... continuing from Scaling bloopers
Scaling before you have a clear confirmation from the market is tempting, but silly. You may believe in what you do, but that’s not the point. The others need to want it. I’ve worked with a company that got this spectacularly wrong. It had a few million of revenue and 17 (!) people in product management. That’s bad enough, but on top of it they never did any checks with the market, checks of whether product ideas from this group are really what the market wants. As a result, they build a huge R&D organisation that produced a lot of product features that nobody felt compelled to buy. And since the company got to millions of revenues (with a clear “Too much too early or too little too late” profile), and it had a lot of people on the payroll to feed (and therefore had investors to satisfy), it felt that it needed to start growing faster. So it was spending like a true scaling company – which it really really wasn’t. Not surprisingly, all features of what I described earlier in “Too much too early or too little too late” were very clearly present.
One of the big challenges for startups is crossing the chasm, as described by Geofrey Moore in one of the first startup bibles called Crossing the Chasm. Getting from early adopters to early majority often is a big change – it’s starting to sell to different clients with different needs. Rather obviously, if you are not conscious about it you may start scaling when you are still talking to early adopters. Which may be ok for a start, if there are a lot of them. Or not ok if there are not a lot of them. Either way, the chasm will eventually happen and you’d need to make changes to your product, selling approach and a bunch of other things to get that early majority customers. That will slow down (or downright prevent) scaling if you are not prepared.
If you start scaling while selling to early adopters and there is not enough of them, you will run out of clients and won’t be able to sell enough. During this process it may seem that scaling isn’t happening (which would be true) and maybe can’t happen (which may not be true at all). If there is enough of early adopters, at some point early majority will show up and make your life difficult with all those silly problems of better usability, product performance, wanting new things in the product etc. Either way, if you are unaware of the chasm, it is likely to give you a problem. But if you are aware of where you are relative to your chasm, you can get things right for the new customer group and make the transition smoother. A transition to proper scaling.
By the way, the worst-case scenario for this situation is if you are stuck in early adopters and never reach early majority. For example, if they exist in different, non-overlapping places (physically, virtually, mentally, whatever) from your early fans. If they don’t hear about you - they can’t buy. And if you don’t hear from them - you may think you have a much smaller potential client base and either can’t properly scale at all, or can only scale to a much smaller size. Either way, a problem.
One of the biggest problems with premature scaling is rapid weight gain. And we all know that to be healthy you need to be in a certain range and if you are not you have to lose excess weight. There are generally two ways of doing it – before and after, in the name not unlike the dieting ads, albeit different conceptually.
When you start scaling, you usually start hiring. If this results in too much fat, i.e. in too many people – it gives you a problem, one of the hardest to correct. Hiring people and investing in your product, be that in sales or product development, makes you heavier to move and more vested in what you are doing. As if an average founder or early team member needs to be given more of the KoolAid, but that’s what they call upon themselves… It’s harder to admit you are wrong, harder to accept that some costs are sunk (“so much has been done, so much invested, surely the good stuff is just around the corner”), harder to go to the board and say “we were wrong in a costly way”, and therefore harder to course correct, change speed or direction. It’s particularly hard to make all these wonderful people you’ve hired redundant. In other words, reducing that spending is a big-bad-difficult thing to do. If you had to do it even once, you know what I mean.
This is where “before and after” come in. You can address excessive spend of premature scaling in one of the two ways.
The good way is “before” – i.e. before you gain excess weight by making sure you really are ready to scale. This is like making the amount you eat (the expenses) conditional on the amount of exercise (revenue and cashflow, aka market validation).
The bad way is “after” – when you are already overweight. Then you most likely have to downsize and possibly radically change direction. The “after” is very messy and could be a deadly bloodbath for everyone – product, strategy, founders, employees and often the company. It’s like a gastric bypass procedure, except the patient can die. The death is usually diagnosed when investors lose faith, you can’t raise more funds and the cash keeps bleeding out. Not a great experience. At all.
Obviously, you are much better off not getting to the “after” – it mean you never got too fat to have to take the two photos because the overweight didn’t happen. Dah.
Forbes wrote about Entrepreneur’s Paradox. If entrepreneurs didn’t believe in their ideas, they would never get anywhere. But because they do believe in their idea, they assume the idea is the reality – while it remains just a guess until it’s proven by customers. It’s a tough one to resolve, because some ideas succeed because of people believing in them (“if I asked a customer they’d say they want a faster horse”), while some die for exactly the same reason. Noone’s said the world is simple and fair, and I won’t be the one to start.
