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See the wall. Scale the wall. See the next wall.
After working with 52 companies at various stages of growth, building a small team in Chicago, and talking with startups of all sizes, I’ve seen a clear pattern of organizational maturity emerge.
I wanted to share some of my findings and continue to map out the patterns of organizational maturity in order to better serve entrepreneurs facing those challenges.
For example, Drew Houston, Dropbox CEO, describes it as scaling walls:
“If you’ve never started a company, or worked at a smaller company, you’ll run into a vertical learning curve, Houston says. There’s no way to know everything you need to from the start, so you need to a) gain as much knowledge as you can as fast as you can, and b) plan ahead to learn what you’ll need months down the line. You have to be prepared for a never-ending conveyor belt of challenges.
‘You have to adopt a mindset that says, ‘Okay, in three months, I’ll need to know all this stuff, and then in six months there’s going to be a whole other set of things to know — again in a year, in five years.’ The tools will change, the knowledge will change, the worries will change.’” Article Link
The good news for entrepreneurs and their teams is that by studying multiple companies at once, it’s possible to better set expectations of what’s coming next, what others have done at their transition, and how to anticipate or avoid the biggest mistakes.
Patterns in Hyper-growth Organizations
We’re going to look at the framework for growth. The goal is to innovate on that growth. In terms of methods, the companies I’ve explored are high-growth, technology-driven and venture-backed organizations. They experience growth and hyper-growth (doubling in size in under 9 months) frequently due to network effects, taking on investment capital, and tapping into a global customer base.
Every company hits organizational break-points. I’ve seen these happening at the following organizational sizes:
Revenue, amount of capital raised, type of company, size of audience, product maturity and other factors vary among all of these companies, but the challenges they face at the different organizational sizes are the same.
I plan to dive a little deeper into each Growth Stage in a series of blog posts over the coming week. I’ll cover what new challenges arrive, what pieces of the organization a company should already have figured out, and what decisions should be held off on at that point.
I hope to share some of the things I wish I knew when I was an entrepreneur. And hey, it may help alleviate that feeling that you’re the only one scaling those walls.
Solving Challenges at Scale:
At USV, my goal is to test which methods work best for sharing these best practices and delivering information right when a team might need it. Most of the work is still in progress, so let me know if you’ve been doing any research in this area.
I’ve leveraged a lot of knowledge around networks, as the framework for how we deliver this knowledge:
Source: Why Being The Most Connected Is a Vanity Metric
Instead of building a centralized method to deliver knowledge, the USV Network uses knowledge across the network to share best practices. The next challenge is how to leverage that network to provide advice and guidance before it’s even requested.
For example, if a company has 15 employees and plans to hire to 30 in the next 6 months, helping provide knowledge that they’ll likely need to hire an office manager or they might need to consider more advanced payroll and insurance tools for employees. The team member feels comfortable asking their peers for advice on existing problems, but doesn’t have an easy way to anticipate the challenges ahead.
Connecting peers at all levels helps surface some of these topics but I think we can take it further. The holy grail would be a resource that anticipated what the company needed in advance and helped educated them along the way so they would have the information they needed when they were ready to make the decision.
It’s not ready yet but it’s in the works. If you have thoughts on things that have worked for you, please let me know in the comments or on Twitter.
In startups, we often hear “X for Y” in terms of business model, “Airbnb for backyards” or “Duolingo for Music”, but it’s also common for market locations. Examples include, “The Knot in the Middle East” or “Amazon for Australia”. Great businesses in the US haven’t spread everywhere, and sometimes for good reason. The market may not be big enough to make sense.
Australia, for example, has 23 million people. It’s a large country but population-wise, it’s dwarfed by neighbors like Japan with 125 million people. And even though there are large populations there, it may not make sense that the market demand there are the same as market demand there.
Understanding the size of the pie first is important, especially when thinking about raising venture capital. It’s very easy to think: I want this product so everyone will too. It’s worth doing some quick analysis of what that pie looks like to avoid the “someone like me” problem.
Potential Customers matter
I’m a New Yorker, 8.3M other people belong to that group too, but that’s only .1% of the 7.14B on this planet.
Well, being a New Yorker means I’m also an Urban Dweller, which makes me part of the 50% of the population (as of 2010) that lives in a city. And that number is increasing. So maybe catering to city dwellers, not just New Yorkers is a big pie.
