Tuesday, 29 September 2020

Strategies for Banks to Make a Profit in a Low Interest Rate Economy

By Steve Lander

Low interest rates don't have to eliminate a bank's profitability. 

A low interest rate economy can be challenging for the banking sector. After all, if banks earn profit by lending out money and they can't charge as much for the money they lend, it's harder to maintain the same level of profitability. However, low interest rate markets still offer opportunities for banks to do extremely well. These strategies are as open to small community and business banks as they are to the largest institutions. 

Fee Revenue 

Instead of earning money by borrowing and lending money, banks can turn to fees to boost profits. For example, banks can charge overdraft fees when customers try to draw money that they don't have from their accounts. One $35 overdraft fee per year generates as much revenue as lending out $1000 at 3.5 percent for the year. Banks can also charge ATM usage fees, account maintenance fees, statement copy fees and just about anything else they can imagine. 

Origination and Turnover 

Another option for banks is to continually recycle their money, such as in the mortgage market. Instead of making a traditional 30-year mortgage loan and tying up their income for a long period of time, banks can make and sell loans. When the bank makes the loan, it ties up a portion of its capital in the loan at a low interest rate. However, the bank can turn around and sell that loan to an investor and, hopefully, realize a profit on the sale. The bank then has the money back to lend again so that it can continue flipping the funds. 

Changing the Spread 

When the rate that a bank can charge plunges, it creates an opportunity for them to increase their profit by charging a little bit more relative to the market. For example, if mortgage rates should go from 8 percent to 4 percent, it's unlikely that a customer would complain or even notice if the bank dropped its rate to 4.25 percent instead. After all, the customer is still saving a great deal of money relative to previous rates. Doing this helps to cushion the blow of low rates and protect or even increase bank profits. 

Rates Don't Matter 

A low interest rate market cuts both ways. While banks can't charge as much for loans, they also don't have to pay as much to attract deposits. Historical data from the Federal Reserve comparing the prime rate to the rate on a three-month certificate of deposit shows that they trade in a relatively tight band. Between 1995 and 2012, the average difference between the two rates was 275 basis points, and the spread varied between 212 and 320 basis points. When you take out the highest and lowest spread years, the range narrows to 267 to 297 basis points -- which is just over a 10 percent difference during 16 years of the 18 year period. For comparison, during that same period, the prime rate fluctuated from 3.25 to 9.25 percent and CD rates fluctuated from 0.28 to 6.46 percent. In other words, while rates change, the bank's profit, which comes from the difference between the deposit and loan rates, remains roughly similar.


Thursday, 20 August 2020

Financial Shenanigans: Concluding Thoughts

This third edition of Financial Shenanigans updates investors with lessons gleaned from examining many of the deceptive financial reporting practices employed during the last decade. Since we published the original edition of Financial Shenanigans in 1993, corporate management has continued to concoct new ways to manipulate its financial reports in order to inflate company stock prices and other compensation-related metrics. And, looking to the future, as management works to create newfangled tricks, diligent investors must continue to learn to detect new financial shenanigans. 

The preface of this book quoted a proverb from the Bible (Ecclesiastes 1:9): 

What has been will be again, what has been done will be done again; there is nothing new under the sun. 

Corporate financial scandals have been around as long as corporations and investors themselves. Dishonest management has preyed on unsuspecting investors, and it is time for such investors to redouble their efforts to be alert for such financial shenanigans so that they can protect themselves. 

Since shenanigans at their most basic level represent management’s attempt to put a positive spin on a company’s financial performance and economic health, our universal message is that investors should assume that the urge to exaggerate the positive and hide the negative will never disappear. And where temptation exists, shenanigans often will follow.


Financial Shenanigans  Third Edition 

by Howard M. Schilit & Jeremy Perler

Key Metrics Shenanigans: Part 4.

Part 4 introduces readers to a group of shenanigans that stretches management’s creativity in deception to the limit. 

This section of the book shows Key Metrics (KM) Shenanigans used to distort an investor’s understanding of the economic performance and health of that company. The accompanying boxes summarize exactly how it is done and how investors can spot these devices. 

