The perils of extrapolation of growth

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.