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.