Warning Signs: Showcasing Misleading Metrics That Overstate Performance (KM Shenanigan No. 1) 

  • Changing the definition of a key metric 
  • Highlighting a misleading metric as a surrogate for revenue 
  • Unusual definition of organic growth
  • Divergence in trend between same-store sales and revenue per store 
  • Inconsistencies between the earnings release and the 10-Q 
  • Highlighting a misleading metric as a surrogate for earnings 
  • Pretending that recurring charges are nonrecurring in nature 
  • Pretending that one-time gains are recurring in nature 
  • Highlighting a misleading metric as a surrogate for cash flow 
  • Headlining a misleading metric on the earnings release

Warning Signs: Distorting Balance Sheet Metrics to Avoid Showing Deterioration (KM Shenanigan No. 2) 

  • Distorting accounts receivable metrics to hide revenue problems 
  • Failing to prominently disclose the sale of accounts receivable 
  • Converting accounts receivable into notes 
  • Increases in receivables other than accounts receivable 
  • A huge decline in DSO following several quarters of growing receivables 
  • Inappropriate or changing methods of calculating DSO 
  • Distorting inventory metrics to hide profitability problems 
  • Moving inventory to another part of the Balance Sheet 
  • Distorting financial asset metrics to hide impairment problems 
  • Stopping the reporting of certain key metrics 
  • Distorting debt metrics to hide liquidity problems

Cash Flow Shenanigans: Part 3.

This part expands the discussion to the Statement of Cash Flows. Since investors have started placing more emphasis on cash flow from operations (CFFO), not surprisingly, management has tried to perfect a new class of shenanigans—those that inflate the CFFO. 

Four general Cash Flow (CF) Shenanigans are used to inflate CFFO, and they are reflected in the accompanying boxes. 

Warning Signs: Shifting Financing Cash Inflows to the Operating Section (CF Shenanigan No. 1)

  • Recording bogus CFFO from a normal bank borrowing 
  • Boosting CFFO by selling receivables before the collection date 
  • Disclosures about selling receivables with recourse 
  • Inflating CFFO by faking the sale of receivables 
  • Changes in the wording of key disclosure items in the financial reports 
  • Providing less disclosure than in the prior period 
  • Big margin expansion shortly after an inventory write-off 

Warning Signs: Shifting Normal Operating Cash Outflows to the Investing Section (CF Shenanigan No. 2) 

  • Inflating operating cash flow with boomerang transactions Improperly capitalizing normal operating costs 
  • New or unusual asset accounts 
  • Jump in soft assets relative to sales 
  • Unexpected increase in capital expenditures 
  • Recording purchase of inventory as an investing outflow 
  • Investing outflows that sound like a normal cost of business 
  • Purchasing patents, contracts, and development-stage technologies 

Warning Signs: Inflating Operating Cash Flow Using Acquisitions or Disposals (CF Shenanigan No. 3) 

  • Inheriting Operating cash inflows in a normal business acquisition 
  • Companies that make numerous acquisitions 
  • Declining free cash flow while CFFO appears to be strong 
  • Acquiring contracts or customers rather than developing them internally 
  • Boosting CFFO by creatively structuring the sale of a business 
  • New categories appearing on the Statement of Cash Flows 
  • Selling a business, but keeping the related receivables 

Warning Signs: Boosting Operating Cash Flow Using Unsustainable Activities (CF Shenanigan No. 4) 

  • Boosting CFFO by paying vendors more slowly 
  • Accounts payable increasing faster than cost of goods sold Increases in other payables accounts 
  • Large positive swings on the Statement of Cash Flows 
  • Evidence of accounts payable financing 
  • New disclosure about prepayments 
  • Offering customers incentives to pay invoices early 
  • Boosting CFFO by purchasing less inventory 
  • Disclosure about the timing of inventory purchases 
  • Dramatic improvements in CFFO 
  • CFFO benefit from one-time items

Breeding Grounds for Shenanigans: Part 1.

The following box summarizes the key warning signs that investors should consider as creating a higher likelihood that shenanigans will be present. 

Warning Signs: Breeding Ground for Shenanigans 

  • Absence of checks and balances among senior management 
  • An extended streak of meeting or beating Wall Street expectations  
  • A single family dominating management, ownership, or the board of directors 
  • Presence of related-party transactions 
  • An inappropriate compensation structure that encourages aggressive financial reporting 
  • Inappropriate members placed on the board of directors 
  • Inappropriate business relationships between the company and board members 
  • An unqualified auditing firm 
  • An auditor lacking objectivity and the appearance of independence 
  • Attempts by management to avoid regulatory or legal scrutiny

Earnings Manipulation Shenanigans: Part 2.

This part introduced seven Earnings Manipulation (EM) Shenanigans used to trick investors. 

  • The first five inflate current period income, and
  • the last two inflate that of future periods. 

