife will make you fatter...), then people got upset with Herbalife results and dumped it.
Also I remmber very clearly that the most strong users were also the strongest sellers, the "end-buyers" usually bought only once.
[+] [-] netcan|12 years ago|reply
Groupon, IMO was a trend. Trends have a ballistic trajectory. The reports of hard selling and unhappy customers confuse the issue, but I think the heart of the problem was that Groupon was popular for a while and now it's less popular.
Our default business systems don't know how to deal with that kind of a thing. A company with a 2 year half life. All our financial systems and our valuation of companies are built around companies that are lang lived, practically immortal (in the sense that impacts net present value). But, not everything is like that. A film or a computer game is often produced by a firm that forms and the disbands to create a single thing. It has all the things a normal company has: employees (including some highly paid stars), investors, assets, liabilities, etc. It only exists for a short time.
Crocs was like that too. A product that made a splash, sold a lot of brightly colored shoes at a great margin and then contracted.
I think the problem with Groupon wasn't Groupon. The problem was the whole system trying to treat it like Strabucks when it was more like Star Wars. Star Wars wasn't a failure because it stopped making money.. ..wait. Bad example. Exceptions prove the rule.
Financially, a company is the NPV of all its future cash flows. In practice, the system assumes those cash flows will continue steadily forever, growing if the company is healthy. If they try to swallow a company that will exist for just 4, they choke.
I think we need to be on the lookout for things like this. The world is getting fast paced. Maybe we need to be able to deal with 4 year companies.
[+] [-] callmeed|12 years ago|reply
[+] [-] nslocum|12 years ago|reply
It had high user turnover masked by a an even faster growing user base. At least until the potential user base dried up.
http://avc.com/2014/04/the-business-insider-interview/
[+] [-] stu_k|12 years ago|reply
[0] http://en.wikipedia.org/wiki/Same_store_sales
[+] [-] jaybong|12 years ago|reply
Agree though that there is a difference between a pyramid scheme (Herbalife imo) and a fad (Groupon) though they have similar growth trajectories.
There are lots of startups that could arguably be considered fads e.g. snapchat, it's yet to be seen whether or not it's a novelty or solving a basic human interaction problem as Facebook did.
[+] [-] rjf1990|12 years ago|reply
It makes sense, given that VCs are often betting on big buyouts. This is the "castle in the air" theory. At some point, I think the pendulum will shift into investing in companies, that while they may not have cashflow here and now, at least have the potential to generate cash.
[+] [-] hownottowrite|12 years ago|reply
http://www.nytimes.com/2014/03/10/business/staking-1-billion...
[+] [-] 6cxs2hd6|12 years ago|reply
> In Washington, Mr. Ackman’s efforts bore fruit on Jan. 23, when Mr. Markey’s office, which Mr. Ackman had lobbied himself and which had been provided with detailed information about Herbalife by Mr. Ackman’s team, sent letters to the S.E.C. and F.T.C., calling for investigations of the company. A little more than a half-hour after the stock began trading that day its value fell by 14 percent.
You could say that Ackerman sincerely believes the company is bad and is pursuing this for the greater good. The $1 billion is just putting his money where his mouth is. And his mouth just happens to be near a Senator's ear....
[+] [-] jacquesm|12 years ago|reply
Given a large enough investment this could easily get you from series 'A' to the next round with spectacular figures showing really nice graphs.
It can be quite a bit of work to figure out where the flaws are, and founders are not always aware of issues like these.
[+] [-] mbesto|12 years ago|reply
>Eventually they’re going to run out of countries to enter, and that will be the end of Herbalife if they don’t figure out a more long-term, sustainable business model.
This statement is pure speculation. Why hasn't any of the same analysis been done on Groupon? I'm not sure why the article conflated the two stories of Groupon and Herbalife, when their data sets and underlying assumptions are clearly very different.
> You should be able to demonstrate sustained growth in a single market segment, whether it's a geographic region, a certain type of customer, or something else.
Isn't this why diversification exists? Why companies like GE, P&G, and now Google, have a massive portfolios of companies, as opposed to one single product that drives all growth? I'm having a hard time understanding what the takeaway is here...
[+] [-] programminggeek|12 years ago|reply
They did the emerging markets growth strategy and it worked to help juice their numbers for a few years until Android and iOS totally destroyed all but their core customer base.
The real danger in this strategy is not that it grows an unsustainable business, just that the sustainable portion is much smaller than the peak and if you forecast up and to the right growth forever, it eventually doesn't happen and you have budget shortfalls and layoffs.
Hyper growth is exciting and gets you headlines, but sustainable, steady growth is probably a happier long term situation for moth businesses.
[+] [-] manishsharan|12 years ago|reply
There is a lesson to be had from Blackberry's decline but its not the same as Groupon /HerbalLife /Fried waffles.
[+] [-] ams6110|12 years ago|reply
[+] [-] arbuge|12 years ago|reply
[+] [-] enginerd|12 years ago|reply
Does anyone have examples of similar businesses to the aforementioned? Curious how much of a trend this actually is.