Can a sinking start-up reaccelerate growth?

Conventional wisdom, at least in VC land, is that no start-up sees a reacceleration of growth. Once the growth curve starts heading down, it only sees a downward slope. This is partly due to the law of big numbers: a bigger denominator makes it harder and harder to keep up year-over-year growth rates.

Things get even worse if growth rates drop dramatically (and even turn negative) – whether it’s due to changes in the marketplace, executives dropping the ball, or a loss in product leadership. This downturn leads to a lot of disenchanted employees who thought they were joining a rocket ship with rocket ship-like options. Employees end up jumping ship at the exact time you need a committed team to execute like hell. This makes a turnaround virtually impossible.

However, conventional wisdom is not always right. We have seen many cases in our own portfolio where the management team was able to turn around a dire situation and reaccelerate growth. How? Here are three factors that can contribute to a turnaround:

  1. If you are in a critical situation, your team either needs to be on the bus or off. To turn things around, you’re going to need absolute commitment from your team for at least twelve months. If some employees can’t give that to you, it’s better they leave sooner rather than later.
  2. A turnaround usually comes from one of two areas. Either one, from a new product line or major product upgrade. Or two, you find new sales/marketing channels that work. For example, Sarah Tavel described how Pinterest survived after its main distribution channel (Facebook) suddenly disappeared.
  3. A real turnaround will NOT come from incremental efforts. Expect to take major risks when choosing a direction and then focus 110% on the new path for the next few months. Yet in this respect, it is interesting how Amazon continuously launches new experiments so that they have a pipeline of projects that can create future growth. They won’t have to rely on a single Hail Mary pass.

The bottom line is that reacceleration of growth is possible if you have the right team and the right focus. The only exception might be with network effect companies (examples: Friendster and MySpace). For as much as we love networks effects at Version One, we know that once a company’s network effects turn negative, it’s pretty much impossible to change the trajectory.

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