Why Growth Can be Evil

When I was younger, I always wondered why companies were so on about “growth.” It’s like, look, your CEO makes good scratch. You’ve got a lot of employees, they’ve got solid insurance, and they’re all getting paid well. Your customers are happy. Aside from gaining new customers to replace ones that drop off, what’s this continuous focus on getting bigger? It can, after all, be hugely detrimental. You have to figure out how to scale processes, compete with ever-larger competitors, and it just feels like a never-ending rat race.

Inflation is not the reason. Yes, your costs will go up, including employee salaries, due to inflation, but your prices to customers should account for that.

No, the reason is investment. Well, that’s the mechanical reason that drives growth. At some point, many companies decide to ask someone for money. Maybe they need to get through a rough patch, or maybe the owners really do just want to get bigger for ego-related reasons. Regardless, once the decision is made to ask for money, you have to grow. That’s because a company that’s currently doing well, turning a slight profit, isn’t going to be able to pay the investors for their money. An investment is an unsecured loan; investors expect to get their money back plus interest, and the interest they expect can be huge. In order to generate the money for that interest, the company is obviously going to have to get bigger.

And not necessarily a little bigger, either. You’ve got to generate enough revenue to cover your costs, still. For a company that was “doing well” and turning a respectable profit, you’re now going to have to generate more profit so that you can pay back the principal on the loan, and more profit to generate the interest.

Let’s say you’re a $1BM company with $900M in costs. That’s a 10% margin, or $100M, which is okay but not great. You want to increase that profit to $300M. One way to do that is to triple your profit margin on existing revenue, but that’s usually really hard to do if you’re already a well-run company. So you’re going to have to become a $3M company – tripling revenue to achieve the profit figure. Let’s say you decide you need a $1M investment so that you can scale up over the next 5 years. Those investors may want as much as a 10% return (in reality, they may want a crapload more, depending on the risk level of the business, but it’s an easy number). So now, you need to generate an extra $220M in profit each year to pay back the principal and the interest. Assuming you stick with a 10% margin, that’s now forcing you to be a $2.2M company just to stay even. 

And this is why companies continuously focus on growth. Unless you’re a very small company that’s satisfied with what you’ve got, growth is tremendously expensive. Numbers add up insanely fast. But in most cases, companies can’t not grow. Not growing means not taking on more customers, which means you’ve put all your eggs in the baskets of customers you already have. You have to grow, or you risk losing everything. Only the very smallest businesses can afford to “just stay where they are.”

As an employee, it’s critical that you understand these kinds of business drivers and realities, because they affect every decision a company makes. Hiring, not hiring, laying off, expanding into new fields – they’re all influenced by these base business realities.

3 thoughts on “Why Growth Can be Evil

  1. Nick

    I think some of those M’s next to the dollar figures need to be B’s, right?

  2. Muggz

    Don, your PowerShell teaching series (old and new) are invaluable..

    Also, great blog…

    You have a typo here – instead of $1M, you meant to say $1B company…

  3. Cory

    There’s a few more M that should change to B I think…

    Or better yet, change them to X000M and keep the conversation in the same unit instead of muddying the discussion with unit conversions…

Comments are closed