The perils of extrapolation of growth

by Ashvini on November 8, 2011 · 8 comments

in Business

Being an entrepreneur is all about staying positive, on top of the things. However , it also means applying discretion wherever required.

A eCommerce company in India is an fast growing start up. It aspires to be a billion $ company in a few years. For most of the people who know that there are a few e commerce companies of this size, it is not a big deal.

However , I still wonder how they arrived at such a figure for future. They are right a few million $ company. They have grown very fast fast, to the extent > 100% every year in last few years . They feel the similar growth will  continue year after year and that they will achieve 1B$ status.

While this does sound optimistic( and I will be happy if I am proven wrong), it exposes a few assumptions that they might have overlooked

  • Is there a market for a billion $ e commerce company?
  • Will they forever achieve 100% growth?
  • What about growing competition from Indian companies?
  • What about competition from foreign competition?

This is what I call the “Perils of extrapolation”. Entrepreneurs often buoyed by early successes in their venture often assume that the growth is forever. They simply extrapolate and calculate future revenue after looking at the growth of revenues from last two or three years.

In stock markets too , investors assume that a particular company will grow forever. We all know it does not happen. Companies when they are small grow rapidly  but soon reach a plateau once they achieve certain size. Once they are there , they have to really do something remarkable to stay there or move up. Here are the few things that happen

  • Competition catches up
  • Its difficult to top up the growth every year
  • Target market gets saturated
  • Costs increase (especially advertising and marketing)
  • Technology changes

Extrapolation should be used as a tool to create plan for the future. But, a plan containing extrapolated figures should also include all assumptions and risks that the company foresees in future. In case of business growth it is better than safe than to be sorry.

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Cristian Balau November 12, 2011 at 7:11 am

Or maybe they will stay in the same area for a time being. I mean, that’s the point right, get to the top and stay there. What can you top if you already are in the top ?

Max M November 11, 2011 at 6:53 pm

I am not so optimistic and especially now when the world is suffering one more recession. When you plan your work, you shoud set realitic goasl which can be achieved. I hadrly beleive that they will have 100% growth as it is impossible, like a fairy tale.

Chrysta Bairre November 10, 2011 at 7:48 am

I agree their goal does not sound very realistic.

As a financial analyst, I get to see the factors that affect business goals, and I am learning how to create an accurate forecast from the bottom up instead of the top down. Planning for the future must include considering changing markets and other factors that influence growth.

Also, there’s a difference between a goal and a plan!

Ashvini Kumar Saxena November 11, 2011 at 3:27 pm

Hi Chrysta,

I think as financial analysts you would understand the limitations of making assumptions and then fail to recognize that they influenced the outcome. Whenever I use to design any software, I always used to write down all the assumptions an impact that it can have on the timeline budgets. It kept me safe when things did not go so well.
No analysis or prediction can be perfect but with enough consideration , workarounds may be created.

Thanks once again for your insightful comment :)

Aswani November 9, 2011 at 9:22 pm

Interesting Ashvini and I think it is very sensible of you to come out with such article. Well, yes…I think it is right for the businesses to come up with their long term goals and plan their strategies accordingly. What you have talked about here looks like being over-optimistic. Can’t really say about the impact it can have for the businesses and positive or negative…too difficult to guess. But anyways, staying positive is what matters in the end. Keeping it less and Keeping it realistic…it should be very achievable..!

Ashvini Kumar Saxena November 11, 2011 at 3:34 pm

Hey Aswani,

There is really a very strong emphasis on an entrepreneur being positive in outlook. Nothing wrong with that . Sometimes however, I see that in blindly following others, the entrepreneur often overreaches. Nothing wrong with having a highly optimistic growth chart but then it should be backed up by 1) Supporting data 2) assumptions 3) workarounds. If you know what you are doing nothing better than that.
Being a little bit careful helps sometimes.
Thanks for your insightful comments :)

Adam Paudyal November 8, 2011 at 8:00 pm

So true Ash about staying positive but shit happens to even the best of us.

Looks like you are kicking it real good as usual. Perils of extrapolation – that’s a new one for me. (O:

Later man.

Ashvini Kumar Saxena November 11, 2011 at 3:31 pm

Good to see you back. Infact I missed your posts a lot. Welcome back!!!

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