The Law of Large Numbers and Startup Growth

Revenue growth is always a hot topic for entrepreneurs. Growth is tied to company valuation, career paths for team members, and requiring significant amounts of cash. Investopedia defines the Law of Large numbers as “a large entity which is growing rapidly cannot maintain that growth pace forever.” The Law of Large numbers really hits startups as they start to scale from the early stage to the growth stage. Let’s look at it a bit more:

  • Say a company grows from $1 million to $3 million in 12 months — that’s huge growth. Now, say a different company grows from $10 million to $12 million in 12 months — the same amount of growth on an absolute basis — but only 20% top line growth.
  • For many tech startups, the goal is to grow 50-100% per year. Here’s how 75% per year growth plays out over five years starting at $5 million:
    Year 1 – $5 million
    Year 2 – $8.75 million
    Year 3 – $15.31 million
    Year 4 – $26.79 million
    Year 5 – $46.88 million
    Achieving this level of growth in later years is especially difficult.
  • If it costs $1 to achieve $1 of revenue growth above a modest amount, it’s easy to see how maintaining a high growth rate at scale becomes incredibly expensive

The Law of Large numbers applies to every startup that achieves some level of success. Entrepreneurs would do well to recognize how much more difficult growth becomes at scale and to plan accordingly.

What else? What are some other thoughts on the Law of Large numbers and startup growth?

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