Last week I got a call from Patrick an ex-student I hadn’t heard from for 8 years. He was now the CEO of a company and wanted to talk about what he admitted was a “first world” problem. Over breakfast he got me up to date on his life since school (two non-CEO roles in startups,) but he wanted to talk about his third startup – the one he and two co-founders had started.
“We’re at 70 people, and we’ll do $40 million in revenue this year and should get to cash flow breakeven this quarter. ” It sounded like he was living the dream. I was trying to figure out why we were meeting. But then he told me all about the tough decisions, pivots and firing his best friend he had to do to get to where he was. He had been through heck and back.
“I made it this far,” he said, ”and my board agreed they’d bet on me to take it to scale. I’m going to double my headcount in the next 3 quarters. The problem is where’s the playbook? There were plenty of books for what to do as a startup, and lots of advice of what to do if I was running a large public company, but there’s nothing that describes how to deal with the issues of growing a company. I feel like I’ve just driving without a roadmap. What should I be reading/doing?”
I explained to Patrick that startups go through a series of steps before they become a large company.
Search
In this first step, the goal of a startup is to search for a repeatable and scalable business model. It typically takes multiple iterations and pivots to find product/market fit – the match between what you’re building and who will buy it.
You’ll realize you’re ready to exit the Search step when you have customer validation:
- You’ve found a sales channel that matches how the customer wants to buy and the costs of using that channel are understood
- Sales (and/or customer acquisition in a multi-sided market) becomes achievable by a sales force (or network effect or virality) without heroic efforts from the founders
- Customer acquisition and activation are understood and Customer Acquisition Cost (CAC) and Life Time Value (LTV) can be estimated for the next 18 months
Startups in Search mode have little process and lots of “do what it takes.” Company size is typically less than 40 people and may have been funded with a seed round and/or Series A.
Most startups die here.
Build
At about north of 40 people a company needs to change into one that can scale by growing customers/users/payers at a rate that allows the company to:
- achieve positive cash flow (make more money than it spends) and/or
- generate users at a rate that can be monetized…
Unfortunately as you hire more people, the casual, informal “do what it takes” culture, which worked so well at less than 40 people, becomes chaotic and less effective. Now the organization needs to put in place culture, training, product management, processes and procedures, (i.e. writing the HR manual, sales comp plan, expense reports, branding guidelines, etc.)
This Build phase typically begin with around 40 employees and will last to at least 175 and in some cases up to 700 employees. Venture-backed startups will often have a Series C or D or later rounds during this phase.
Grow
In the Grow phase the company has achieved liquidity (an IPO, or has been bought or merged into a larger company event) and is growing by repeatable processes. The full suite of Key Performance Indicators (KPI’s) processes and procedures are in place.
Lucky you’re not the ex-CEO
I pointed out to Patrick that he was in the middle of the transition from Search to Build. And I suggested that he was lucky to be encountering this problem as a 21st century startup rather than one a decade or two ago. In the past, when venture-funded startups told their investors they’d found a profitable business model, the first thing VC’s would do is to start looking for an “operating exec” – usually an MBA who would act as the designated “adult” and take over the transition from Search to Build. The belief then was that most founders couldn’t acquire the skills rapidly enough to steer the company through this phase. The good news is that VC firms are beginning to appreciate the value of keeping the founder in place.
I reminded Patrick that the reality is startups are inherently chaotic. As a founder he got the company to the Build phase because he was able to think creatively and independently since conditions on the ground changed so rapidly that the original well-thought-out business plan became irrelevant.
He managed chaos and uncertainty, and took action rather than waiting around for someone on his board to tell him what to do, and his decisions kept his company from dying.
Now Patrick would have to pivot himself and the company. In this Build phase he was going to have to focus on how to thoughtfully start instituting things he took for granted in the Search phase. He was going to have build into his organization training, hiring standards, sales processes and compensation programs, all the while engineering a culture that still emphasized the value of its people.
Patrick took a bunch of notes, and said, “You know when I figuring out how to search for a business model, I read the Startup Owners Manual and Business Model Generation, but where are the books for this phase? And come to think of it, in the Search phase, there are Incubators and Accelerators and even your Lean LaunchPad/I-Corps class, to give us practice. What resources are there for me to learn how to guide my company through the Build phase?”
Time to Make New Friends
I realized Patrick just hit the nail on the head. As chaotic as the Search phase was in a startup, you were never alone. There was tons of advice and resources. But in the past, the Build phase was treated like a smaller version of a large company. Operating execs hired by investors used the tools they learned in business school or larger corporations.
