A journey of a thousand miles begins with a single step. Lao-tzu
If you read the academic literature or business press, you might believe that large companies and their business models are brought by the stork.
This series of posts are going to offer a new three-stage model of how startups grow into large companies. And I’ll end with some thoughts about a new approach to entrepreneurial education using this model.
Children, Adolescents and Adults
In the Middle Ages children were considered to be smaller versions of adults. We now know that the human life cycle is more complex; children aren’t just small adults, and adolescents are not simply large children. Instead each is a unique stage of development with distinctive behavior, modes of thinking, physiology and more.
The same is true for startups and companies.
In the past, most business literature has treated the life cycle of corporation as if the practices that make sense for a large corporation were equally appropriate for a startup. They only differed by timing or scale.
I argue that as a scalable startup grows from a garage into a Google, it progresses through three distinct stages – each presenting a unique set of challenges and decisions – and each requiring vastly different resources, skills and strategy.
Let’s take a closer look at the first two of these stages.
Stage 1: The Scalable Startup
A scalable startup is designed by intent from day one to become a large company. The founders believe they have a big idea – one that can grow to $100 million or more in annual revenue—by either disrupting an existing market and taking customers from existing companies or creating a new market. Scalable startups aim to provide an obscene return to their founders and investors using all available outside resources.
Entrepreneurs who have run a startup know that startups are not small versions of big companies. Rather they are different in every possible way – from goals, to measurements, from employees to culture. Very few skills, process, people or strategies that work in a startup are successful in a large established company and vice versa because a startup is a different organizational entity than a large established company.
Therefore, it follows that:
a) Startups need different management principles, people and strategies than large established companies
b) Any advice that’s targeted to large established companies is irrelevant, distracting and potentially damaging in growing and managing a startup
Getting From Here to There
If you would ask a startup CEO to create a diagram showing how their startup will become a large company, you’d probably get a simple line extending from “here’s where we are” to “here’s where we’re going.”
All the activities of a scalable startup such as Customer Development, Agile Development, Pivots, search for a repeatability, scale, business model, team building etc. would be inside the box to the left. In this simplistic model, on the day a startup achieves product/market fit, they would stop doing all the startup activities and magically become a “large company” – somehow acquiring a completely new set of skills, executing a known business model, generating profits and achieving liquidity for its founders and investors.
Since we know the world doesn’t work like this, the question is, “what is the process that transforms a a startup into a large company?”
Stage 2: Metamorphosis – the Transition
Any entrepreneur who has been successful (lucky) enough to grow their startup into a large company knows that this process is not a simple linear transition – it’s a metamorphosis. Startups traverse a clearly defined and chaotic stage before they become a large enterprise.
And once again, very few skills, processes, people or strategies that work in a scalable startup or in a large established company are successful in this transitional stage.
The transitional period between a startup and a company is a different organizational entity than either a startup or a large enterprise. While it is no longer an early stage scalable startup, it is not yet a large company.
This is the “they fired the founders and took away the free sodas” stage.
Summary
The new taxonomy for understanding how startups differ and grow into large company’s looks like this:
Each stage is an entirely different business entity with different management needs and requirements. In the next few posts I will explore how they differ in:
- Management
- Culture
- Sales
- Marketing
- Strategy
Then I’ll propose why this three step model calls for a new approach to entrepreneurial education—Durant School of Entrepreneurship™.
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Filed under: Corporate/Gov't Innovation |
Great read Steve. So true.
Steve,
I look forward to reading this series. As someone still going through ‘the transition’ I can agree that it is an extremely difficult stage in all functional areas where what was no longer is. Internally, you need to change many of the things that got you to where you are and changing those is not an easy process. Change is naturally hard to most as we all know but getting an organization to understand that we cannot become who we need to be by remaining what we are and continuing to do the same things is a true challenge.
Look forward to following….
~Paul
Totally right on! I had the unpleasant experience of watching a startup company with less than $4MM in sales bleed to death under the weight of a Fortune 100 level overhead structure. (One of my unsuccesful turnarounds.)
At the risk of generalizing, overhead and infrastructure are only necessary to the degree that they address span of control, work product quality, and asset protection. Unfortunately, these usually come at the cost of nimbleness and cash. One must weigh the “cost” of problems associated with the former vs. the cost of the solution.
This model assumes that the firm grows organically – truth is the growth/exit strategy for most start up companies is aquisition.
Love to see this type of simplicity applied to the largest market opportunity.
