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Knowing When to Sell

Every startup begins with aspirations of being “the next” Google or Facebook or Amazon. This unbridled optimism is what drives an entrepreneur. Each new technology market has new success stories, and drives future entrepreneurs to chase after their dreams. However, the reality is that not every startup can “win” their market. With each new technology market, billions of potential entrepreneurs exist around the world as potential competitors.

As an entrepreneur, there is no reason to be ashamed if your startup doesn’t win the market. Every successful entrepreneur will admit that luck and good fortune play a significant role in deciding the winner. In fact, many successful entrepreneurs in a technology market are the startups that got out early, and avoided a devastating market crash or a market that never materialized.

To preserve their hard work and to protect employees and investors, entrepreneurs need to know when to turn the unbridled optimism into sober realism. They need to know when it is time to sell. At different points in a startup’s lifecycle, the management team needs assess the market and to acknowledge that the best strategy is to sell the company. Selling at the right time is the best way to preserve value.

Conversely, missing the right exit window will destroy a company’s valuation. In each new technology market lifecycle, numerous exit windows exist. A startup’s relative success and competitive positioning may dictate selling early. The competition may have clear (and potentially insurmountable) advantages early in the race, such as funding, key partnerships, technology advantageous or other related advantages. If you miss your right exit window, your valuation will suffer.

To illustrate the different exit windows in a market lifecycle, Gartner’s hype cycle is a good proxy for understanding the market dynamics.

Most startups are created and funded during the climb toward inflated expectations. Startups can achieve increased valuations by selling near the Peak of Inflated Expectations where established companies pay increased valuation to ensure that they don’t miss the next big thing. In this phase, valuations usually aren’t based on financial metrics, but some other metric is used to justify the valuation. For example, Twitch valuation discussion centered around having 55 million unique visitors, and AlchemyAPI’s valuation discussion centered around having 40 thousand developers.
Many startups crash in the Trough of Disillusionment as they run out of cash. The forced exit during this time period hurts valuation; however, if the company has some interesting technology or other assets, the startup can obtain a reasonable exit for the employees and investors. The investors may lose some value, but angel investors will appreciate receiving some of their money back, and the founders usually find value in having an exit on their resume.
During the Slope of Enlightenment, valuations begin to rise again. The remaining startups survived the downturn and presumably have customers and revenue. As more conservative incumbent companies recognize the new market’s threat and opportunity, they make acquisitions based on traditional financial metrics, such as multiple of revenue or earnings.
After entering the Plateau of Productivity, the hype is over and the clear winners begin to emerge. The winners’ growth begins matching or exceeding the overall market growth. Other startups begin to falter, although they may still be growing and profitable. The winners begin planning to go pubic. Currently, in the Hadoop ecosystem, companies like Cloudera, Hortonworks and MapR are emerging as the clear winners, even as they jockey for position to become the overall winner of the market. The valuation for the other startups begin to falter as their optimism and promise begin to falter.
On the other side of the Plateau of Productivity, the story doesn’t end. The market dynamics will determine if there is one clear startup winner (such Cisco, Google, Microsoft in their day), if the market fractures (the ERP market in the early 2000’s), or if the startups are crushed by bigger players via innovation or acquisition earlier in the cycle (Microsoft Office in its day). At this stage, unless your company is a clear winner, your valuation is based purely on performance without any premium for a promising future. Usually, private equity firms and opportunistic companies are aggressive in driving down valuations, as they execute on consolidation of the remaining industry.

On the other side of the Plateau of Productivity, one huge danger for entrepreneurs and investors is becoming a “lifestyle business”. Startups can remain with limited/no growth but sufficient profitability to say alive. This lifestyle business gives the entrepreneur a comfy lifestyle; however, it destroys value for the investors and employees as the startup becomes less valuable over time. The entrepreneur fears giving up the prestigious and comfortable lifestyle (CEO of a startup always sounds good at parties). In reality, the entrepreneur fails to see that this lifestyle business is bad for the entrepreneur as they spend years not doing much except for managing a non-growing business. If an entrepreneur sits too long in a stagnant company, it is hard to find their next job commensurate with their existing position. The entrepreneur can take a huge step back in their career when the startup eventually ends. The entrepreneur needs to recognize the situation, and to avoid the trap of a lifestyle business.

