Organic growth: a more certain way to succeed
Organic growth is growth that is funded out of income. Organic growth is directed by trying things on a small scale and increasing the scale of those that are working. Because of the size of commitments being kept to what the company can afford to lose, organic growth is a more certain way for a company to survive. It is generally the philosophy of choice for a lifestyle company as, in stable times, it will provide a good return at a lower risk.
What organic growth does not do generally is provide massive ability to scale. Rapid growth is constrained by capital and cash flow. While in theory you can have a successful venture that funds more growth that in turn grows the company exponentially in practice this is rare. The reason for this is simple, profits can rarely be ploughed directly into growth without leaving the company short of cash and so vulnerable. Organic growth is about avoiding vulnerability to small environmental shifts, and so tends to be conservative. If a company that is growing organically has an injection of funds this can often allow the company to do extremely well solely from revenues. With cash in the bank lucrative avenues can feed themselves and so grow exponentially. I know of one lifestyle company (realseeds.co.uk) where the founders were not trying to make money, just to do what they enjoyed doing. This left them without the same barriers to success as there was less infrastructure to feed. They split their profits between their employees at year end in one of the nicest profit sharing schemes I have seen. Despite this meaning that their employees were paid far better than average they were able to do the things that were working because they could throw as much of their own labour at them as they wanted. They worked hard and things grew. They are the only company I have come across to hit the problem of being too successful.
Another company I have been involved in, Green Cathedral, experienced the same effect. We were running quite happily getting enough work to pay the bills but not growing very fast when we got a small amount of funding to develop a product idea we had. The £300k went into the bank, and gave the whole company a boost. By the time the money actually arrived we had already built the prototype of the product so the money wasn’t required for its original purpose. What it did do was allow us to invest more in growing the things that were working. This investment repaid itself so fast that the money in the bank was never touched, but the company went into accelerated organic growth. This effect was almost directly opposite to the effect on the same company of a later investment of £5m which was enough that it allowed the company to move away from the organic growth mind set. In hindsight it would probably have been a good time to go into an acquisition growth mode, but the company had been looking at things in terms of organic growth for so long that it would have been a difficult management challenge.