That pie is big by population, but not necessarily by potential customers for your product.
Around 1.29 billion people (18.4% of the world population) live in extreme poverty, subsisting on less than US$1.25 per day; approximately 870 million people (12.25%) are undernourished. 83% of the world’s over-15s are considered literate. In June 2012, there were around 2.4 billion global Internet users, constituting 34.2% of the world population.(Source: Wikipdedia)
There are big problems for big populations of people. Those are pies worth thinking about. If your mission is to serve 10% of all internet users, that’s roughly 244 million people. That’s a big pie to shoot for, but it may be spread across different countries with different languages.
What other requirements about your product need to be true? Do customers need to speak English? Be a tech early adopter? Have a smart phone? Travel? College educated? Parent? Tech savvy? Know your market.
Spending matters
If you want to serve every mother living in New York City that makes over $100,000, that’s a smaller pie but maybe a bigger opportunity to sell a higher priced product.
Margins matter
You could build a big business selling 100M widgets with a $1 profit on each. Or you could sell 1M widgets with a $100 profit margin on each. What the market will allow matters, think about the margins and how they will change over time. It’s easy to sell a $5 coffee when you’re the only game in town, but what happens when competition moves in and you need to cut prices to maintain sales? Goodbye margin or hello decrease in customers. You could do either, but you’ll want to think about that before you start.
Even large, well funded companies sometimes choose to give up their own margins to drive more business. Sometimes they do this because they have the volume to maintain a profit, or sometimes they do it to squeeze their competition, driving competitors to cut prices too.
Pie ownership matters
Is this a winner take all market? Could many companies build big businesses in this space?
Walmart, Target, and local convenience stores co-exist. Walmart and Target have built massive businesses, they each own enough of a very large pie. It’s a massive market, so it doesn’t matter that they aren’t the only owners of the pie. Not winner take all, two winners take most.
Android and Apple are winner take most in operating systems. It’s a slightly different story in handsets, it’s Apple, Samsung, Nexus and a number of manufacturers competing for share, especially in the US.
For a good read on the US Brewery industry only having room for 3, not 4 big players, read ‘How to Blow $9 Billion: The Fallen Stroh Family’.
Big businesses can be built without venture capital
The majority of businesses are not venture backed. There are a number, especially those recently making their way to the public markets, but that doesn’t mean every business needs to shoot for venture funding.
If there is a big pie that could benefit from a large amount of growth capital, that’s worth discussing. If it’s a business that can grow on it’s own revenues, that’s a great way to get there too.
If you look at the big picture, you can own 100% of your business, take 1% share of your market and build a $100M business. You could also own 10% of your business, take 10% share of your market and build the same $100M business. The goal would be to take 10% of a market that pushes your business to $1B+.
Go with the market
Markets move quickly, but if you understand the ceiling, it’s easier to be realistic about how to get to 1% of the pie and grow it from there.
A superior leader is a person who can bring ordinary people together to achieve extraordinary results. Remember this if you are lucky enough to manage a team.
Part of scaling as a leader is knowing where you belong.
First you belong at the top, you have the vision and the skills to get things started. You hold the information and spread it down within a small team. The team is flat and they all look to you for what’s next.
Then, the grass roots begin. You have to evolve so that you’re highlighting other people. Sharing their strengths. You are still the keeper of the vision but you lead by showing the work of others not your own. Expertise bubbles up, not just a trickle from the top.
Next, you have area expertise, whether it’s marketing, technology, design or data, but are slowly building a team of better experts around you. They may be better than you at the skill that you’re leading them in. That’s what you want. The real way you lead is from way behind. The message is shared through the experts, let them share with the company what’s going on, what’s worked, and what is up next. You lead the vision but it’s told through the people building towards it. Leadership is spreading up and down.
Then you become a leader of people who are leading teams. You’re leading leaders. You are less into the mechanics and more on the showroom floor. Leading with the vision and passing off the vision to the leaders in your company to lead their teams. Everyone has ownership and is expected to lead, title or not.
In order to grow a company, you have to change along the way. There aren’t hard and fast rule to when things change, but it can work out better to move onto the next step earlier rather than later. You have to work to be better at letting others lead.
It won’t be like it used to be, but that’s not where you wanted to stay, now is it?