Growth 101 & the cost of doing (startup) business
Growth is the Holy Grail for all startups, or at least for most of them. Some others prefer to target higher to the Blitzscaling level of becoming a Unicorn. No matter how you name it, growth phase is the common denominator for all startup trajectories that differentiate them from those that enter the valley of death and those that thrive.
Definitions and metrics vary, depending on the industry and the location. In traditional industries, growth can even be a 20% YoY turnover increase and that after 10 years of operation, while in Silicon Valley growth is observed even for startups of 2 years with 500% increase in terms of subscribers, or more.
I decided to write this post, as I monitor both well-known and less-known case studies (including of course Innovation Sprint) and I want to summarize my findings on the growth requirements and mechanics, as well as the cost of doing business.
Growth requirements and mechanics
Let’s dive deeper into it and see the requirements for a company to enter into a growth phase. First, I don’t want to generalize, so there are many companies that can reach a growth phase even if they don’t have the described requirements. All others that are grouped under the typical growth startups have at least the following characteristics. I will not explain each of the above with definitions and scientific publications, as I expect my readers (you guys) are smart enough to understand. I would prefer to give some examples and suggestions that will make it easier to follow.
1. Target users with a B2C or B2B2C model, offering a digital service or good
Sometimes you are given the chance to sell your consulting time with a 4-digit number per day and then you go back to your excel and make calculations. Fair enough, but this will not help you to scale, because you can never find so many skilled people to maintain such rates. Only companies established for decades can have juniors charged with 4-digit numbers and that because they have accumulated knowledge. Therefore, the only way is to go to the consumer directly, usually with business models like B2C, B2B2C, or similar. In the same way, the product should better be a digital service or good that does not require logistics, only cloud resources.
2. Eliminate human-in-the-loop
If you understood the previous characteristic, the need to eliminate the human-in-the-loop is very easy to be understood, as it targets the same challenge, i.e. the valuable human resources. In the clinical research industry, in which I am involved, I see the customization as a prerequisite for every digital solution. Even if this charged adequately, you can never find so many people to write code, so you will face a bottleneck in your pipeline. Focus on your product, to be reproducible and easily customizable. The rule of thumb is that 10% max should be the income from services and the rest from selling of goods or licenses.
3. Not being afraid of competition
I have faced that many times with friends, colleagues, student, mentees, and some time ago with myself. You think you had the most disruptive idea… and then you search. Usually people get upset and demotivated. I always suggest that the existence of competition should make you happy, as there is a market already validated for you. However, you have to do a thorough and continuous research. At the same time you should realize that competitors are companies like yours, maybe a few years more mature.
4. Quickly surpass the Chasm and offer the ‘whole product’
Geoffrey Moore has nicely presented in Crossing the Chasm book the recipe to move within the early majority, after convincing your enthusiasts and earl adopters. This mainly applies to consumer electronic products, but also to most of the digital services and goods. Try to take the required steps to move from monolithic software approaches with no documentation and chaotic situations, into more structured approaches. This requires a quality system that works and a team with discrete roles. You cannot achieve that with people running all over the place with all kinds of hats. The change management of a startup is a tough job and often underestimated, but is always an essential element of growth.
5. Be visionary, but leave the egos aside
This can also go first in the list, as vision is the key element for creating growth prospects. You cannot target a growth phase if you are not visionary, because lack of this will prevent you from looking at the bigger picture. I am not using the word vision like those who instruct you to write one paragraph for vision and one for mission of your company on a piece of paper (or on stone). This is old stuff. Vision is something that you define today and you keep on refining and updating. Now, having a vision is one thing. Having a vision that can lead you into a growth phase, is something that doesn’t come with a paragraph of text. The latter requires that you are on top of everything and you are very well prepared before defining the vision, the strategy and the tactics. Often visionaries have egos. Don’t be afraid, you are not alone. Everybody has egos and this has also some (few) healthy aspects in it. You should work hard, leaving egos aside in all phases, as described in the book of Ryan Holiday, Ego is the Enemy. It is better to say less and do more, thus implementing your vision, rather than being the most optimistic guy in town that at the end cannot deliver.
6. Follow a lean startup methodology
When I teach Entrepreneurship at the University, I ask students if they have read Eric Ries and the Lean Startup. If they say no, I request them to do so during weekend. Eric wrote the book many years back and it is true that there are several variations today, even vertical approaches. Nevertheless, there is no reason to explain why a lean startup methodology is a must, when you want to grow. MVP, evaluations and pivoting should be regular processes that you exercise aiming to increase your impact.
7. Do business development (and not just sales)
Selling is always good, but sometimes sales people are like those who say “I don’t give a sh*t about my product, I just want to get rid of it”. In our era, we fall in love with our products and therefore, it is not bad to sleep in bed with others who can fall in love with your product too, however, not for a one-night-stand, but for a long lasting relationship. It is much better to sell your stuff through a business relationship, rather than doing this alone. Why? Because alone you cannot go very far. You need to create networks and distribution channels. Don’t forget that the global market, accessible through the Internet, is big enough and synergies are not minimizing your profits.