Frank
Hi Steve
Amazingly insightful read. I can’t wait to read the next parts of the series. I have a blog that deals with the initial startup stage of a company, and how entrepreneurs can deal with it.
Interesting read. The process of growing from zero to a large-sized success is indeed a bumpy, complex process. But your three-stage model is a nice compartmentalization of the basic concept.
When it comes to thinking solely about the startup process, I like to assign three stages as well:
* Initial startup phase: pre angel or VC funding
* Funding phase: angel and/or VC funding; or successful bootstrapping
* Scaling up to transition: IPO or outright private purchase of startup
Durant vs. Sloan is a nice analogy, but I would like to see your take on how this is done by founders who steered the company through the whole continuum. Think Ellison, Siebel and Duffield.
Thanks for another great post Steve 🙂
I’ve helped start 8 tech companies and this is right on the money. I’ve been saying so to founders for 20 years so they know what is going to happen. I’ve only known a handful of founders that were capable to running a large company; Steve Jobs and Bill Gates are recent (relatively) examples.
The skill sets, motivation, interest, ability, leadership are different for each stage.
Steve,
Have you read Tribal Leadership by Logan, King, and Fischer-Wright? You might enjoy it. It’s a quick read. I reviewed it here.
Michael,
Thanks for the recommendation. I haven’t read it but just ordered it.
steve
Something you might find interesting: http://www.cbs.dk%2Fcontent%2Fdownload%2F92518%2F1215558%2Ffile%2FSharon%2520Alvarez%2520Jay%2520Barney%2520and%2520Janice%2520Molloy.pdf
Slide 15 onward discusses the firm structures for entrepreneurship. Clan, Charisma and Expert based firms. From what I recall studying this was the most sustainable through the whole process was charisma based firms (from the founder’s perspective)
It is interesting that when you get to an MBA program, you are usually thought Sloan type management, which may be excellent when joining an existent big company. Nevertheless, as you point out it is not applicable when joining an startup.
Great writing
Can the startup culture exist in a more mature business entity that is highly profitable?
Do we have to throw out the “baby with the bathwater” to execute in the process of creating a larger business?
These are the questions we rarely have time to think about while iterating on the product/market fit. Is Google’s corporate culture closer to Lockeed Martin than a startup?
[…] As mentioned in my previous post on the Lean Startup Business Model Pattern, configurations of new frameworks often assembly and facilitate best practices from previous work. I believe that the vast amount of business strategy formulation frameworks out there, to some degree are overlapping and can be summarized. Consider whether entrepreneurs have the time and resources to sit down and carefully carry out their long-time strategy. Or whether strategy forumaltion should comes as consequence of processes when resources are scarce and uncertainty is extreme. This calls for new blue-collar frameworks that are embracing entrepreneurial learning and pivoting. To site Steven Blank, A Startup is Not a Smaller Version of a Large Company. […]
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For me, as a start-up person (masochist), this article brings hope. Our company is in the transition stage (finally), although recently profitable. I can hardly wait for the next posts.
Thanks,
Rick
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Steve Blank’s talk also provides some incredible insights on why its necessary to scale if you are building an important company. Video link: http://startup-marketing.com/steve-blanks-sll-keynote-its-a-must-watch/ In his own words: “A scalable start…
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Ummm… nice post (I look forward to the rest of the series), but how radically different is this from Robert X. Cringeley’s three stages of development in Chapter 12 of his “Accidental Empires” – Commandos, Infantry, Police? [Market penetration, market exploitation, market retention].
There’s a nice 2000 summary of this on the Motley Fool here: http://www.landley.net/writing/mirror/fool/foth000731.htm
Overall, my concern is that by polarizing startups against the MBA/Sloan world, aren’t you sidestepping the need for synthesis, the need to find a third way more appropriate to their situation?
Surely the key problem startups have right now (and going forward) is that of finance, so how can the kind of learning startup you and Eric Ries propose get funded in a world full of Sloan-thinking angels and VCs?
no.
Three points in response to your two letters:-
(1) Startups need to plan, even if their plans need constant iterating based on customer feedback. And if they need to plan at all they need to use Sloan thinking to some degree.
(2) Startups also need finance, and to extrapolate and communicate their financial needs, they need to use Sloan thinking to some degree. The finance world is a Sloan world, and Sloan thinking is the interface to that world.
(3) Only a few entrepreneurs genuinely have the flair and outright brilliance of Billy Durant – the rest of us need Durant *and* Sloan in roughly equal measures. Properly integrated thinking means being able to work comfortably in both certain and uncertain contexts: fundable startups need a third way, not a be-like-Billy manifesto.
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