The Psychology of Startup Growth

James Currier is one of Silicon Valley’s foremost experts in growth and network effects. A four-time serial entrepreneur, having founded companies like Tickle (150 million users), Wonderhill Gaming (45 million users), he helped more than 10 companies get to more than 10 million users, including Goodreads and Poshmark. He was a pioneer of user-generated models, viral marketing, A/B testing, crowdsourcing, and other influential growth techniques.

When companies come to me for growth advice, they typically ask:

What’s the one thing I can do tomorrow to get 10 million users? Which channels should I use? Which tactics?”.

It doesn’t work that way. Growth is not a one-time gimmick. To get 1000% growth, there is no silver bullet.

Growth comes from adopting the right psychology. The right mindset. From an approach you bring to your daily work consistently for years. Tactics change and become outdated, but growth is an endless creative endeavor. You have to develop your psychology for that.

We’ve seen that high-performance growth psychology has five hallmarks.

  1. Language first
  2. Empathy for users
  3. Always be moving
  4. Data love
  5. Sustain pain of failure

There are the five mindsets we spend the most time trying to communicate to teams. They seem deceptively simple on the surface. However, once you try to implement them, like many things of real value, they become more complex. We’ve unpacked them in detail below to help you put them into practice.

One more thing. We’ve often heard the general sentiment that all the good growth ideas have been tried, but we think otherwise. We firmly believe there are 10x more growth opportunities out there waiting to be discovered than have already been tried which could be used to build industry-defining companies.

You just need the right Founder psychology to get there.

1. Language first

One of the more common mistakes we see is that companies build features first and then “put language on it.”

This is backward. Language should come first.

The exact language you choose to describe your product and company tells you what you’re doing, and it tells your user what to expect. Your language defines you. It tells users how you are relevant to their life.

“Ridesharing marketplace?” Not relevant to me. “Get a ride in 4 minutes or less?” Ok, now you have my attention. If your button says “share your photos”, the feature is going to be different from “store your photos” and you have to build two different things.

Your language can be a growth multiplier or inhibitor— starting with your company name.

Few realize it, but language comes first in growth.

2. Empathy for users

The typical “good” Founder spends their whole day thinking about their product. They want their product to be noticed and loved by the user, to be useful and delightful for the user.

But thinking about your product is not the same thing as thinking about your user — although it’s easy to conflate the two.

The great Founder spends more time thinking about how the user thinks and feels. About their psychology.

Here’s the reality. Your user has a big, complex life and you are fighting to be a tiny sliver of it. They have their job, their family, their apartment, their friends, their car, their sick mom, their dog, their insurance, their debt, the next holiday that’s coming up, their kids, the kids’ schools, their smartphone with 100 apps, etc.

You are somewhere buried in there. In your world, your product is everything. 12 hours per day, 6 days a week. In theirs, your product is just a tiny sliver (at best — if you’re great).

So the question you have to ask every day is “What is your product to them so that it deserves a place in their complex lives?”

Your answer should reflect the observation that behind every interesting tech company, there’s a powerful insight about human psychology. An insight that makes that sliver stand out to their users.

For example:

  • Facebook’s insight was the human need for acclaim and social reputation: “See me perform”
  • Snapchat capitalized on the desire for privacy (even secrecy) and ephemerality: “I’m sick of performing”.
  • Instagram tapped into the hunger for glamor and appearance. Statuary and portraiture for the internet age: “See my good side.”
  • Etsy allows people to buy and sell small-scale craft goods in a time of mass commercialization. “I want to feel unique”
  • WeWork tapped into the desire for community in a rising gig and remote work economy with increasing social atomization: “I want to belong.”

Understand your user psychology — know what you are to them — and your way to 1000% growth will become much clearer.

3. Always be moving

Go back 85 million years ago. Who was the dominant life form on the planet?

Dinosaurs. They were huge. They were on top of the food chain. They were the giants that ruled the earth.