For an entrepreneur, there are numerous decision points for deciding if it is the right time to sell. The CEO and management team need to continually assess the market cycle, the likely market structure, the likely market outcome, their position in the market, their competitors position in the market, and numerous other factors. Most entrepreneurs lack the structural knowledge, experience and objectivity to make this ongoing assessment. More importantly, entrepreneurs can’t spend their days thinking about their exit strategy; instead, they need to focus on execution and becoming one of the winners. However, if they don’t have someone monitoring the optimal exit time, they will miss the optimal time to sell.

Growth and Scale: The New Skillset for Entrepreneurs

For the entrepreneur, life in an early stage startup is fairly straightforward: you build a product and acquire your first customers. Plenty of books and other materials have been written to guide help a company through the initial stages of sales and product development, including the Lean Startup movement.

After the product has been built and the startup has initial customers, the entrepreneur begins thinking about how to “scale and grow” the business. To be successful, entrepreneurs need to learn entirely new skills. They must become strategists and managers. Fewer materials exist to help the entrepreneurs through this stage of the company development, because the process is not as formulaic and crosses multiple disciplines.

Often, this is stage where the entrepreneur is replaced as CEO and/or other “seasoned managers” are brought into the company by investors. However, there is a movement in the investor community against replacing the founder as the CEO. A product oriented founder as the CEO is seen as the best way to keep the entrepreneurial and innovative spirit of the organization. Andreessen Horowitz is the biggest proponent of the product-oriented founder as the CEO.

Regardless of who is leading the organization, the startup needs to quickly evolve to handle the challenges of scaling and growing the business. On the other side of this journey, the startup will be transformed into an “emerging company”.

Many startups fail at this stage, because they underestimate the difficulty. The frantic and scattered startup must evolve into a scalable organization.

Below are a few of the key areas where entrepreneurs and startups face difficulty in the scale and growth phase.

Recognizing Change. Most entrepreneurs are successful, because they are confident and self-assured (which make them believe that they can change the world). While these personality traits have served them well throughout their career, entrepreneurs must recognize that the game has changed. The entrepreneur needs to start over in the learning process. They need to recognize that new skills are required to be successful. This is what investors call “coachable” entrepreneurs. Without the ability to adapt, entrepreneurs will make key mistakes that could doom the startup during this important transition phase.
Management Skills. The CEO entrepreneur needs to learn management skills. They can’t continue to do it all by themselves. Other people need to drive the continued development and sell of the product. The CEO will always be involved, but the CEO can’t drive every decision. Additionally, the CEO needs to learn how to help others be successful by training, teaching, and managing. The CEO should not micro-manage, but must empower the team to execute on the corporate strategy.
Corporate Strategy. The CEO needs to develop a corporate strategy. The startup will face new distractions, as it hires new people and builds out the different functional organizations (sales, finance, HR, etc.). The corporate strategy should clearly define the vision, and how the company will execute on this vision. The strategy doesn’t need to be a complicated and long document; instead, the strategy needs to succinct and sufficiently clear so that everyone in the organization knows what to do. Outlining the strategy will also set priorities for the company, and enable the CEO to monitor progress. Without a clear corporate strategy, the company will haphazardly execute of different activities, and will hope these are the right activities to make the company successful.
Exponential Revenue Growth. The CEO needs to drive exponential revenue growth. While the sales organization creates processes to scale (make coin operated) the customer selling process, the CEO needs to focus on exponential growth where the company’s efforts are multiplicative, not addition. Exponential growth begins with understanding the company’s ecosystem and potential partnership options. The CEO needs to develop a strategy for targeting the best partners, including how to incentivize the partners and what sustained activities are necessary to develop the partnerships. After building a relationship with the partner, the CEO usually reaches out to a licensing lawyer to help structure the deal and drive the agreement to completion. Finally, the CEO must execute on the partnership and naturally transition the relationship to the sales or business development organization.
Competitive Positioning. After landing the initial customers and selling to mainstream customers, a startup realizes that it is no longer flying underneath the radar. The competition has prepared customer materials comparing products and explaining why their product is better. The startup needs to take a new look at its competitive positioning, and develop materials for the mainstream customers. Often, this task is given to the new marketing team. However, the CEO needs to own this strategy development, as it provides key insights into the overall corporate strategy.
International Expansion. Chasing all possible revenue opportunities, the startup begins contemplating international expansion. This is an area where startups usually fail to have a coherent strategy, and often, startups rely on the same selling tactics in their home country. Startups often will hire individual sales people to cover one country or an entire region. This is called the “seal team six” approach, where an extraordinarily talented sales person could win some battles, but they never seem to win the war. They are left to fend for themselves with predictable results. The startup usually needs help understanding the different strategies for international expansion and help with execution.
Buy-side M&A. With additional investor funds (Series B or Series C) in the bank, the startup begins to contemplate acquisitions. The normal M&A strategies may include technology tuck-ins, acqui-hires, or new product acquisitions to diversify or to fill a feature gap. The entrepreneur CEO usually underestimates the complexity of and the diversion created by M&A. Most startups lack the bench strength to handle an M&A transaction and need to bring it outside experts to help with this process. M&A is an effective means to scale and grow the business, but only if managed correctly.

