Entering the Growth Phase
Risks continue to lurk in different ways
Reid Hoffman, Managing Partner at Greylock Partners, compares entrepreneurship to a person jumping off a cliff and assembling a plane on the way down. He continues by saying, “Your willingness to jump is your most valuable asset as an entrepreneur.”
This sure does sound like an apt metaphor, but it doesn’t address what happens once the plane is built, and what comes after that. I don’t hold this against him. After all Reid is an early-stage investor.
I like to compare entrepreneurship to a mission to the moon. You can compare it to leading a spaceship to break through the atmosphere and journey into space. A trip to the moon involves three main stages: the initial launch (early stage), the transition into orbit (growth stage), and the point where you’ve set the right trajectory toward the moon (late stage growth / maturity).
As a metaphor, the growth phase is similar to the period between entering orbit and landing on the moon. While the astronaut has cleared the initial challenges, they now realize they’ve established some stability (product-market fit) and are ready to transition into orbit and set the right trajectory (growth stage). That said, “some stability” is relative to the crazy launch phase. What they still need to know is that many things can go wrong in space:
An oxygen valve might fail.
Food supplies could run low.
Communication systems might break down.
A course correction might be miscalculated.
The throttle could malfunction.
Or even small debris could compromise the trip.
For startups, I wouldn’t say the stress during the growth phase is more or less intense than at the early stage. The stress levels remain high but manifest differently. Early on, you’re consumed with finding true product-market fit—something you’ve likely achieved by this point. In the growth stage, the focus shifts to operational efficiency and cash management.
Then there’s the Abyss—the point of no return. This is when cash runs out, people start to leave the company, and all hell breaks loose. Debt can provide short-term relief from pressure, but it always catches up with you in the long run. That’s why you must plan carefully once you start utilizing debt (with at least five years of conservative estimates). Use debt wisely and stay away from the Abyss. I’m not saying to avoid it entirely. It still is the cheapest form of capital.
Leverage can work wonders when things are going well, but it amplifies the pain when they’re not. And there will come a time in life when things take a turn for the worse (probably in an extreme way). That’s why using leverage conservatively is likely the wisest approach.
I explored this concept in more detail here, where I reference an article by Morgan Housel.
The beauty of debt is that it is cheaper than equity, but it comes with obligations. Once you take on obligations, pieces of your freedom are taken away. That is the catch with using cheap forms of capital. Equity offers the most freedom but comes with the cost of being the most expensive (dilution). As you scale and move through the growth stage, balancing the cost of capital with freedom becomes crucial for an entrepreneur. Debt can work wonders when blended with equity, allowing you to create a margin of safety within the 'ideal zone.'
As you scale passed the early stage and into the growth stage, you know you have a product that works and most of the risks associate with operational strain, quality control, supply chain issues, culture deterioration, misallocation of resources, competitive pressure, churn, etc. etc. These are powerful forces and as a founder/operator, you need to set your pulse on them. When starting a business, you have one big risk, and that’s whether you’ve achieved true product market fit, but once you get to the growth stage, a whole set of new challenges emerge that are totally different from the early stage.
This is why I like comparing entrepreneurship to a spaceship heading to the moon. The launch phase is critical, with risks intensified within a short time frame. Any single miscalculation can result in mission failure—or even death. Similarly, a startup that misjudges the market can face a complete loss of capital before it even begins.
Once (and if) orbit is reached, the pressure of the launch subsides, but a whole set of new challenges emerge. Systems must work perfectly to maintain stability and any misalignment can cause the spaceship to drift off course. There is no single misalignment. There are many. Similar to a company entering the growth phase.
One of the things I tell my team is to plan for the worst, but expect the best. We like projecting doomsday scenarios to see what would happen to us if they occur. We then ask ourselves “What levers can we pull to survive or even thrive in these scenarios?”. Usually, they are tough choices. I am no expert in growth stage navigation, but I have read enough about other businesses in history to know that doomsdays do occur. They are infrequent but the odds are high that they will occur multiple times within someones lifetime, and any business owner needs to be prepared for them. In my own working life (at 39), I have experienced the Great Recession and the COVID pandemic. That’s over 16 years. What more could we face when we look 20, 30, or even 40 years ahead?
Most businesses failed to anticipate some of the largest downturns in history, such as the dot-com crash, the Asian financial crisis, or the 2008 Great Recession. That’s why most were not immune to their impacts. Success as an investor and entrepreneur lies in adopting a contrarian lens and understanding that such events occur regularly. The key is having enough levers in place to navigate through them effectively.
Here is a clip of Bernard Arnault who applies this mindset for LVMH:
When preparing doomsday scenarios, it can create a feeling of pessimism in the room, but in reality you are building antifragility into your operations. When testing you might get reactions like “yeah but this will never occur” or “this is unlikely, so we won’t have to ever do this anyways”. These reactions usually occur when managers have no way out of these situations. They like to believe they will never happen, so they dismiss them.
Like anything else in life, whether in sports, engineering, construction, and space journeys, the professionals need to be prepared. Tiger Woods didn’t become the greatest golfer because he hit the fairway all the time (he was one of the poorest in fairways hit), he was the greatest because he was an amazing scrambler. While he was consistent, when he did get into trouble, he knew how to recover fast. Scrambling in golf is being a master at recovering from doomsday situations. Navy Seals practice by being immersed in doomsday situations, just check out the BUD/S training program. This way when they get into battle, they are prepared for any scenario.
Confidence is built through worst cases, not base cases.
Often we like to think that things are at base-line or better. That the average should always take priority over a lifetime. The truth is, base cases are rarely hit consistently over time. There will be peaks and valleys and we need to be prepared for them. This is the art of navigating the growth phase.
Side note: for those of you interested in learning about this phase, I highly recommend the writings of Elad Gil, and especially his book The High Growth Handbook.
ABOUT THE AUTHOR
Keenan Ugarte is Managing Partner at DayOne Capital Ventures, an independent private holding company that invests in and builds high-growth, early-stage businesses that serve the underserved Philippine mass market. He is also the Co-Founder of The Independent Investor, a media platform spotlighting early-stage companies and innovation within the Philippine startup ecosystem.