It’s common knowledge in the business world: all companies want to grow. Big companies with board rooms and shareholders want to create earnings to boost their bottom lines. Bootstrappers working 75 hours a week want to hire out some of their backbreaking work.
But while growth can be a symptom of a healthy business model, it’s not always what it’s cracked up to be.
Companies that grow too fast or get too ambitious while failing to see a peak in their market ultimately put their business at long-term risk. Managing your company through growth might seem like a quality problem – but sometimes it’s just a plain old problem.
The Case of Cupcakes: When Acceleration is Not an Indication of Quality
Remember the cupcake craze? It’s a trick question; we’re still in the midst of it. But Sujan Patel found that Google trends is showing a slowdown in the popularity of cupcake searches since around 2013, after several years of encouraging growth.
In 2010, as the cupcake craze kicked into high gear, Crumbs Bake Shop was on Inc.’s list of 500 fastest growing companies. The company’s shares even went public at $13 dollars per share. A quick Google of CRMBQ will tell you the rest of the story:
As of today, the stock is only worth two cents per share.
What went wrong?
How’s “nothing” for an answer? The company’s sugar rush of growth was partially the result of a culinary trend. Consumers had exponential appetites for cupcakes… until they didn’t. As Patel writes, “The cupcake’s massive popularity is, in essence, a fashion – and fashions come and go.”
This isn’t to say that Crumbs Bake Shop did poorly, or that they never should have grown at all. It’s great when an interesting new company that makes people happy does well.
It should serve as a word of warning, however: not all growth is always due to the extraordinary quality of your business. Sometimes, you might simply capitalize on a trend, riding the right wave at the right time. But that’s the thing about waves – eventually, they lose momentum.
If you grow too fast because of external factors, then once the wave crashes against the shore, you’re suddenly stuck with a large payroll and a product offering that’s going out of fashion. Sometimes, patience is the best approach.
Diminishing Returns: Losing Sight of Quality Growth
If you’ve already hired your first employee, you know the process. You handle each interview with close scrutiny. You regularly review their job performance. You track exactly how much you’ve invested in them and are careful to make sure that that expense is with your while.
Employee number 15? 108? 937? Not so much.
Sometimes, companies with a lot of cash on hand feel the need to spend it simply because they’re told that growth is king. They have money, after all; shouldn’t they put that capital to use? Shouldn’t they reinvest?
The conventional wisdom doesn’t always apply. Just this week, Apple saw its hoard of cash ballooning to $246 billion. If just Apple’s cash were translated to GDP, it would outweigh Finland.
Yet Apple doesn’t deploy their cash army because they know that growth for the sake of growth is often not growth at all. They still pick and choose their investments as if they didn’t have two hundred billion dollars lying around.
If there’s an obvious investment that could improve your company and you have cash burning a hole in your pocket, by all means, grow. But remember that throwing cash at new assets doesn’t necessarily mean you’re going to grow. Bad investments remain bad investments and can ultimately lose you money no matter how much cash you can afford to lose.
Signs That Your Company Should Stress Patience, Not Growth
Investor Warren Buffet learned his lesson at a young age. When he bought his first stock, Cities Service, it was $38 per share. He sold after each share went up to $40. Not bad for a first investment. But the stock eventually went up to $202 and one day became Citgo. Today, Buffet calls it one of his earliest lessons in business: sometimes, patience pays dividends, too.
How do you know when you should practice patience instead of growth? There’s no real way to predict the future – but you can watch for a few signs that your company needs to think long and hard before expanding too quickly:
You’re unclear about the reasons for your growth. An increase in customer demand is great. But it might also be the result of a temporary spike in visibility or a trend that’s totally out of your control. Moving to a giant warehouse might seem like the only way to manage your sales volume, but it’s not. On the other hand, if you know you can count on future business and investing in yourself is the only way to increase your productive capacity, that’s reason enough to be confident that your growth is sustainable.
You’re growing simply because that’s the thing you believe you should do. Apple doesn’t do it; why should you? There’s nothing wrong with keeping a little bit of cash on hand to weather downturns in market demand.
Remember Why You Went into Business
Many entrepreneurs went into business for themselves simply to get control over their professional lives. If your business balloons, that’s great. But it might also defeat the purpose of even owning your own business.
Every entrepreneur’s reasons for getting into business are different. If you’re looking to make a lot of money alone, then sustainable growth is the name of the game.
On the other hand, if you’re looking for more freedom, maybe growing before you can get control over your business or hire a new executive is the better choice.