The entrepreneur usually has the talent and adaptability to meet the “grow and scale” challenge. However, the entrepreneur needs to understand that new skills are required and must learn the new skills and seek help when necessary to transfer the startup into an emerging company.

What Is Strategy?

Strategy can be a confusing topic. Countless books and articles are still being written explaining what strategy is and how to do it. New strategy models are constantly being developed and sold like snake oil as the cure for all corporate ills. Early in my career, I watched an executive off-site derailed over the confusion between a strategy and a goal. Additionally, examples can found everyday where companies struggle because they lack a clear understanding of strategy.

Since strategy is such an important topic, people are afraid to ask: “what is strategy” and “how do I do strategy”? This article provides a simple definition of strategy, and outlines various corporate activities associated with strategy. All of these activities are happening everyday in organizations, but most people lack an understanding of how these activities fit together.

This articles doesn’t address the “art of strategy”, which is how to choose the right strategy. Also, this article doesn’t address why strategies fail in execution and how to improve your success. The first step is to understand the basic framework of strategy before tackling these other topics.

Simple Strategy Definition

Strategy is simply: how you intend to achieve your goals. The four key components are:

Goals: a strategy needs a clear goal. You need to clearly define what you are trying to accomplish. Your goals are distinct from the strategy by which you wish to achieve these goals. For example, some companies state their strategy as “growing by 20%”. This is actually a goal that they want to achieve, but it doesn’t explain how they intend to achieve this goal.
Achieve: this is how a company intends to win. Winning can be accomplished by deceit, flanking maneuvers, overwhelming force, surprise attack, lowest cost, etc. Most strategy models and tools fall into this category. These models show you how to achieve your goals. The classic strategy model is Michael Porter’s 5 Forces, where an industry’s competitiveness and attractiveness is assessed utilization 5 factors. These strategy models guide decision-making by capturing a unique insight about the world and by providing a simple framework to understand the insight.
Intend: strategy requires an overt act of decision-making. If you accidentally discover a great innovation, that isn’t a strategy. However, once you recognize the innovation and begin to develop a plan to utilize the innovation, then your activities are intentional and are a strategy.
How: these are the activities necessary to achieve the goal. Strategy requires marshaling the team, equipping the team, placing them in position and giving them execution orders. Without understanding the activities necessary to achieve the goal, a strategy is simply an idea.

Strategy in Business

Within organizations, numerous formal activities are part of the strategy process. Below is a summary of the primary activities involved with strategy. These activities are normally performed by some combination of the CEO, finance organization, corporate development, or marketing. BU leaders and product managers engage in similar activities for their respective organizations.

Strategy Objectives (Goals)

Vision. The CEO articulates a vision for the company, establishing its long-term direction. The vision may be formalized in documents or may be ascertained from the CEO’s speeches and talking points.
Mission Statement. The mission statement articulates a variety of core principles about the organization, such as its purpose and core values. This informs the employees and the public about what is important and where to focus their energy. For example, many mission statements declare a customer centric focus to the company.
Corporate Goals/Priorities. The CEO sets strategic priorities for the next year and coming years. These priorities focus the company’s attention and resource allocation. Some CEO(s) prefer setting “big hairy audacious goals” forcing a company to stretch to achieve these stretch goals. The priorities usually establish 3-5 new projects or things that must get done for the year. For example, a priority can be entering an emerging market segment or cutting 10% for the operating expenses.