The boxes given here show various techniques that management uses for each of the seven shenanigans. 

Warning Signs: Recording Revenue Too Soon (EM Shenanigan No. 1) 

  • Recording revenue before completing any obligations under contract 
  • Recording revenue far in excess of work completed on a contract 
  • Up-front revenue recognition on long-term contracts 
  • Use of aggressive assumptions on long-term leases or percentage-of-completion accounting 
  • Recording revenue before the buyer’s final acceptance of the product 
  • Recording revenue when the buyer’s payment remains uncertain or unnecessary 
  • Cash flow from operations lagging behind net income 
  • Receivables (especially long-term and unbilled) growing faster than sales 
  • Accelerating sales by changing the revenue recognition policy 
  • Using an appropriate accounting method for an unintended purpose 
  • Inappropriate use of mark-to-market or bill-and-hold accounting 
  • Changes in revenue recognition assumptions or liberalizing customer collection terms 
  • Seller offering extremely generous extended payment terms 

Warning Signs: Recording Bogus Revenue (EM Shenanigan No. 2) 

  • Recording revenue from transactions that lack economic substance 
  • Recording revenue from transactions that lack a reasonable arm’s-length process 
  • Lack of risk transfer from seller to buyer 
  • Transactions involving sales to a related party, affiliated party, or joint venture partner 
  • Boomerang (two-way) transactions to nontraditional buyers 
  • Recording revenue on receipts from non-revenue-producing transactions 
  • Recording cash received from a lender, business partner, or vendor as revenue 
  • Use of an inappropriate or unusual revenue recognition approach 
  • Inappropriately using the gross rather than the net method of revenue recognition 
  • Receivables (especially long-term and unbilled) growing much faster than sales 
  • Revenue growing much faster than accounts receivable 
  • Unusual increases or decreases in liability reserve accounts

Warning Signs: Boosting Income Using One-Time or Unsustainable Activities (EM Shenanigan No. 3) 

  • Boosting income using one-time events 
  • Turning proceeds from the sale of a business into a recurring revenue stream 
  • Commingling future product sales with buying a business 
  • Shifting normal operating expenses below the line 
  • Routinely recording restructuring charges 
  • Shifting losses to discontinued operations Including proceeds received from selling a subsidiary as revenue 
  • Operating income growing much faster than sales 
  • Suspicious or frequent use of joint ventures when unwarranted 
  • Misclassification of income from joint ventures 
  • Using discretion regarding Balance Sheet classification to boost operating income

Warning Signs: Shifting Current Expenses to a Later Period (EM Shenanigan No. 4) 

  • Improperly capitalizing normal operating expenses 
  • Changes in capitalization policy or accelerated capitalization of costs 
  • New or unusual asset accounts 
  • Jump in soft assets relative to sales 
  • Unexpected increase in capital expenditures 
  • Amortizing or depreciating costs too slowly 
  • Stretching out depreciable asset life 
  • Improper amortization of costs associated with loans 
  • Failing to record expenses for impaired assets 
  • Jump in inventory relative to cost of goods sold 
  • Failure by lenders to adequately reserve for credit losses 
  • Decrease in loan loss reserve relative to bad loans 
  • Decline in bad debt expense or obsolescence expense 
  • Decrease in reserves related to bad debts or inventory obsolescence

Warning Signs: Employing Other Techniques to Hide Expenses or Losses (EM Shenanigan No. 5) 

  • Failing to record an expense from a current transaction 
  • Unusually large vendor credits or rebates 
  • Unusual transactions in which vendors send out cash Failing to record an expense for a necessary accrual or reversing a past expense
  • Unusual declines in reserve for warranty or warranty expense 
  • Declining accruals, reserves, or “soft liability” accounts 
  • Unexpected and unwarranted margin expansion 
  • Unusually “lucky” timing on the issuance of stock options 
  • Failing to accrue loss reserves 
  • Failing to highlight off-balance-sheet obligations 
  • Changing pension, lease, or self-insurance assumptions to reduce expenses 
  • Outsized pension income

Warning Signs: Shifting Current Income to a Later Period (EM Shenanigan No. 6) 

  • Creating reserves and releasing them into income in a later period 
  • Stretching out windfall gains over several years 
  • Improperly accounting for derivatives in order to smooth income 
  • Holding back revenue just before an acquisition closes 
  • Creating acquisition-related reserves and releasing them into income in a later period 
  • Recording current-period sales in a later period 
  • Sudden and unexplained declines in deferred revenue 
  • Changes in revenue recognition policy 
  • Unexpectedly consistent earnings during a volatile time 
  • Signs of revenue being held back by the target just before an acquisition closes 

