Sunday, July 7, 2013

Scaling a startup can be like driving without brakes

I dream of driving with the brakes failing on my car all the time.

As CEO, sometimes you just have to put your foot on the gas and go, knowing you may have no brakes and if you take a wrong turn you may not have time to correct and recover. It's part of growing fast. But how do you know when is the time to put your foot on the gas?

First, you have to have enough proof of the value of your product - proof that some people, and enough of them, will use it. In the enterprise world this means one of two cases:

1. You have lots of SMB (small and medium business) customers signing on fast and you can track the adoption rate. You want to be sure these are real companies with the ability to buy over time, and not just startups who want to use a trial or freemium product for free because, unless you're lucky like Yammer and you get purchased early, your value will depend on your growth AND your renewal rate, so you need to be sure your SMB business is repeatable. Or

2. You have major household name companies buying in volume. When you can see companies with $10B+ in revenue (the usual suspects like HP, IBM, GE, J&J) buying your product, and then buying more, you can track their usage, how much they'll pay you and whether they renew.

Both cases tell you that your product has value to end users. So it's time to ramp your revenue.

Next, you need to be sure you have a business model where you can make money, sustainably. For every rocket ship ride like Facebook and Twitter (who still have not actually worked out their business model), the startup landscape is littered with failed companies who never worked out how to make money and, eventually, tapped out their investors and could not find more. Cool product but no ability to scale the business.

Your path to revenue obviously depends on the type of product. In the enterprise case you need to be clear, again, whether you are going after SMB or large enterprise. The sales channels are completely different and it's very tough to do both (or very expensive as the Marketo P&L shows - so to do both you need very strong access to capital).

You need to track your cost per sale - can you sell your product for enough money, to enough people, that you can pay sales people and make enough margin? And then, can you support the customer and still make a profit on each sale eventually? This can be hard in the early days of a SaaS model where you are paid annually (and many business do not make a profit until year two) and can be easier in a licensed revenue model (where you charge about 5 year's worth up front and then maintenance) so it's important to model cash carefully, and know which model is right for your market.

Now you've convinced yourself that your product has real value to lots of users, and that you can make money selling it, now what?

Finally, you need to have the team to do the ramp. Scaling fast means knowing how to hire and train quickly. It means having a strong culture so you can keep shared goals in mind as you make rapid decisions. And that means leadership. So before you pull the trigger and say go, make sure you have enough of the right leaders in the room with you for critical mass. You can't lead alone.

Most VCs will tell you to scale too early. They have a standard model and often don't have the on-the-ground experience to advise you on when is the time to be cautious vs. when is the time to take risk. I've heard the same hackneyed phrases from so many different VC mouths based on what worked for the 1% of companies that have been wildly successful - and many VCs would rather you succeed or fail fast rather than be patient with you because that is a more efficient use of their time. As Fred Wilson describes on his blog - the failed companies take the majority of the VC's time so IF you are going to fail they want you to fail fast and hit the wall, not turn into a zombie company.

Instead seek out other successful CEOs for advice - they have a much better nose for the timing. They'll ask you questions, challenge your assumptions and help you figure out whether your business is ready for scale.

Once you think you're ready your job is to lead. To bring your team with you, help your cynics get on board, encourage your more cautious employees and make sure every one is aiming for the same target. This means focus and repetition, but if you have the product, the business model and the team then you're ready.

Some people dream of being naked in public. I've never had that dream. But in my dreams I'm driving round a corner and the brakes fail; I'm pulling up to a traffic junction and the brakes fail as I careen through the oncoming cars; I'm going down hill and the brakes fail. Each time I pound my foot on the floorboard but the car doesn't slow down. I wake up in a sweat, my heart pounding, and smile. Yup, it's that time again.

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