Business building happens by a series of 1% improvement. But business domination comes with step functions. You can build a very good business with just the first one. But you need both if you want to build a great business.
One-percent improvements can build a solid company.
You can build a good company with slow, constant progress. By building through a series of 1% improvements, a start-up can grow to $8M ARR in year 3, $16M ARR in year 4, $26M ARR in year 5, and $40M ARR in year 6, etc.
Here’s what that growth looks like:
The nice thing about continually making 1% improvements is that they have a high likelihood of success and a high likelihood of helping the business. One can follow a playbook from other similar companies about what to do and how to up-level and make investments. And no company can be successful without consistently making 1% improvements.
One-percent improvements add up over a long time.
Seventy-two 1% improvements results in a doubling of the output of the company. The faster you make these 1% improvements (OODA loops), the quicker you get to the doubling. It works, and it can work well over the long term.
If your company could get just 1% better every day for an entire year, you’ll end up 37X better after 365 days. Writer James Clear has a great chart for this:
That’s the power of slow, constant improvement.
One-percent improvements feel good.
The other reason why we tend to lean into constant 1% improvements is that it feels really good. The human brain loves a continual feed of small, positive feedback. So incremental steady growth does wonders for the morale of the company. Everyone feels like they are making consistent progress towards their goals when they put an input in and get a near-immediate output back out.
This is also one of the reasons why people shy away from step functions. With step functions, this relationship changes from linear to non-linear. The positive feedback is delayed indefinitely. And when it does show up, it hits like a hammer and then disappears again relatively quickly.
One-percent movements are easily reversible.
Start-ups move really fast. This means that not every decision they make is the right one. But with one-percent moves, those decisions that quickly turn out to be wrong can be reversed easily.
This has value to both the employee who can reverse something if they mess up AND the management team who can reverse course quickly with little collateral damage.
All of these attributes make one-percent improvements very attractive to a business. But it will only take you so far.
For any company to become a GREAT company, it needs a step function (or sometimes, multiple-step functions).
If you want to build a $1 billion ARR business, you will need a step function along the way. Step functions accelerate the trajectory of the business.
This is what a step function looks like:
They have the potential 10x the business quickly but carry more risk than constant 1% improvements.
Step functions are really hard and have low success rates.
Step functions have a low likelihood of success and are much harder to pull off. There is usually no playbook for a step function. There is little to copy from other companies, and you really have to innovate and get it right.
OODA loops are still super important in the step function (because you need to iterate a LOT along the way), but so is careful planning.
You can’t move as fast with step functions, and they are much harder to reverse once you’re finished. This makes them a higher risk.
Step functions are nonlinear, so you have to wait for an outcome that may never come.
Step functions are nonlinear—you input and input and input without any output. Then, with one additional input (and some luck) you get this giant, nonlinear explosion upwards.
Here’s the same chart as above, but with my annotations:
It’s hard psychologically to get through that period of no feedback. Many businesses may even be tempted to abandon the project. They have no idea how close they are to that big step up.
Step functions have the potential to 10x the business … often a lot quicker than people realize.
And this is why, despite all the risk, you still work for them. They have the potential to 10x the business really quickly with one solid step up.
And while many competitors are solidly grinding out one-percent improvements, you can leap over them all with a single step function.
Step functions have value, even if you miss.
Even when step-functions don’t work great (a single instead of a home run), they can still help the business along the way.
Here’s what you gain from a step function that didn’t work out as planned:
- You got feedback and can improve your processes moving forward.
- You gained some momentum you can use to push into your next sprint.
- You still improved the business.
You can do a lot with constant, one-percent improvements, but you can do far more when you add step-functions along the way.
They make the difference between $100MM in ARR and $1 billion. That’s worth the risk.
Special thanks to Thomas Waschenfelder for his help and edits.