I suggested it was time for Patrick to consider four things:
- Read the sparse but available literature that did exist about this phase. For example, The Four Steps to Epiphany Chapter 6, Company Building, Ben Horowitz’s The Hard Thing About Hard Things (a series of essays) or Geoff Moore’s classic Crossing the Chasm
- If he already had an advisory board (formal and/or informal), add CEO’s who have been through this phase. If not, start one
- Get a one-one CEO coach or join a CEO peer group
- And potentially the most difficult, think about upgrading his board by transitioning out board members whose expertise was solely rooted in the Search
As we finished our coffees, Patrick said, “Thanks for the advice, though I wish someone had a methodology as simple as the Lean Startup for how to scale my company.”
Lessons Learned
- Startups go from Search to Build to Scale
- The Search to Build phase happens ~40 people
- Very different management tools and techniques are needed to guide your company through this new phase
- You need to reset your board and your peer advisers to people who know how to manage building a company versus starting one
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Filed under: Family/Career/Culture, Lean LaunchPad, Venture Capital |
Scalerators should fill the gaps left by accelerators.
http://www.rocket-space.com (where successful startups go to reach “orbit”). Alums include Uber, Spotify, Leap Motion, etc., etc.
Steve, a book that might give entrepreneurs some guidance in the build stage is “Traction, Get a Grip On Your Business” by Gino Wickman. An number of entrepreneurs that I associate with have used these principles once they have moved out of the discovery/search phase.
I think that “Inside the Tornado” and perhaps “Escape Velocity” by Geoff Moore would be better at this stage than “Crossing the Chasm”. In those books, he talks about growth and achieving separation from competitors rather than gaining adoption.
Another good overview of various stages a company goes through with real life examples of the challenges a growing company faces, like scaling an actual team with all the pain that comes with it – process, rules, HR docs, etc.
It seems like that’s when it stops being fun for the members of a growing team and I suspect many early hires have a bit of a career crisis, due to the changing role(s), at this point and choose to leave the company.
My personal non-expert opinion on the growing phase – it’s best to avoid aggressive hiring goals to avoid the pains and bad decisions (compromising on talent) that come with it. People are the best asset a company has, and a strong team that understands product and customers is a company core to build around.
Yes, I agree that he is looking for Processes now. E-Myth could help. Also, leadership and delegation stuff as well as Delivering Happiness by Tony Hsieh.
A nice problem to have indeed. Great advice, but I wonder as he was an ex student why didn’t you teach this to him? The problem with reading books is that it’s a lot of platitudes and examples of success nothing day by day, rarely practical in that sense. The answer is always to invest in an individual or team who has the experience to do a stage transformation in what is needed, in fact it’s quite easy from here on in IF you get the right team… Where do you get the right team? http://www.bobpanic.com and I will take care of it all, it what I do… Just don’t expect it to be cheap…
I worry if it is such a nice problem to have, in the way it is put.
“I had a good idea what I was doing trying to start this business and make a bunch of ideas into something that can be turned into a business, but now I have no clue what to do next or which way to turn.”
I do mean to be provocative.
Because it ought to be a simpler equation in my book:
A founding CEO is who sets the vision and goals of a company,
A successful founding CEO is who attains a business model that is viable, from those aspirations, dreams and goals.
They have already earned their spurs, at this point.
But they need to build a business.
This is more classical territory, but still hard transiting from startup, especially assuming the very same headcount in charge.
I say it actually does require a different talent set, which can be brought in.
My own experience was lucky, I started with cofounding talent who came from much larger roles and in essence were simply patient with me until I got things passable, and by then they’d gotten enough of me to be sympathetic to my vision to know how to step in and help. But step in they did. Just not to push me aside.
If, as a company founder, you have a genuine personal vision of how your business wants to transform a industry, and believe that industry needs that transformative effect yesterday, you have a mission to communicate that, and your role, immediately, is to become a kind of super salesman for your entire company, whilst still staying utterly intimate with your product. You start to think outside your company, as a customer first, then as a investor in your customer’s companies, then as a competitor, you start getting paranoid, you start thinking of the survival of everyone connected with you, not now, but twenty years from now, and you start to feed this back into your board and the realities you face. You have to be out there, more than metaphorically, but in another way practically, as well as mentally, and yet appear to customers as if you just this moment left your developer’s seat or test bench.
Don’t let any new founder CEO get too far into building, because too much of it can be traps for that kind of a person. The most common trap is the entirely wrong kind of building, when CEOs “build” fancy new offices and start dictating on site catering… all of which sank too many firms before the goog made it appear sine qua non for success. Get someone truly experienced, preferably someone who built a major company division, or sold a medium size company to a merger. I genuinely think that this transition creates a new role. Same way marrying your mistress creates a vacancy. Just there’s no requirement to abdicate, if you know what you need to do.
