The problematic of Growth versus Stability in a SaaS Startup
By: João Camarate Silva
Tags: Startup, Venture Capital, B2B, SaaS, Growth

Photo by George Hiles on Unsplash

Or the risk of ruin in the Startup World.

It is my experience that a SaaS Startup is constantly facing a hard choice between Growth or Stability.

This choice is present in many day to day activities of the company such as in deciding which markets to approach, which opportunities to pursue, what features to develop, how to allocate existing resources, how to handle a particular support ticket, etc.

It is in this choice that the life of the company exists and it is here that the excitement of being part of a startup is born.

Risk taking and risk decision making have been the blood and soul of leaders since countless times. If you remove risk then you do not need a leader, you need a manager and thus the enterprise is no longer a startup and becomes a company.

It is in this choice that the life of the company exists and it is here that the excitement of being part of a startup is born.

As reading Nassim Taleb’s excellent Skin in the Game has shown me, there is a big difference between risk and ruin. Nassim puts it very straightforwardly with his explanation of ergodicity using a Russian Roulette parabola.

If you get 5 people to play the Russian Roulette at, lets say a 1M€ bet each, there is 80% probability you don’t die and get paid 250K€ in the first round of the game. Sounds exciting right?

The problem is that there is a 20% chance that you might die, and if you do, the game stops — at least for you — and thus it creates a whole bigger problem, the problem of ruin.

Nassim builds a strong case for tail risk, coming to the conclusion that if a certain risk bears a possibility of ruin then even if the probability of that risk occurring is 1% you should take extraordinary measures to defend yourself from that risk, as it will only take one event to take you out.

Further more, you should avoid such risks at all costs because if you stack up multiple activities that entail such risks then the chance you will be ruined will move closer to 100%.

Coming back to Startups, and the dichotomy of risk and ruin, one can say that the probability of ruin of the company generated by not answering a customer support call is pretty low.

You don’t answer this support phone call, lets say because you are actually more preoccupied with the international expansion of your business to the US of A, and then your company goes out of business as a direct traceable consequence of not answering that phone call. The probability must be 1 to 1000000000 right?

Does that mean that you can afford not to take that phone call?

We need to look at insurance and insurance companies to answer that question.

Is it worth paying 10€ to insure my phone screen?

What about paying 20€ a month to make sure my kids have some money if I die before they reach independence?

Growth is the primary focus of startups, all the charts you will ever see as an investor will always represent one form or another of growth.

Does that mean that you can afford not to take that phone call?

As a founder or a leader, at a startup, growth is all that you will ever speak about and concentrate your problem-solving mind on.

Growth of revenue, growth of features, growth of use cases, growth of tech scalability, and so-on.

Growth will, many times, steal resources from serving the existing customer base and thus create a choice, one that is not free from risk of ruin.

Existing customer base is actually, in most healthy startups, what keeps you alive. They pay your bills, they give you the fuel, in form of brand logos, that you need to go upmarket, they give you credibility and so on.

Growth of your startup has little impact on them. They bought your product to serve their needs in a specific time frame with a specific price and value offer. They most likely wont adopt your new features, no matter how sexy they are and there is also a very small correlation between the value they extract from your service and the fact that you have more customers using that service.

Yes you may say that with more customers the service will get better — more features mostly — but the reality is that customers compete for your resources and if you want to stay nimble and agile most likely what is bound to happen is that the ratio of resources allocated per customer will be lower in the future and not higher. Remember when you had your full team dedicated to that one first big customer? Not gonna happen in the future if you want to keep growing.

The problem is that growth by itself only generates a promise of return, and sometimes can deliver on that promise, but the fallacy begins when startups don’t realize they need to pay insurance on the tail risk of growing too fast and not serving the existing customer base as well as they should.

Going back to the phone call and the risk of ruin. I can guarantee you that if you do not answer those phone calls you will inevitably end up in ruin and thus you need to insure your company against such risk.

Let me try and define then the formula by which we can calculate your capacity for growth while keeping your tail risk under control:

Resource Available for Growth = Total Resources — Resources Allocated in Reducing Ruin Risk to Zero

It is pretty simple right?

You start by defining your total resources. Capital and Labour.

You allocate all the resources you need, in a given time period, to the activity of reducing your risk of ruin to zero, namely taking phone calls, fixing bugs, keeping up with existing customers, etc.

Then the rest you allocate for growth.

Have in mind that growth produces an effect in your startup, and creates more ruin risk (in several forms), so as you grow you will have to allocate more resources in reducing that risk to zero accordingly.

This doesn’t sound exciting right? What about the fast pace growth, the cut-throat adventure fueled with never-ending streams of other peoples money I was promised?

You can have that as well, if you would like. I have another formula for you:

Total Resources for Growth = Resources Left Available for Growth in the Company + Resources to be Produced in the Future

If you want to grow faster you have two options. Reduce the “Resources Allocated in Reducing Ruin Risk to Zero” or borrow from the future.

If you decide to reduce the “Resources Allocated in Reducing Ruin Risk to Zero” then you should understand that it is just a matter of time until you hit the ruin point, or bite the bullet in the Russian Roulette.

If you decide to borrow from the future then you must be 100% sure that your strategy will produce more resources than those that are being borrowed, or else the proverbial bullet will pop-up once again.

A startup leader is accustomed to think of such matters in terms of risk and probability, but I must say that I have never met anyone, yet, who spoke to me about ruin as something that you should insure yourself against in the startup world.

The startup world is one of betting. You bet on yourself and your product and your team and there is a probability of you being right and the world of riches and glory open up to you. Randomness chose you.

You never consider the downside of that bet until its too late.

What if you’re wrong?

Make your insurance today.