Warning Signs: Shifting Future Expenses to an Earlier Period (EM Shenanigan No. 7) 

  • Improperly writing off assets in the current period to avoid expenses in a future period 
  • Improperly recording charges to establish reserves used to reduce future expenses 
  • Large write-offs accompanying the arrival of a new CEO 
  • Restructuring charges just before an acquisition closes 
  • Gross margin expansion shortly after an inventory write-off 
  • Repeated restructuring charges that serve to convert ordinary expenses to a one-time expense 
  • Unusually smooth earnings during volatile times

Financial Shenanigans: A Holistic Approach to Detecting Financial Shenanigans

What to look for when reviewing financial statements and searching for financial shenanigans. 

 A Holistic Approach to Detecting Financial Shenanigans 

Just as the three branches of government rein in bad behavior by government officials, the three financial statements help to protect investors from misbehaving corporate executives. 

  • Specifically, investors can sniff out Earnings Manipulation Shenanigans by scrutinizing the Balance Sheet and the Statement of Cash Flows. 
  • Similarly, they can detect signs of misleading operating cash flow by finding unusual or troubling changes on the Statement of Income and the Balance Sheet. 
  • Additionally, investors can use the supplementary disclosures and key metrics provided by management as another form of “checks and balances.”


Financial Shenanigan 
Warnings on Other Financial Statements 

Earnings Manipulation Shenanigans 

Boosted income by capitalizing operating costs 
SCF: Capital expenditures surged 

Transaction Systems Architects 
Recorded revenue too soon 
BS: Rapid increase in long-term and unbilled receivables 

Boosted income with one-time gain 
SCF: Gain on investment sale in Operating section 

Boosted income by capitalizing operating costs 
BS: Deferred marketing costs exploded 

Cash Flow Shenanigans 

Inflated CFFO using acquisitions 
BS: Receivables increase differs on BS and SCF 

Home Depot 
Boosted CFFO with unsustainable gain 
BS: Accounts payable surged 

Sun Microsystems 
Boosted CFFO with unsustainable gain 
IS: One-time litigationrelated gain

Saturday, 8 August 2020

You Don't Understand Compound Growth

 You Don't Understand Compound Growth

Einstein once (supposedly) said:

Compound interest is the most powerful force in the universe

Of compound interest, Warren Buffet proclaims:

Over time it accomplishes extraordinary things

Compound interest, or growth, is one of the, if not the most, powerful and impactful forces in nature.

And yet, it is also one of the most consistently misunderstood in the world of business.

How so?

Simply, we misapply the term "compound growth" to things that do not actually grow in compound fashion.

Let's first establish what "compound growth" even means.

I propose the following operative definition:

Compound growth ~ constant growth

The fact is, very few objects, organisms or organizations can sustain truly compounding growth over any extended period.

From an observer's or investor's perspective, it's quite easy to fool yourself into thinking compound, exponential growth is much more common than it really is. And it's understandable given how often the term is thrown around. Firms in fleeting phases of fast growth can visually demonstrate their breakneck pace with the ubiquitous, infamous "hockey stick" chart.

Who could argue with that?

As an entrepreneur or operator, you too can fall prey to your own fictions - convincing yourself you've "cracked the code" when you've only really cracked the piggy bank. Irrational exuberance eventually turns concave, finally ending in a plateau of linearity.

Through some examples, I hope to demonstrate that compound growth 1) implies constant growth 2) is exceedingly rare and 3) is incredibly important to building a large, valuable business.

But before we get to business, let's talk about - bacteria.

Bacteria and Bricklayers


In bacteria populations, growth is fixed. Subject to the resource constraints of the environment they inhabit, bacteria grow at a constant rate indefinitely.

A simple example to illustrate the point:

Let's say we have some bacteria that reproduce on a fixed time schedule, one doubling per minute to keep the numbers simple.

We start with a single bacteria cell. After one minute, we'll have two bacteria. With time, the population grows as such:

  • 1
  • 2
  • 4
  • 8
  • 16
  • ...

Now we ask the question, how fast does our bacteria population grow (in percentage terms)?

The number of bacteria cells one minute from now is:


Which implies the minute-over-minute growth rate is:


or 100%.

This is an example of perfectly compounding growth, also referred to as exponential or geometric growth.

