Growth almost killed our company
I want to talk about the dark side of growth. Towards the end of last year our relentless quest for growth nearly pushed our company over the brink: we almost ran out of cash and almost had to shut down.
Thankfully we caught ourselves in time, and made big adjustments: now we’re profitable and growing sustainably. We learned a lot from the crisis, which I’ll share with you here.
I’m David, co-founder and CTO of SketchDeck. We’re a graphic design service powered by our own collaboration platform, and we design for some of the greatest companies in the world.
Note: This was originally written in 2017, and has not been updated.
Hypergrowth in the valley
An important background to this story is the environment of Silicon Valley. Since the days of the silicon boom, it’s been the American epicenter of “think big”. It spawned the “Unicorn club”, the tiny group of companies valued at over a billion dollars.
In Silicon Valley the dominant model is to build a company, take on venture capital and grow really big. Since VCs require exceptional returns in their portfolio to pay for the rest, there is an omniscent pressure to achieve those exceptional returns. It’s hard to forget that in four years Slack grew to a valuation of $4 billion.
This all translates into an intense focus on growth¹ for startups:
“The good news is, if you get growth, everything else tends to fall into place. Which means you can use growth like a compass to make almost every decision you face.”
— Paul Graham, Startup = Growth
SketchDeck‘s initial hectic growth
SketchDeck’s birth was a happy accident. My co-founder Chris and I had moved countries, started Y Combinator and within the first week were advised to ditch all our work and start again.
We’d entered YC as a futuristic iPad app, and were now a human-powered design service. We rapidly prototyped, trying to see what would stick. We got some initial market enthusiasm around presentation design:
Y Combinator is three months long, with the Demo Day pitch looming at the end. We all know we need impressive growth stories by then, and work furiously to make that happen.
“A good growth rate during YC is 5–7% a week. If you can hit 10% a week you’re doing exceptionally well. If you can only manage 1%, it’s a sign you haven’t yet figured out what you’re doing.”
Looking to capitalise on the initial burst of enthusiasm for our product, we did a press launch:
From this initial spark, our revenue grew rapidly over the next year:
We were furiously working to keep up the pace of growth — both of us founders would design slides late into the night, we’d pitch people on design projects and try to sell as much as possible.
At the time we were not really sure where the growth was coming from. Now I realise a good proportion of it was baseline market enthusiasm for a new offering in the space. People were excited to try something new.
As we kept up the pace of revenue growth, investors got interested in us and we raised capital:
Growth, but at what cost?
There’s a graph drawn on a whiteboard in the old YC office in Mountain View, showing Paul Graham and the partners’ view of the founder experience:
This would be the start of SketchDeck’s trough of sorrow.
Through all our growth we’d been chasing to keep up with it, whilst trying to fan the fire bigger. Regrettably, what we’d not focussed on, was the customer experience.
When growth is good, it’s easy to ignore your problems and blindspots. “Growth solves all problems” is a popular refrain from YC. As the company grew we’d known in our hearts that the service wasn’t reliable enough, nor high enough quality, but given we were growing, we’d deferred solving it until later.
As we grew we moved to higher value clients, who would pay more, and had higher expectations. This was a natural and beneficial move for the company, but further strained the service.
We got to a point where our churn was as high as our customer acquistion. This meant that we could not grow, no matter how hard we tried to sell our product and acquire more customers.
Just as building a house on shaky foundations leads to a painful and expensive problem, our poor initial product market fit had been compounded by the scale of operations and revenue we’d grown on top of it, and now things were very difficult to change.
Interestingly, around this time Sam Altman released blog posts detailing the risk of growing too early:
“Startups are defined by growth, but growth isn’t step one in building a great company. If you focus on trying to grow before you make a product people love, you are unlikely to succeed.
We’ve said this before, but it’s worth repeating–many founders hurt their companies by focusing on growth too soon.”
Alas, we had that problem!
Upon reflection, I think it would of benefitted us if YC had told us we’d do the program, then pitch at the subsequent demo day, and that our metric should be user satisfaction. What actually happened was that we were encouraged to have a revenue metric and felt a huge amount of pressure to deliver sales by demo day (which is three months after the start of the program).
What I realise now is that the company was too young to fully benefit from the program, and we were not experienced enough to know that at the time.
Digging ourselves out of this
As we realised the developing dynamics around us we were greatly frustrated by the lack of growth and hugely motivated to fix it. We did a bunch of things that solved the problem, and another bunch of things that almost killed the company.
The stuff that almost killed us
At this point we’d a sizable amount of venture capital and a lot of investors watching our progress. In response to one of our investor updates we received the reply “Sounds like you’re dying”. That hurt, but didn’t dissuade us.