Inevitable, all startups have at least a little bit of smoke and mirrors. One big component is product readiness – it’s always overstated. You just have to do it – with little resources, you have to sell the vision and the roadmap as well as the current product. But there are good smoke and mirrors and bad ones. Let me illustrate on 2 examples.
One of the companies I worked with was Solexa (bought by Illumina), a world-changing breakthrough in gene sequencing, that actually did get to change the world. When they announced, with big fanfare, general availability of a product in about 6 months’ time, a lot less fanfare went to the fact that the product was not yet finished. You wouldn’t be surprised to learn that they didn’t make the deadline and kept that fact pretty quiet. The actual customer deliveries started about 1 year after the announcement. Similar approach is very often used by Elon Musk. It’s basically warming up the market, starting sales conversations and also putting a pretty strong deadline on the company itself. While knowing that the product will come along – an important detail (!). Then Solexa (and Musk in many cases) proceeded to deliver what they announced. That’s good smoke and mirrors.
Theranos would be an example on the other side. Not only announcing, but selling the product which didn’t work – and most importantly never got to working. And they knew the real status of things, from what I can tell it would be pretty hard to believe they believed they see a path to a working product. Plus, huge amounts raised with all kinds of dignitaries buying into the fairy tale. Bad, bad, naughty boys and girls lost in their own bad smoke and mirrors. Not a big surprise that it led to state-imposed restrictions on personal mobility of the founder (aka known as prison).
I talked about unit economics. Scaling negative margin is usually a bad idea. But I also mentioned industries where landgrab is needed (or a particular company thinks that it is needed).
WeWork was scaling in a massive way ($22 billion in funding, including debt), but it was losing money on its product. The real catch is that even after it had a very solid market share, it couldn’t get to positive unit economics. The market cap last I checked was is $44 million (pause and compare it to the amount raised!). Of course, a big factor was a bold, charismatic and questionable founder. But that alone doesn’t explain why such names as Insight Partners, BlackRock and Goldman Sachs invested. Those are not stupid people
Another example is home food delivery. This really is a “winner takes most” market where top players should enjoy much better economics for a number of reasons. The race was brutal. For example, Delivery Hero has raised a total of $10.2bn in funding over 22 rounds. Some others were in the billions too. Those, who raised less and failed to gain as much momentum as the bigger guys, closed – doing exactly what the landgrab winners were after. There also was a bunch of acquisitions – more successful ones buying the struggling ones (i.e. buying market position on the (relative) cheap). There was also a bunch of selling parts of the business – essentially exercises in prioritisation of the markets and an exchange of assets to cement stronger positions while exiting weaker positions. Basically – you are number 1 and I am number 4 in market A, the reverse if true in market B, so let’s exchange – I give you my business in market A and you give me yours in market B. I can’t win in A, so I’ll exit (stop losing money) while you get stronger in it. And the reverse for market B. This example is basically showing that landgrab largely worked – although many of them are still struggling with profits.
It really is, albeit this is a cliché. Having people who can handle scaling is crucial. If you are a visionary founder, chances are you suck at sales process. Which means you need a people structure that can build a machine after you sketched it and you need to allow this structure to build this machine and operate it. In bizspeak you need a proper organisational structure, hiring and delegation. Don’t try to control the whole thing, it’s not humanly possible. And if you have no choice, but to delegate caring for your baby to someone you want to delegate to the right people. There is no point hiring someone to run something they can’t, you are perfectly capable to drive it into the ground yourself.
Team dedication deserves a mention. There is a natural progression from founders to early employees (who’d kill for the idea and don’t need sleep) to the bigger company with “hires” or “headcount”. As the company grows it becomes impossible to only hire people who are as enthused as the founders are and are ready to give up everything for working in the company. Some try to do it (famously, Elon Musk), but I think it’s a losing battle. And in my view hiring for attitude over skills and knowledge is just way to risky and dangerous. Therefore, you need to morph the culture to accommodate the different attitudes. It’s ok if someone wants to spend time with their family rather than spend the weekend in the office. They could be extremely valuable. So let them be valuable in their work time only (a luxury that early stage companies often can not afford…)
However, I would not hire 9-to-5ers. I define that not via times worked, but via attitude to getting things done. If someone gets their above average deliverables done without being in the office or Zoom 24-7, why would you not be happy with that person?
And you want professional and knowledgeable people, who are excited to work for the company. Anything else kills the culture faster than a knife fight in a phone booth.
I don’t need to write much here, do I? At any stage anything can go wrong. But that’s hard to describe and predict, so the only thing you can do is to have good folks around you – the kind that can think and react.
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