The most common mistake when forecasting growth for new products (and how to fix it)

Forecasting weather is hard, and so is forecasting product growth.

Startups are about growth

Paul Graham’s essay in 2012 called “Startup = Growth” makes a big point in the first paragraph:

A startup is a company designed to grow fast. Being newly founded does not in itself make a company a startup. Nor is it necessary for a startup to work on technology, or take venture funding, or have some sort of “exit.” The only essential thing is growth. Everything else we associate with startups follows from growth.

The other important reason for new products to focus on growth is simple: You’re starting from zero. Without growth, you have nothing, and the status quo is death. Combine that with the fact that investors just want to see traction, and it’s even more important to get to interesting numbers. In fact, later in the essay, Graham talks about how important it is to hit “5-7% per week.”

Getting to this number while trying to show a hockey stick leads to a bad forecast. Here’s why.

The bad forecast

The most common mistake I see in product growth forecasts looks something like this:

In this example, the number of active users is a lagging indicator, and if you multiply this lagging indicator of a growth curve, it’s a truism that the growth will go up and to the right. If you do that, the whole thing is just a vanity exercise for how traction magically appears out of nowhere.

And of course these growth curves look the same: They all look like smooth, unadulterated hockey sticks. The problem is, it’s never that easy or smooth. In reality, you’re upgrading from one channel to another, and in the early days, you do PR but eventually that doesn’t scale. Then you’ll switch to a different channel, which takes some time but also eventually caps out. Eventually you’ll have to pick one of the very few growth models that scale to a massive level.

The point is, incrementing each month with a fixed percentage hides the details of the machinery required to generate the growth in the first place. This disconnects the actions required to be successful with the output of those actions. It disassociates the inputs from the outputs.