Put simply, how fast the bacteria grow is entirely independent of population size. In other words, growth and scale are perfectly uncorrelated.

Importantly, most things do not work this way.

Layering on

Let's look at another example - constructing a brick wall.

Assume a bricklayer can lay 10 bricks per hour. The brick count will proceed as follows

  • 0
  • 10
  • 20
  • 30
  • 40
  • ...

The brick count grows by 10 bricks per hour.

Going through the same growth rate calculations from above:

The number of bricks 1 hour from now will be:


Which implies hour-over-hour growth is:


Notice that the growth rate depends on how many bricks we've already laid. This is linear or arithmetic growth. Because the number of bricks laid each hour is static through time, growth (in percentage terms) necessarily slows down. Scale is in the denominator. Therefore, growth and scale are negatively correlated: more scale -> less growth.

Sure, initially we are growing the brick count quite fast - 100% in fact. But by the time we reach 30 bricks, our forward-looking growth rate has fallen to 33%. At 100 bricks, we'll only be growing 10% - which is a far cry from our halcyon days of tech reporters and venture capitalists gawking at our growing (tech enabled) bricklaying operation.

Two flavors of growth

The key difference between the bricks and the bacteria is that one has scale invariant growth (SIG) and the other... doesn't.

OK OK, friends who reviewed this before publishing said that was a big word/phrase to suddenly drop. So let's take a step back and examine this phenomenon visually before moving forward.

A great way to do this is plot the growth rate of the bacteria and bricks over time:


The bacteria grow at a constant rate over time. For the bricklayer, growth simply... collapses.

I've plotted this chart hundreds of times over the years, and for most startups the growth plot looks eerily similar to the bricks here.

Growth is not the natural order; growth cannot be taken for granted. As we get larger, we get slower.

I mentioned correlation earlier. The correlation between growth and scale in the case of the bacteria is 0 - perfectly uncorrelated.

For the brick count, the correlation is -0.7, a very strong negative correlation.

We've now established two ends of a spectrum we can use to characterize various forms of growth.

On one side, we have linear/additive/arithmetic/correlated growth, and on the other we have exponential/multiplicative/geometric/uncorrelated growth.

The question now is, where do various things fall along this spectrum? Said another way, how accurate is it to say that "XYZ" grows in compounding fashion?

Let's walk through some more examples.


Compound growth is often used in reference to compound interest earned on a financial instrument of some sort.

Anyone who has ever suffered through mounting credit card debt knows this quite well. Debt grows like bacteria - it multiplies without end at a rate that depends entirely on the interest rate and not at all on the current balance.

1%, 5%, 10% - whatever the interest rate, unless paid off, debt continues to grow without end. If only paid off partially, the remaining balance will continue to grow.

Not a bad business model if you ask me.

World GDP Per Capita

Growth is not the natural state of affairs. For most of human history there was no meaningful economic growth or improvement in livings standards for the average person. Until recently, Life was nasty, brutish, short and... static:


Unless growth is literally contractual, as in the case of debt and interest, we can't take it for granted, as history plainly shows.

And it's not simply a question of the scale of the axis. If you zoomed into that long straight line, you wouldn't see a hockey stick growth pattern. Living standards actually did not improve meaningfully over time for the vast majority of human existence on this planet.

A few years of bad weather, major epidemics like the Black Death (the bacteria strike again), social upheaval - these events drastically impacted the day-to-day well-being and lives of our ancestors, often erasing decades of progress.

Even today, many parts of the world experience major swings in their rates of growth, especially within the developing world. Regions and countries can end up in severe economic doldrums, leading to entire lost generations.

Many stops and starts, fits and spurts.

However, before we get too depressed, let's look at a best case scenario.


The good ol' US of A ('s real GDP):

Looks pretty good huh? Let's look at the growth plot:


Ugh, this is pretty noisy. It's difficult to tell if growth is changing in significant ways year-to-year or if it is generally variation around a certain value.

This view hides some interesting detail. One neat math trick - taking the natural log rescales a metric such that, when graphed, linearity implies constant growth.

Do this, and the real GDP chart becomes:

Over this period, we can make a few interesting observations:

  • Log real GDP is impressively linear - one could fit a linear line to the above data fairly well, implying reasonably constant growth
  • That said, it is not perfectly linear, and therefore not perfectly compounding, per our earlier definition
  • We can see multiple distinct inflection points where growth changed, in connection with recessions (1970, 2008)

Taking advantage of these kinks in the curve, let's estimate the growth during each period through piecewise linear regression (i.e. the "line of best fit" for each period):


Annual real growth goes from 3.9% in the 1947-1970 period, to 3.1% in the 1970-2008 period, to 2.1% in the 2008-2017 period.

