After completion of my study with Y-Combinator’s startup school in 2019, I have tried and failed severally to figure out how to launch that next big startup that hopefully, will one day turn into a unicorn. This plunged me into further research and despite my young age in the world of startups, funding, VCs, etc., I stumbled on a concept that hopefully if done right, can actually create that next unicorn.
The concept is called a “Power Law”. According to Wikipedia;
A power law is a functional relationship between two quantities where a relative change in one quantity results in a relative change in the other quantity independent of those quantities. In order words, one quantity varies as a power of another. It is also interchangeably called the scaling law.
An example of this formula is when you double the length of a side from 2 – 4 inches, automatically, the area will quadruple from 4 to 16 inches squared. There are a lot of real mathematical formulas at play here but I am no mathematician. So, I won’t dwell on that angle.
It’s a very simple (yet complex) term. It basically hovers around the possibility of moving from zero to one and subsequently, larger in time. It’s a concept that focuses on how very tiny changes can have disproportionate results for your startup. It is more like compounding interest. Understanding this concept will help you determine if your startup will be successful or not and if you should go ahead to seek funding or not. It’s basically the indirect stuff VCs look at before funding your startup.
Let’s examine the Pareto Principle (it perfectly describes the power law) which stipulates that for many outcomes, roughly 80% of consequences come from 20% of the causes otherwise called the 80/20 rule. E.g., 20% of Nigerians actually own 80% of companies. In order words, the relationship between inputs and outputs is NEVER balanced. How does this align with startups and VC funding? I’ll explain more below.
Now as we all know, every VC or moneybag as often called by Francis Oguaju, a tech advisor, often invests in startups with potential for early growth spurts so that they can profit as quickly as possible. There will be many startups or companies, but a few will achieve exponential growth more than the others. And these few are the targets of VCs. For your startup to get funded, it means your company is actually playing with the power law howbeit, unknowingly to you. Fortunately, most VCs do not also see the power law at play but they see growth or the potential for growth which is all that matters.
Since the power law is almost invisible to notice or see, so how do you position yourself as a startup to align with it? It’s actually very simple. Read on.
Brands can last for a very long time especially in tech – if nurtured. This isn’t a secret but I’m sure most founders don’t get it. If you can achieve 100 customers (happy customers), you can achieve 500 customers. Achieving N100,000 ARR can transition to N3million the next year and noticing this exponential growth and leveraging (investing) on it can make your startup grow to become a unicorn. What am I blabbing about? Simply, go long. If you start something and it’s working, keep going. Go longer. Power laws don’t manifest in a short-term plan. You feel the impact when you invest a few more years building on what works.
When you get a happy customer, identify what worked, invest more in it, and you’ll start noticing an exponential growth pattern which again, will reveal itself in the long run. In a nutshell, valuation usually compounds vis-a-vis an impressive impact over time. Look at Hubspot for example which IPO’d at a $750million valuation some few years ago and is now valued at $20 billion. When you present this record of disproportionate growth to VCs, guess what? They’ll give themselves a hi5 because they’ve seen a startup worth investing in. This process might take you a few months to achieve or a few years. In fact, let me still break it down.
When you launch your startup, you are bound to start getting customers. One thing worthy of note is to pay attention to customer segmentation. Do not make the mistake of treating all your customers the same way. Make use of the 80:20 Pareto’s rule to improve on your customer acquisition. The first step is to understand that all customers aren’t equal. Work out who the 20% of your customers are, then use the data to find more like-minded customers. If you understand Facebook advertising (lookalike audience marketing) you will understand this concept. Spend the majority of your time on these 20% customers – the category that is responsible for 80% of your revenue. Focus on EVERYTHING about them and you’d be surprised at how you’ll start acquiring more customers like them. What does this mean? Your ARR (Annual Recurring Revenue) might actually jump from N100,000 this year to N3 million next year.
Congratulations, you have achieved exponential growth – you know, the process that increases quantity (revenue) over time. This means you have begun riding on the Power Law and have now positioned your startup to get funding and hopefully, become a unicorn someday. There are many ways to understand and implement the power law for your startup growth. However, I focused more on the multiplicative process – rapid growth where a result can be multiplied by another which equals exponential growth. There are other concepts like preferential attachment, etc.