The problem with month-over-month growth rates
What all of these charts and their headlines have in common is that they’re trying to convey exponential growth. Since traction is the #1 factor that determines fundraising success, it’s understandable that founders try hard to show exponential growth (which talking about a m/m growth rate implies). This is especially true if you’re one out of 50 startups that present at a “demo day” and you have three minutes to get investors excited. At some of the demo days that I’ve attended, I felt like this led to an arm’s race for the highest growth rates and sometimes made me feel like this:
You can calculate a growth rate of 40% per month on average or a compound monthly growth rate (CMGR) of 35% without having to lie, and you can have Excel draw a trendline using an exponential regression. But I believe this is highly misleading. A more reasonable way of describing this company’s revenue growth would be to say that the company has been adding between $300 and $700 in net new MRR per month in the last ~ 12 months.
.. When you’re talking to investors you of course want to show your numbers in the best possible light, and to say that you’re increasing revenue by $300-700 per month (to use the example from above) may not sound as exciting as a CMGR of 35%. However, keep in mind that experienced investors have very fine-tuned BS antennas, and if an investor gets the impression that you’re getting too creative in your interpretation of your data, that’s a huge turn-off.
.. the problem with an exponential growth assumption is that for early-stage startups it makes short-term goals too easy and longer-term goals too hard
.. The problem with a plan like this is that if you’re at $8000 after month 6 you think you’re on track, but actually you’ve only achieved 1/10th of what you have to achieve in the year.
.. The problem with a plan like this is that if you’re at $8000 after month 6 you think you’re on track, but actually you’ve only achieved 1/10th of what you have to achieve in the year.