We’d identified a number of our fundamental problems: Churn was making growth impossible, and people churned because our quality and consistency were not good enough. We’d broke those issues down into their causes and remedies.
We knew we needed to improve and extend our software, and we believed we needed account management to nurture and grow our accounts to their full potential. We knew we needed more marketing to feed leads into our sales effort.
To achieve these things, we went on a hiring spree. We brought on seven people to help make them happen.
The new team members layed a many-jawed trap for ourselves. Our burn was now (much) higher, and we’d many people who needed time and nurturing to get up to speed. It would take time to prove that those were the right hires for those roles. Furthermore, it would take time to prove those were the right roles to achieve our strategic goals.
Around the same time our cashflow changed against us. As we took on bigger clients, they demanded to pay via invoice, pushed to extend the amount of time they had to pay, and then wouldn’t pay us until we chased them excessively. This meant that although we were taking on new work and clients, our cashflow in the short term was getting worse.
The sum of all these effects was that our runway shrunk dramatically. In October 2016, as we drove to a founders retreat weekend, we analysed the cashflow model and saw that if nothing changed, the company would die early next year.
[ Insert bank graph ]
The stuff that helped us
Fortunately, there were other things we did during that year that benefitted us a lot.
As we’d identified our service issues, we dedicated our existing engineering team and CEOs’ efforts towards solving them. One engineer was in charge of monitoring and improving our deadline compliance (we went from 40% to 99%). I spent my entire time fixing the thousands of small bugs we’d accumulated over the past years whilst rapidly growing and building features. My co-founder (the CEO) spent a lot of time improving the human side of our service through hiring and training.
At the start of that year, as a product manager, the challenge ahead seemed daunting. One thing I learned is that product quality can be vastly improved through a war of small fixes — their cumulative effect was transformative of how people thought about and used our platform. Whilst it is compelling to pitch and build bold new features, the same effort put into improving what you have can be much more rewarding.
All of these improvement works gave the company sturdy foundations to build upon.
What saved us
It’s often remarked that “necessity is the mother of invention” and that times of crisis can precipitate the best results. This was certainly true for us.
The first thing we did was to be open with the company. We got the whole company together and told them the situation in plain factual terms. And incredibly, everybody remained calm and stuck with us through the whole ordeal. It was a huge testament to everyone’s belief, professionality and work ethic, and to this day I’m so impressed by what everyone did during that period.
Having briefly talked to our investors, who were understandably unenthusiastic about throwing money into a company in crisis, we created a plan for profitability.
The plan was to have strong control of our per-project margin, reduce our costs, better control our accounts receivable, and simplify our offering down to just the parts that worked best.
One of our engineers was charged with making our margin visible, then getting it under control. He did a remarkable job of this, producing a real-time margin model that every project manager could now see and was held accountable for. With a few adjustments to how we worked, we were now reliably unit profitable.
Our controlling for margin forced good discipline elsewhere in the company — now we thought a lot more about which designers, projects and clients we took on. We reduced our service line down to those that we sold most of and did best.
Having our company’s future in jeopardy, we found confidence to make more ambitious changes. We ran the numbers and found that most of our revenue, and our best margin, came from a small number of regular users. We’d always dreamed of being a membership only service (until that time, we operated more like an e-commerce store). We decided to finally make that change — during December told the majority of our customers they could no longer use us.
The final change we made was to shrink the number of people at HQ. This was particularly painful as we’d worked so hard to recruit these people, and they were all people we enjoyed working with. We knew the expenditure number we needed to get down to, and we systematically identified which roles were working best and kept those. It was tough and upsetting for everyone involved. Again, we were greatly thankful for how well everyone in the company handled the transition.
Pulling out of a nosedive
Depsite being very optimistic individuals, the next period surprised us.
Our sales, for the first time in a year, started to take off. Many of the customers that we’d closed our doors to now were interested in a membership. Having a smaller number of clients and services allowed everyone to focus and provide a better service. Our revenue growth, customer satisfaction and retention metrics all rose to the levels we’d so badly wanted for so long:
Besides KPIs, many team members have remarked how the company now feels much more focussed. The combination of simplification and greater visibility and control of our core metrics has brought a new level of clarity to the company.
This is certaintly not the end of our journey, but it’s a new highpoint for us that we’re really proud of. We’re enthusiastic for the future, and excited to build upon the foundation we now posess.
I hope you enjoyed reading this — as we try new things and learn from them we’ll continue to post those experiences here on Medium. If working for one of the most innovative design services in the world interests you, check out our jobs page, we’re hiring.
Footnotes
(1) Paul Graham does point out that initially you have zero growth whilst you’re working out what to do — this is a very true and often forgotten point. Our troubles came after that point, during what he’d call the “trough of sorrow”. Paul Graham also encourages startups to be like cockroaches: impossible to kill despite lack of money.