Dinosaur companies vs. startups


But they weren’t alone. Scurrying in the underbrush you had a tiny, shrew-like creature — the ancestor of modern mammals. A quivering, overlooked nobody who lived in terror of colossal predators. The shrew had no advantages against the dinosaurs except one…

…it moved constantly. Every minute of the day, even in its sleep, it kept moving.

Then an asteroid came, and everything changed. The climate was radically disrupted. Survival competition took on new dimensions. Ultimately, the shrew won out. Why? Because its small size and speed prove to be advantageous in times of rapid change, while the dinosaurs, victims of their own dominance, lumbered to extinction. Their huge size became their greatest weakness.

The shrew should be the totem of great Founders. Startups today should be familiar with its story and adopt its mindset. As Andy Grove said, “Only the paranoid survive.” You, too, inhabit a world dominated by giants. You, too, have no advantages, except one: speed.

Move constantly. Make more moves than anyone else. To grow, you have to run quicker experiments. Iterate faster. Never stop. This requires the shrew psychology.

4. Data Love

If you want to grow, you have to be committed to measuring everything. You must test, measure, and iterate. That’s the engine that powers growth.

Data can’t be an afterthought. “Data-driven” can’t be a buzzword. You have to truly commit to it. Devote significant engineering resources to measurement. Even up to half of your engineering resources.

You have to love your data. That has to be your psychology. Your daily stats email should be a core part of your culture and outstanding enough that everyone at your company can be proud of it.

When I go and look at startups, I want to see everybody looking at triangle retention charts. I want to see the stats dashboard displayed on a big screen on the wall of your office in full view of everyone.  Seeing that means that Founder took the time and effort out of his weekend to go out and get a TV and hall it up and deal with the wiring and the mounting and all the other headaches of getting it set up. It’s a sign that the Founder really loves their data.

5. Sustain pain of failure

Iterating relentlessly is the next part of the growth engine, and it’s much easier said than done.  It means that in your psychology, you have to learn to sustain the pain of failure.

You’re going to fail daily. Most of the things you put time and effort into will come back negative. Most new tactics aren’t going to work.

You’ve got to be able to mentally move on from the losses. And so do each of the members of your team. It’s the system, it’s the growth psychology that can’t fail.

There’s a great quote: “Success is going from failure to failure with no loss of enthusiasm.” That’s the psychology you need to embrace in order to grow 1000%. Such improvements don’t come easy. You need the grit and grind that lets you keep going past when others give up.

Putting it to work

The Founders — and the CEO in particular — need to have the psychology described above. But how can you implement the principles of growth psychology with a team of 6 or more people?

These five steps will go a long way:

  1. The CEO must teach this mentality to the team, particularly the willingness to sustain repeated small failures.
  2. Employees must be told that they’re directly responsible for growth as part of their job, even if their title says something else like Product, Engineering, or Marketing. Everyone is on the growth team in this sense, especially the CEO.
  3. CEO must give their team clear authority to change product and allocate human resources in pursuit of breakthrough growth.
  4. The team should be more aggressive in pushing the boundaries of growth than the CEO. If you’re in a growth position and the CEO is pushing you to run more experiments instead of vice versa, you’re in the wrong job.
  5. You have to keep taking big swings. 10% growth per month is OK, but once you’re there, there’s probably a way to grow 40% per month. Finding 40% growth, or even 1000% growth, requires creativity and stepping outside your own box. As our friend Andy Johns pointed out in a recent conversation with Pete Flint, over-reliance on low-risk A/B testing and optimization will not get you to 1000% growth.

Growth is ultimately a company-wide effort, but the quality of that effort comes from the psychology of the CEO. Through a thousand small actions every day, Founders imprint their psychology on their startup.

Because of this, a well-cultivated growth psychology has ripple effects for the future success of your company. It’s the difference between a startup plagued by slow growth and a startup empowered by data visibility, constant movement and big plays for 1000% growth. If you’re in the second camp, come talk to us.

