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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.

Integrating Business Development with Exit Strategy

Most startups and emerging companies miss the opportunity for an effective exit strategy by not integrating exit strategy into their business development activities. The most likely M&A partner is an existing business partner, especially if you are making the partner successful. By understanding the relationship between business development and exit strategy, you can utilize your partnership efforts to accomplish both objectives.

Startups are often told that exit planning is a dirty word, because investors (mainly venture capital firms) want the startups focused on building the next $1B company. Unfortunately, only 0.07% of the companies make it into this “Unicorn Club”1. Additionally, only 22.5% of venture back companies go public (although that number does seem high)2. The remaining startups are left to contemplate a different future: bankruptcy, M&A exit or stagnation (also known as irrelevancy to your investors looking for a return). Of course, everyone knows that significant amount of investor returns come from M&A exits, which creates a dichotomy between what your investors tell you and the realities that everyone knows. To deal with this dichotomy, startups should integrate an exit strategy into their business development activities.

Without an exit strategy, startups often lose significant value in their exit. The startups aren’t prepared for the worst-case and best-case scenarios. In the worst-case scenarios, companies wake up one morning to realize that their funding is drying up and they haven’t achieved profitability. The inevitable scramble to find an exit ensues. However, the harsh reality sets-in for these companies when they realize that they haven’t built the necessary partner relationships to facilitate an exit. There is a mad scramble to figure out the potential buyers, who is the right person at the partner to execute an M&A deal, and how to pitch an acquisition to each company. Often, companies face the terrible phone call of having to introduce their company to a potential buyer, explain to the buyer why they are great, and explain why they must sell in the next few months. The success rate of such “fire sales” is low, and even if the company can find a buyer, the valuation is usually pennies on the dollar.

In the best-case scenario, when your company receives its first unsolicited M&A offer, you want to reach out to other potential buyers to solicit competing bids. When companies aren’t prepared, they are forced to pay millions to advisors to find other potential buyers. However, if you have done your planning in advance, you should already know who the other potential bidders are and can save significant fees. Additionally, the window for obtaining other bids is often short and other potential buyers are in reactionary mode. The internal process for potential buyers takes time. Many potential buyers can’t respond quickly enough to make a serious competing bid.

To avoid these scenarios, you should integrate exit strategy into your business development activities. With any business development effort, you should start by understanding your ecosystem, including your competitors, inbound partners, alliance partners, go-to-market (GTM) partners, GTM alliances and other partners. As you build your business, you will start forming partnerships with the key players in your ecosystem.

Layering an exit strategy over your business development activities only requires a slightly different analysis of your partners. You should understand (1) your M&A fit to their organization, (2) the rationale for a potential acquisition, (3) the partners M&A history, (4) the “M&A power structure” at the partner, and (5) the key decision makers to know for M&A activities. Once you understand these factors, you will have a roadmap for positioning your company for a potential exit.

1 http://techcrunch.com/2013/11/02/welcome-to-the-unicorn-club/
2 The Venture Capital Cycle, 2nd edition, 2006.

International Expansion Strategy

As startups and emerging companies expand, they inevitably face the question of how to grow in international markets. Too often, companies haphazardly build their international businesses and are frustrated by the results. International strategy requires surveying the market and weighing a number of considerations. A good international strategy will address the following:

Approach

Starting Point: In what region should you start? Traditionally, US companies have started in Europe, and more specifically England, since the market is similar to the US and numerous commonalities exist. Over the last decade, companies have looked at the BRIC countries as the best starting point with the huge growth opportunities in these markets. With the fluctuations in some of the emerging markets, careful analysis is required to assess the best strategy for your product.
Direct or Partner: Should you enter a new market directly by hiring a few local sales people or through partners? The most common path is finding a partner, since partners already have an established customer base and market knowledge. However, for new technology, proper partners may not exist. Additionally, partners may require you to bring them the first few deals to prove there is a market and it is worth their time.
Seal Team Six or Operation Overlord: How should you distribute your resources across the globe? With the global market opportunity, many companies take the “Seal Team Six” approach and send sales people across the globe to win one-off battles in individual countries. This approach can be effective for testing potential markets for your product; however, this ultimately leads to frustration that sales don’t grow exponentially. The opposite approach is the “Operation Overload” (code name for the D-Day invasion) approach, where you marshal your forces to establish a beachhead and back it up with the resources to dominate one particular market. Overtime, you will win the market. However, while this leads to exponential growth in one region, you may be exposed in other regions where the competition may gain traction.