Reblogged this on CA Daydream Academy and commented:
business model canvas, as well as a strong network of mentors and peers is always helpful. the guy knows what hes doing though!
Sarcasm filter not properly engaged:
Yup, I highly recommend placing your fledgling, just barely fallen form the nest, some feathers to be oiled yet, company, right in front of the soft vastly ever widening maw of a multinational major organization with vast resources which no matter how soft and friendly they may appear, oft by virtue of being decorated with sugar sweetness of people like you or even your same age, all of which organization, like it or not, being a consultancy, is devoted to being a symbiote, living whilst extracting from your cooperative body every last fluid ounce of vital juices it can without actually killing you.
YMMV 🙂
But to preempt something here: why do so many people when confronted with my intuitive dislike * of consultancies immediately start out on giving so much “survival guide” kind of advice how to supposedly get mileage out of such interactions, to the extent of which their own complexity looks like a MBA course in full detail before you see a bottom line? (I have a theory, about a consultant insider insider inside… or how you get a kind of Mandelbrot creation of sub consultancy at every rendered edge of the subject area)
*I’m not actually mean to consultants or consultancies all the time. Even i’ll say I can find value in some. But that’s come with time and experience. I would totally not want to go back in time and make anything critical upon anything in this arena. I have such clearly and vivid memories of being told imperiously how all my business problems would be solved by twenty year old graduate hires… amusingly they didn’t know I was younger, I looked into my thirties, but the attitude was not isolated at all. My generic argument is beware of any time waster, in fact anyone not identifiable on your own planning RADAR maps.
In addition to Delivering Happiness, recommend Tribal Leadership and Jim Collins’ “Level 5 Leaders”.
Add to that Jim Collins’ “Good to Great” (where Level 5 Leadership comes from).
Also a book I came across by accident browsing Amazon is “No Man’s Land” by Doug Tatum, subtitled “What to do when your company is too big to be small, but too small to be big”.
Corporate partnerships are critical to many companies at Patrick’s stage. Consider teaming with Accenture Technology Labs (trusted advisor to the Global 2000) http://www.accenture.com/us-en/technology/technology-labs/Pages/technology-labs-overview.aspx
Good question, great advice.
I believe this book is highly under appreciated in situations like Patrick’s – http://www.predictablesuccess.com/books/predictable-success/ – highly recommended!
A great “how-to” manual for the build stage, and excellent complement to the “Startup Owner’s Manual” is “Scaling Up” by Verne Harnish of Gazelles Growth Institute.
Here’s one recent HBR article that deals with this issue… 😉
https://hbr.org/1983/05/the-five-stages-of-small-business-growth
But seriously, your friend should try these two books:
Sutton& Rao (2014): Scaling up excellence
http://www.amazon.com/Scaling-Up-Excellence-Getting-Settling/dp/0385347022
Hess (2012) Grow to Greatness: Smart Growth for Entrepreneurial Businesses
http://www.amazon.com/gp/product/0804775346/
And Robert Sher wrote a book that directly addresses the needs of mid-sized companies: http://www.ceotoceo.biz/mighty-midsized-companies
In my opinion, the best book covering the build phase ($10M to $100M in revenue) was Startup CEO, written by Matt Blumberg. Fred Wilson has said Matt is one of the best CEOs he’s every worked with.
http://www.amazon.com/Startup-CEO-Scaling-Business-Website/dp/1118548361
Agree. Matt put together a good reference here…
As a lecturer teaching a subject on this very challenge, here are a couple of books I’ve found useful:
Jim Collins “Good to Great” (don’t dismiss this as a book for big companies – entrepreneurs find it very relevant)
Doug Tatum “No Man’s Land” (based on years of experience of supplying CFOs to businesses at this crucial growth stage)
I find that the Good to Great model (Disciplined People, Thought, Action) makes a great framework for ideas, method, models etc contributed by others.
Great post Steve,
My day job that funds my startup burn rate is giving advice to entrepreneurs in the growth phase. The book “No Man’s Land” by Doug Tatum is good ( previously mentioned).
If I was designing the tool you desire it would have three main themes:
– consistent systems
– activity based gauges ( yes also relevant outside a startup!)
– confident pricing ( based on a good differentiation strategy)
Get those three right and keep your job!
Patrick is welcome to reach out if he would like.