Strategy Development (Achieve)

Industry Landscape. As part of strategy development, companies assess the competitive landscape and assess their positioning in the market. Getting a realistic assessment of the industry and competitors is essential for knowing how to win. For example, if your company is in a highly competitive market with a slow growth rate, your company may look to diversify into different markets. On the other hand, if you are the market leader in a high growth market, your company may focus efforts on capturing more market share and consolidating your position in the market through M&A.
Market Segmentation. Companies assess where they can position themselves (play) in the market. By segmenting the market, a company is assessing whether it can discover any patterns and opportunities. The market segmentation can be by customer, geography, white space, vertical, emerging technologies or other segmentations. A detailed analysis of the different segmentations is essential and can reveal insights into how to attack the market.
Competitive Advantage. Companies decide how they will compete, i.e., the low cost leader, new product innovator, entire solution, etc. The competitive positioning will drive the corresponding activities, such as marketing, financials model, product design, and all other related activities. A unique competitive advantage will significantly increase a company’s chances for success.
Core Capabilities. Companies assess their core capabilities to isolate what makes them unique. These capabilities can be the distribution model, the sales model, the engineering capabilities or anything in the organization. Identifying core capabilities enables a company to assess how they won and provides valuable insights for potential expansion plans.
Other Models. Countless other models exist for strategy development. These models cover every imaginable scenario, such as growth options, creating a new product market, M&A strategies and countless others. All these models are providing some insight into how to achieve your goals.

Strategy Management (How)

Corporate Roadmap. To enable a winning strategy, companies need to establish a corporate roadmap as the execution plan. This process ensures that everyone understands what it takes to be successful and their role. A good corporate strategy will lay out all the steps necessary to achieve the goals.
Functional Strategy. In functional organizations, companies often have functional strategies for how they will support the corporate strategy. This process ensures that the functional teams understand what it takes to be successful and their role in the corporate strategy.
Strategic Planning. The strategic planning process is essential for establishing financials metrics and budget allocation. Strategic initiatives must be given the funding necessary to be successful or else these initiatives will likely fail.
Portfolio Management. With large and diverse organizations, a core function of corporate strategy is portfolio management. The business unit’s are individual companies that need to be managed as assets. One of the primary decisions is resource allocation among the different BU(s), which includes setting the P&L parameters.

With a basic strategy framework, you will significantly improve your decision-making and execution by providing a clear understanding of what you are trying to accomplish and how to achieve these results. You will also understand how the new strategy models fit into the overall strategy framework and whether the latest models are relevant to your organization.

What is Business Development?

There has always been a lot of confusion around “what is business development?”. I recall a Venture Hack event in the past where a speaker remarked, “there is no such thing as business development”. While the speaker was making the statement for shock value, it does illustrate the confusion around business development.

Historically, with startups, confusion reigned because no one wanted to be called “sales”. Apparently, this didn’t sound executive enough or there was some perceived negative connotation with being a sales person (these people obviously have never seen the pay check of top sales people). To avoid the term sales, people called themselves “business development”. In the last few years, this positioning has evolved even further. Now, startup sales people call themselves Chief Revenue Officer (CRO) or some equivalent.

To unravel the confusion, it is necessary to start with the conceptual difference between sales and business development. Sales people should be focused on customers, and driving quarterly revenue. Sales people are paid on commission for driving revenue, and will instinctively avoid “time sucks” where short-term revenue possibilities don’t exist. Also, a well-run sales organization is supposed to be “coin operated” with standardized sales materials, pricing models, etc. The more efficient the process, the more success you will have with selling.

On the other hand, business development is focused on strategic partners who are not customers, and is less focused on driving short-term sales. Business development requires latitude for building a long-term relationship where revenue might take time to develop. Business development is also a different skill set. The relationship between the companies and deal structure needs to be defined. There might be a revenue model or only coordinated sales efforts, or there might be only interoperability between the parties.

Different variations on business development:

—GTM Partners (Outbound Sales):
—GTM Alliances:
—Technology Alliance (or strategic alliances)
—Inbound partners

Do startups need business development? Driving sales is the most important thing. The sales/business development/CRO person needs to do what it takes to drive sales. One argument is that startups should outsource business development, because it is not a core competency for a startup. On the other hand, one trap for startups is to neglect proper business development, because they have a sales person called “business development”. These are distinctly different activities. The startup will not scale or achieve exponential growth without proper business development activities.

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