Viewing Valuation as a Discount of Future Future Value

Why does growth rate matter so much? Why does growth rate influence valuation so much? I was reading a book recently written by a hedge fund manager who discussed valuation frameworks. His explanation was one of the best I’ve come across.

If your business is growing at 100% next year, then 90% the year after, and then about 80% the year after, the business will have grown 6.9x. That’s the way I’ve always looked at company.

But this hedge fund investor said it a different way: 85% of the value of the business will be created in the next 3 years. At 10% growth, the company’s value today is 77% of the value in three years. The value won’t change that much. It’s already the most of the size it will be.

Same cup, same water, just a different perspective.

The chart above shows how this changes with different growth rates. It assumes a company starts growing at the growth rate on the y-axis. This growth rate falls 10% each year. On the x-axis, you can see the fraction of the enterprise value (EV) that will be created in the next 3 years.

Instead of looking at today’s valuations as a multiple of current revenues, we can think about it as a discount to the future value. This math makes that perspective concrete.

State of the cloud 2019

BY: BYRON DEETER, KRISTINA SHEN, AND ANNA KHAN

A decade ago there weren’t any private cloud companies valued at $1 billion. Today, there are 55 private cloud unicorns. If we include the additional 44 public cloud companies, there are 99 cloud players valued over $1 billion. What’s truly remarkable about the cloud ecosystem isn’t just the sheer size of the market, but also its interdependence.

When a cloud company scales it often signals the growth of others, but there are a number of other signals to the cloud sector’s velocity. For example, this year, the demand for cloud shares and cloud liquidity hit record highs, outpacing 2015, which was the last record-breaking year.

The demand for cloud shares and cloud liquidity hit record highs, outpacing 2015, which was the last record-breaking year.

With IBM’s purchase of Red Hat ($33B), Microsoft’s acquisition of GitHub ($7.5B), and SendGrid joining forces with Twilio ($2.9B), there was more than $90 billion spent in large mergers and acquisitions. More than $50 billion was also added to the market cap through cloud IPOs, including DocuSign, Dropbox, Elastic, and Carbon Black.

For more than a decade, we’ve had the longest bull run in U.S. history. At $175 billion, the top 100 private cloud companies have never been worth more. At this point, many founders are probably wondering how they can protect their companies from volatility.

The longest bull run in U.S. history.

While uncertain times are still ahead, cloud founders don’t have to thwart their aspirations of growth. Developing a new level of operational rigor by following the G.R.I.T. framework is one way for founders to understand their growth and build an enduring business along the way.

Operate with G.R.I.T.

Operational rigor is what separates early stage companies from the most influential cloud leaders. But take comfort in the fact that it’s possible: Twilio’s Jeff Lawson and Shopify’s Tobias Lütke are just two examples of the many first-time founders who were running cloud businesses during and post-recession.

At Bessemer, we recommend cloud founders operate on G.R.I.T.— a critical set of metrics that resilient, enduring cloud companies use as yardsticks of success.

Growth (ARR)

The first operational metric is annualized recurring revenue (ARR) growth. While companies such as Slack, Twilio, Shopify, and more are all considered successful in their own right, each one had their own path to earning its first $100 million in ARR.

Years from $1 million to $100 million

Here’s a breakdown on how long it took for companies to go from $1 million to $100 million AAR:

Years it took for companies to go from $1 million to $100 million AAR

  • The top 25 percentile of public cloud companies spends 5.3 years on average to reach the $100 million milestone.
  • The median 50 percentile spends 7.3 years to reach $100 million in ARR.
  • The bottom 25 percentile spends 10.6 years to reach $100 million in ARR.