8. Raise (more) money that is needed
It is a stereotype, but companies die because of inadequate cash flow. Having enough cash is the number one job of the CEO and often a dream or nightmare. The tricky thing is that sometimes you think you are okay, in fact you should never be. If you think you are okay, there are 3 possibilities: a) you became the CEO of Apple and you don’t remember it, b) you don’t have a good reporting, or c) you target low. If you target low, you can indeed be okay with cash you have. If you target high, you should stretch your boundaries and this requires a lot of cash.
9. Work hard with a clear roadmap
Working hard is a prerequisite; working smart is an outcome of having a clear roadmap and the ability to define the strategy and the tactics. Working hard can be of no use, if this is not in the right direction. The more I dive into the stories of startups, the more I see that those that reached the growth phase, are those that admitted that they were not in the right direction and all the hard work was thrown in the trash bin. This should not shock you; it should make you be alerted and read between the lines to realize if you need to refine your roadmap or your tactics.
10. A team of smart members
Last but not least, a key characteristic of startups in growth is the team. A startup team that targets growth should consist of smart people. Some people call them Class A, some other smart creatives, but in any case you should be targeting on talent. When talent meets culture, then you have the right people that surrounds and supports you. Having the right team in place is very difficult today, because of lack of talent, given the huge demand, and because HR practices are often far away from CEOs mindset.
Cost of doing business
Growth is usually associated with success, revenues and profits, but what is the cost of aligning your startup into a growth trajectory? It is becoming a trend that previous failure is a per-requisite for startupers, but also many small failures within a single startup operation is a mandatory step to observe new winning paths. Like many people say, fail often, but quick and in a way that nobody will remember.
These many little failures are associated with a cost, which can be money, time, opportunities and many more. Let’s see some of the typical parameters, related to the cost of doing startup business:
Prototypes and MVPs
Several hours of programming can be thrown away, once realizing that these will not have the desired market traction. This is the main reason why you should be able to deliver quick and meaningful MVPs that will not make you suffer when you see them in the trash bin. A very nice approach to achieve that is the Design Sprint, from Jake Knapp and Google Ventures. Jake presents a smart way to deliver a meaningful prototype, as well as its evaluation within a week! (With this opportunity, I would like to say that Jake is a very cool guy. I contacted him once over email to ask him if I could make such Sprints in my courses; I could never imagine that he would respond promptly and be so kind and helpful.)
Human resources
Your startup needs resources and as described above this should be talented and passionate people. You might be running out of time and most probably you don’t have HR skills to find the right people. And then you make wrong choices. How do you deal with wrong choices? The up or out strategy could work, but you don’t want to be this type of guy and besides this destroys any kind of culture. A more effective choice is to be clear from the beginning that you are results driven. If results don’t come, both sides will understand it on time. However, this is associated with costs: salaries, training time and opportunity loss. Can you afford that? No matter if you can afford that or not, the cost of having people that don’t help you to grow is always higher.
Re-platform
You start your MVP, you get a positive feedback and guess what… you decide to build your platform on the sand(box). It normally helps you to take the next step, but to cross the chasm and scale up you will need a proper infrastructure. At this moment of truth, there are two type of people: those that keep on trying to reuse what they have and those that start in parallel the re-platform project. Both cost a lot, the difference is that the existing platform will have less costs for a longer period and a high opportunity loss, while the other option will cost you more until you re-platform, but will allow you to scale up.
(Pre-)sales and BD
Any sales, pre-sales, or business development costs can be very high, but you are desperate for money and traction. A streamlined business has optimized processes and knows how to select appropriate leads for their activities. A startup at growth phase often bypasses such processes, which can result in a lot of valuable time and money loss. There are no super recipes here, as it is a fact that you can be surprised from the outcomes you may experience through less probable leads. My only suggestion, is to measure and use this knowledge for your future planning.
Take away message
We saw key characteristics of startups at growth trajectories, as well as usual costs associated with the growth needs. There are many more costs, including synergies, strategic choices, etc, but what it matters is to understand that going for growth means you have to burn cash, a situation that is a paradox, when considering that you, as a startuper should have been more careful.
How is this paradox viable? We will have to see the startup DNA to understand this better. Startupers, are usually low- or no-paid and can find time all around the clock for their companies. That alone can save some hundreds thousands of dollars at an annual basis. Moreover, they are not risk averse (at least they shouldn’t be), so they can balance situations that may lead into success, or total failure. For example, it is much easier for a startup to engage into a project with high liabilities, compared to a big enterprise that will have to go through several rounds of approvals, before taking a risky step.
In any case, the beauty of startups is that they operate under these circumstances and that is why they can achieve a great impact.