The economists yelling and screaming that we are on permanently lower trajectory after the most recent recession may have a point.

So not exactly constant growth, but still impressive given the real economy grew 8x+ over this period. Growth has roughly halved over a 70-year period.

In terms of the connection between growth and scale, the correlation here is -0.3, which certainly indicates a relationship, but not a strong one.

We can therefore conclude that U.S. GDP grows in reasonably compound fashion.


Most businesses see their revenue growth rate tick down over time. This is even more true for companies that are growing quickly today.

On the other hand, some exceptional businesses have managed to drive truly compound growth over long periods.

Take Amazon for example, which has exhibited incredible revenue growth over time ($B):


This is an impressive chart in its own right. But I am actually more impressed by the log-transformed chart, which is nearly a straight line:


Amazon has grown at a nearly constant rate over almost two decades, despite increasing scale by 64x over the period.

At best, one could identify a slight kink in growth in 2011. Replicating the piecewise analysis, we can see that Amazon grew ~30% year-over-year from 2000 to 2011 and ~23% year-over-year from 2011 to 2017.


Amazon's growth-scale correlation? -0.1!

It's hard to put into words how impressive that single number is. Worth reiterating: most things do not work this way.

Amazon is an exceptional business that has evidently identified a way to grow at a nearly constant rate over many years. A combination of tapping into the long-run secular growth of e-commerce and deft expansion into seemingly orthogonal spaces (for example, via Amazon Web Services) that in fact leverage the core infrastructure the company's built up over time has enabled it to grow in bacteria-like fashion.

Growth functions: Are you adding or multiplying?

Every growing business needs an honest answer to this question: Is your business growing through multiplication, like the Amazonian bacteria, or addition, like the brick wall?

Businesses that simply "add" must necessarily slow down, by the simple math we outlined earlier. Scale begins to work against you, making it harder and harder to maintain a rapid growth pace. Eventually, you will, figuratively, hit a wall.

An example of an additive growth function is paid customer acquisition through a channel like Google Adwords.

Spending $100 on Adwords is going to generate some number of users. Spending another $100 is probably going to generate a similar number of users, and so on.

There's no "magic" here. This is "buying growth" in the most direct manner.

If anything, customer acquisition through paid channels that you do not control (and Adwords is the epitome of this) tends to get less efficient over time as you saturate keywords etc.

Like a bricklayer at the end of a long day, businesses reliant on this form of growth tend to run out of gas sooner or later.

Sure, you can attempt to stack bricks at a faster and faster rate, raising venture capital when you can no longer self-fund the endeavour, building the wall ever higher...

But this too will pass. Eventually, some proportion of those users must stick around and continue to buy from you without meaningful additional spend on your part, otherwise you'll find yourself on the proverbial "acquisition treadmill", unable to jump off without significant disruption to the business.

A number of companies in the subscription e-commerce "send me a box with a psuedo-random assortment of goods" space fall squarely into this category. Users churn at high rates, requiring more and more fuel to be poured on the paid acquisition fire to keep the train going.

On the other hand, businesses that "multiply" can grow indefinitely. Their "growth functions" are inherently multiplicative. Users beget more users. Revenue begets more revenue.

The classic exponential, multiplicative growth function is the viral word-of-mouth (WOM) or referral program.

PayPal built a viral engine in its early days, giving users money for each additional friend they referred to the service:

Dropbox replicated this, giving out additional space for signing up friends:

The act of sharing a Dropbox file or folder with someone who wasn't yet a user generated even more sign-ups:

Whatever the approach, it is vitally important that every business vigorously search for and identify exponential growth opportunities. It is mathematically inevitable that an additive, linear growth engine that does not compound on itself will eventually peter out, or even collapse like a wall built too high.

Likewise, investors must diligently sift through the noise to find the few bacteria-in-a-hay-stack that will drive true, long-term value creation. Ignore the steep trajectory in the short-run. Instead, focus on the curvature of the horizon.

Scale invariant growth is the key to building a large, meaningful business.

Go find it.

Nnamdi Iregbulem

DevOps, application infrastructure, and machine learning nerd. Soft spot for developers ❤️. MBA @Stanford | Ex-Product @confluentinc | Former VC @ICONIQ Capital | Economics @Yale