If you want to build the next big cloud company, here’s our Good, Better, Best framework for ARR. A cloud founder should aim for one of these timeframes:

Bessemer Growth Benchmark

  • Good: Cloud companies operating on “good” ARR growth models earn the first $10 million in four years, and reach $100 million ARR in ten years. (e.g. Cornerstone On Demand)
  • Better: Those that are better positioned earn the first $10 million ARR in three years, and reach $100 million ARR in seven years. (e.g. Shopify)
  • Best: The best performing cloud companies reach $10 million ARR in two years and reach $100 million ARR in five years. (e.g. Twilio, ServiceNow)

Enduring companies don’t just have contingency plans for when a recession hits. They set these goals and figure out how to achieve them based on the expectation that there will eventually be changes in the market.

Retention is your best friend

Retention, the amount of revenue accrued over a period of time, including upsells, is one of the most influential levers for cloud and SaaS businesses to pull when growing ARR. Some of the best performing SaaS businesses we’ve seen in the past decade have higher than 100 percent net retention rate because they’ve built a metered business that sells more to a customer as its business scales.

However, retention rates have different meanings depending on customer segments.

Here are the retention benchmarks a cloud company should aim for, by customer segment:

Retention for different customer segments.

  • SMB customers that have an average account contract value less than $12K see a gross retention rate between 70-80 percent and net retention rates between 80-100 percent.
  • Mid-market companies that have an average account contract value between $12-50K should aim for a gross retention rate between 80-90 percent and net retention between 90-120 percent.
  • Enterprise businesses that have an average account contract value $50K+ should aim for more than a 90 percent gross retention rate and more than 100 percent net retention.

Retention is a major driver of valuation.

An additional one percent in net retention can increase valuation by $100 million.

Improving net retention rate has great ROI.

If a company’s retention rate doesn’t fit within these bands, it’s time to investigate the culprit behind the “leaky bucket.” Churn is always a symptom of larger problems. By identifying and addressing the root cause of churn, a company can directly impact top line ARR growth by just retaining its current book of business.

In the bank

For early-stage cloud founders, the cash you have in the bank reigns Queen (or King). Also known as “runway,” cash is the fuel to build your product, acquire new customers, hire employees, and invest in growth opportunities.

Efficiently managing runway is the lifeblood of an early-stage company’s longevity, and it begins with three critical rules:

How to manage your runway.

  • Buffer your budgets for a contingency plan;
  • Target for 18-24 months of runway, at a minimum;
  • Be as judicious as possible when expanding your team.

Hiring is an effective way to grow a business, but it’s also the most expensive. When in doubt, hire slow and release fast when a new team member cannot drive forward the company’s goals. The way cloud founders allocate their runway will ultimately determine their destination.

Targeted spend

Cloud founders must always spend wisely to fuel growth. In 2017, Bessemer created a way to measure wise spending by coining the Bessemer Efficiency Score, which is defined in two ways, depending on the size of the company.

For startups earning less than $30 million ARR, the efficiency score is defined by net new ARR over net burn. In the Good, Better, Best framework when evaluating efficiency, the “best” score for a company at this stage is greater than 1.5x.

Bessemer efficiency score

This metric is different than ARR growth because it measures a company’s spending habits. It’s great if a company grows 3x, but if it’s spending crazy amounts to get there, this rate wouldn’t be considered efficient growth.

In a bull market, startups can get away with less efficient growth by acquiring new customers at a higher cost than necessary. However, this approach reflects a lack of discipline and doesn’t make for resilient companies. The good news is that when you do develop more efficient businesses, they are rewarded in all markets.

How to calculate your score

The G.R.I.T. framework highlights critical metrics when evaluating resiliency. By tracking ARR growth, retention, years of runway, and efficiency, the G.R.I.T. framework also translates into an equation.

Here we illustrate how to turn each metric into a variable and calculate a company’s G.R.I.T. score.

G.R.I.T. framework and equation

Based on Bessemer’s research and the most resilient companies in the industry, we provide another Good, Better, Best benchmark so any cloud founder can see where they fall and how they can improve overtime.

What’s your G.R.I.T. score? Once a cloud founder equates where they land within this framework, they’ll have a clearer idea of where their business can improve, or if it’s time to celebrate (and maintain) a high G.R.I.T. score.