Paul Foster
I don’t know any of those titles, but a book that gets little mention in startup talk is, The Education Of A Speculator, by Vic Neiderhoffer. I would thoroughly recommend it to anyone, in fact. But his discussion of markets and market ecosystems and patterns is I think good intellectual lubricant to the grist of more practical advice. The nice things about any book by a trader (worth the name) is they never tell actual examples of trades, just how to think about what you’re trading with.
Oh, okay, one I will dig from memory, The Art Of The Hard Sell by RL Shook is a must read, in my vicinity. Because of a bum break in my education, I pitched up to a publisher where I got to cold call adverts for some surprisingly major (PGA, e.g.) magazine prints.. when I went to see The Wolf Of Wall Street I was finishing Di Caprio’s lines before he did, to the great annoyance of my neighbor. That stuff is real, and does work. Ancient history to me, but it works. Know it, if you sell any kind of product, though.
I’ve done a lot of falling flat on my face starting up. A lot. I mean I need to relearn how to be embarrassed. But I dunno how I could advise anyone doing a startup bent part time, not myself, anyhow, it’s all consuming to me, even if totally not my gig.
I do not think Patrick needs to learn a new model to sclae.
Up to now he was searching for a business model. While scaling he is still searching, and now for an operating model. The same overall (now abstract) Lean Startup principles apply, where “customer” is replaced by “operating model”.
Literature, mentoring, and all the great suggestions offered here (thank you) will help only if Partrick’s initial search resulted in an existing, well understood business model (and here the VC’s would be “right” to replace him with someone who has doen it before). Apologies for being heretic.
However if that is not the case, and the initial search resulted in a fundamentally new business model, Patrick will have to search for his company’s new operating model. It won’t be from scratch, but it will still be a search.
Anything else would mean Patrick settling for a sub-standard operating model to realise a potentially new business model, discovered through pain and tears. That would be a pity after all the hard work.
Hi, some time ago I wrote an article on applying “Search” for scaling a lean startup. Here is the link http://neoschronos.com/insights/how-to-scale-a-lean-startup/ I hope it clarifies my initial thoughts.
Not trying to be funny, but is there not a role here for a “founder friendly” CEO, or interim CEO, someone specifically good at doing this build, whilst working to interpret the nuances of the founder CÉO, who is then freed to spend time to align the company in terms of coherence in vision, outward appearances, outward communication, ideals including where they affect the bottom line, long term goals, keep everyone focused on ultimate purpose whilst the build is happening?
To me this really sounds like a new job opening, not a tender for replacement of the CEO, but a chief builder. In my own experience, much younger de facto CEO, I had the ability to make one of my cofounders much senior to me President/COO and do the building role, and he had plenty enough powers then to achieve, whilst I lost none of mine.
I still put “salesman” on my visa entry forms, when asked…
Because I find thinking like a salesman reminds me sometimes of …
:… maybe this isn’t the actual question being asked?
I mean, maybe a different question is more important?
People do not always articulate the best,
That’s a given, when you know what you are asking,
It gets a touch harder when the asker doesn’t really have too much a grasp what they are asking, but they have a fundamental feel..
– – –
So what if the question is more defined,
Like:
“I found product and a market, but I do not know how to execute to get to the volume sales we need with the margins we need and I have no idea about the input variables such as cost of financing as this gets big, or any clue how to level head negotiate these big numbers?”
Pivot is one thing that I think is getting so over used, obviously some people think it legitimized taking money to run with until they hit on a way to get people to sign up for vaporware… and excuse further to scratch that and pivot again…
Okay, that much we know, sadly
But there is a pivot also in trying say to get to Apple levels of manufacturing integration prowess.
Can anyone even touch Apple’s ability to swing input prices with its volume orders that dwarf the market for screens and CNC machines?
What if the question is, more succinctly,
“I think my investors bought on some assumptions we can execute clearly to a level at which their models are using X Y or Z company as comparators, and I’m scared their discount valuations will break grumpily if we can’t show how we’ll get there”.
Then, oh then, I think you have a further pivot, to take a idea from small to large scale.
Now that works maybe more in manufacturing where mass scale is a particular complexity
But even software and apps, apps need complex back end, and engineering pivots possibly.
And I think very few new companies are really going to get the economies of scale in datacenter they might like to. I’d sure be very scared if I saw a spreadsheet enumerating returns from margins attained by a top tier vendor in any category. At best, you have a long path to that goal. If you can make a go of it, it will be undoubtedly the coolest thing… but what are your expectations of yourself, at any given random observation point between then and now? If there’s not a linear line to be plotted, you may just have to pivot another whole lot over again, maybe much deeper even than original engineering, since your growing business will be more complex.
I would recommend the following book and website http://scalingup.com/
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