Non-linear growth for Product-Market Fit and Valuations
Unveiling the reality of non-linear growth in entrepreneurship: from product-market fit to sales and valuations.
Demystifying Growth: The Non-linear Trajectory of Product-Market Fit, Sales, and Valuations
There is a myth that businesses have this perfectly linear or even exponential growth … well at least in all the pitch decks and financial forecasts I see : ) More realistically, there are step functions that dramatically increase sales/valuations at certain points. From our recent Atlanta Healthcare Entrepreneur Meetup with Ryan Jones, CEO and co-founder of Florence Healthcare, Ryan also shared some great insights on this topic. Here is more of what to expect growth to look like for Product-Market Fit, Sales, and Valuations.
First, we should probably all level set what is Product-Market Fit (PMF). The journey to finding PMF is ever evolving. It is not just a certain number of interviews or paying customers. There is a constant back and forth of learning and testing that can eventually unlock a unique insight. How quickly you can move through this process is a combination of how fast you can learn and test, as well as market readiness. Don’t expect a linear journey.
Even as you start to find PMF, that doesn’t always mean you have fully aligned your go-to-market approach. There are still many iterations on pricing, channels, messaging, ramping up the sales team, etc. to get things fully functioning. Sales are always a lagging indicator that things are working.
Let’s say in a theoretical world, you were perfectly executing and doubling your valuation every year. Year 1 = $1M valuation, Year 2 = $2M, Year 3 = $4M, etc. That means you wouldn’t cross $100M valuation until between years 7-8, and not cross $1B valuation until year 10-11. But that is theory. The reality is a business is often worth next to nothing for a long period of time until you start getting proven customers, sales process, value proposition, etc. Then you get a small step-up in valuation until you reach the next milestone, then the next. You will generally have a long period of time where your business is not worth much, but if you get things right your valuation is often going up significantly in the outer years. Back to the doubling example, if you were valued at $500M in Year 10, and in Year 11 doubled valuation to $1B, that means you created $500M in value in the first ten years, then another $500M just in the most recent year.
While the numbers above are hypothetical, the point holds that PMF, sales, and valuations do not follow linear paths. Be prepared for many periods of iteration and uncertainty, but huge upside if you make it through with a clear problem, value proposition, and must-have solution.