30,000-ft view of The Cloud

Since Bessemer penned the canonical laws of cloud computing more than ten years ago, our investors continue to explore how cloud businesses evolve over time and how these ten laws have aged with time. G.R.I.T. is a new framework for founders to build an enduring cloud business.

A few short years ago, we predicted that the public cloud market would reach $500 billion by 2020. We were happily proven wrong when we hit the mark two years earlier in March of 2018.

Less than a year later, the total cloud market cap sits right around $690 billion. Now, it’s time to set our sights on the next major milestone for the cloud industry, and see how new companies will innovate with emerging technologies.

2019 predictions

Every year at Bessemer, we share our top cloud predictions, which we believe will impact how enduring companies change the way we live, work, and engage with software.

1. Robots to the rescue

State of the cloud prediction: robots to the rescue.

We see “robots” as the change agents of the world. Machine learning and artificial intelligence will be instrumental technology for all the apps, platforms, and services cloud founders are building, particularly in industries where people deal with massive amounts of data like healthcare and agriculture.

Robots are especially exciting when they free up human time to work on value-based thinking rather than automated tasks. We see this particularly in business areas like fraud, customer support, and accounting, with companies, such as ScaleFactor or Ada Support.

2. Product has purse strings

Prediction #2: Product has pursestrings

Product is foundational to any software company– it’s what you build and sell. However, in the past, product teams were not the traditional, target decision-makers and buyers when businesses evaluated software purchases. They had unlimited budget for headcount, but not software. We think this may have been shortsighted.

If product is the center of the organization and touches all areas of the company (sales, marketing, engineering, and customers), there should be platforms that help people manage, measure, and build the designs, plans, and roadmaps behind products.

We’ve seen entrepreneurs realize this gap and build exciting tools, like Gainsight. There are many more solutions to come since product-centricity gives teams a deeper understanding of every aspect of the software, customer lifecycle, and business.

3. Open source makes money

Prediction #3: Open source makes money

Open source communities have always been beloved in the Valley – they are tight-knit, full of brilliant engineers, and at the cutting edge of innovation. But in the past, finding commercialization or liquidity has been a challenge. In 2018, there were two record-breaking IPOs for the open source community with Elastic and Pivotal.

We also had three of the largest M&As in history with Red Hat at $33 billion, MuleSoft, and GitHub. Private companies like npm, Confluent, and Hashicorp are developing and innovating open source for the enterprise.

4. Deeper verticalization of mobile

Prediction #4: Deeper verticalization of mobile

We thought the mobile channel would manifest across both horizontal and vertical sectors, but on further reflection, mobile development is progressing rapidly in vertical sectors like construction, HVAC, etc.

ServiceTitan, for example, offers software and mobile solutions for businesses in field services, and their technicians.

Just think about people you know and how they work. There will certainly be more deskless workers who are always on the move and need access to technology, so we expect to see significant change in the vertical category.

Technical roles such as product, data science, SREs, QA, and others within an organization are prime, underserved buyers. As every company becomes a software company, these technical roles will have growing budgets and purchasing power to make decisions about what types of software they want to use to help them do their jobs better.

PagerDuty, for instance, makes the lives of IT Ops and SRE teams much simpler by providing a reliable alerting system to guarantee alerts are sent when needed.

Periscope Data empowers data analysts to very quickly visualize their SQL queries and create beautiful dashboards.

5. Low code/no code

Prediction #5: Low code/no code

The Low Code/No Code movement will provide technologies with amazing DX (developer experience) and offload smaller tasks so engineers can focus on more complex problem sets with the help of companies like Twilio and Auth0. No code solutions also give knowledge workers powerful functionality without requiring engineering resources. This includes easy automation, such as Zapier and UiPath, and business apps within the Salesforce and Workday ecosystem.

These are only five of the many trends we’re excited about at Bessemer, and we look forward to seeing how these ideas continue to contribute to the Cloud ecosystem.