Type of Partner
If you decide to head down the partner path, new sets of strategic questions arise: which type of partnership is best? The typical choices include:

Distributor/Reseller: Traditional distributors and resellers are the easier path. However, many of these companies are “box pushers” and simply fulfill orders. You may be required to handle demand generation, which can defeat your purposes for partnership.
Joint Venture: These are sometimes called “a marriage without love”. Joint Ventures can make sense under certain circumstance; however, they are notorious for misaligned incentives and falling apart after failing to achieve success.
Referral/Independent Sales Rep: Hiring an individual or small firm to land your first few deals is often used. Many times, these individuals are former executives from your potential customer who promise access and influence in buying decisions. These can be effective, but often times the former executive’s influence is less than promised.
M&A: You can always look for a competitor or similar company in the market. If the ideal candidate exists, this can be an effective strategy. You may face difficulty if you buy a company that is not a direct competitor, as you might inherit a product and team that distracts you from selling your product in the market. Also, the integration process can be challenging if not handled correctly.

Choosing the best international strategy will significantly increase your chances of success. Of course, strategies are never effective without good execution. You should tie your strategy and execution together into an integrated approach to ensure you achieve your goals.

When Should You Begin Exit Planning?

Exit planning is essential to achieving maximum shareholder value and ensuring that all your hard work is rewarded. Without an effective plan, market forces or some unforeseen event could leave you scrambling to find an exit. If you sell under distress and without preparation, your valuation will be significantly less.

Exit planning is like an insurance policy. You pay a small amount (of your time and energy) per month to ensure that you are protected against downside risks or worst-case scenarios. Even though entrepreneurs are risk takers by nature and don’t always think about the downside, their friends, family and other investors would certainly appreciate insurance against downside risks. Also, entrepreneurs often don’t realize that their future ability to raise capital may depend on a decent exit with the existing company.

Once you have accepted the need for exit planning, the next question is when to begin exit planning? The answer must be divided into two phases (1) Exit Strategy, and (2) Exit Execution.

Exit Strategy
Your exit strategy should be baked into your overall strategy from the very beginning. In fact, thinking about exit planning from the beginning will help you grow your business. The questions asked during your exit strategy discussions will force you to expand beyond the “comfort zone” of your current business and should create new opportunities.

An example will illustrate this point. Exit strategy discussions start with the basic premise that the most likely exit will come from a partner or someone who knows you. With these partners, the key M&A decision maker could be a variety of different people, including the CEO, CFO, CTO, BU leader, VP or Products and/or Corporate Development. As part of your exit strategy, you will need to figure out who is the M&A decision maker(s), and begin building relationships with these key people. By taking this extra step, you will actually be building a stronger relationship with your partner and may create new business development opportunities by building these relationships. Too often, companies stop at simply building a relationship with middle management, because this relationship is sufficient for your immediate business needs. Thinking about your exit strategy will force you to push further into an organization and to create new opportunities.

Exit strategy discussions will also benefit other areas, such as ecosystem development, financial optimization, customer acquisition strategies and numerous others. These exit strategy discussions will focus your thinking on value creation and how to expand your business beyond its current trajectory.

Exit Execution
The exit execution process should start six months before you desire to have a letter-of-intent (LOI) signed, assuming you are initiating the M&A conversations. Without an effective M&A strategy, the process may take longer. If your M&A advisor must introduce your company to decision makers during exit execution, it can take a long-time to find the right decision makers, get their attention and convince them that acquiring your company should be made a priority (over their other priorities).

Often, companies looking for an exit underestimate the amount of time required to execute an M&A deal. On the seller’s side, you must create all the marketing materials, collect the due diligence materials, and complete numerous other tasks. On the buy-side, time is required to align decision makers around doing this deal, to conduct due diligence and to adequately plan integration.

To avoid the time crunch, a clear exit strategy and a disciplined execution plan are essential to achieving shareholder value.

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