Hey Dudes, over the past years it is becoming more and more ‘in fashion’ to run a start-up or a scale-up. But have you recognized same as me that the definition of what-is-what seems to be a little bit shaky at best? Especially in the technology business scene the wording seems to be used almost at random. Within this post I try to give some background in which maturing phases a tech business can be and how to define them.
Basically there are three states in which a beginning and growing tech-business can be
- You are searching for a valid business model
- You have found your business model and are “just producing growth”
- You are losing growth and are searching for optimizing your business model again
I call these the three upward stages of growth business: start-up, scale-up and tune-up.
Main definition of a Start-up: getting from a dream to a scalable business
Most new businesses see the light of day because some founder, or a founding team, had a dream. Either an experience with current business that lead to disruptive ideas about some business aspect that can be done better, or a grounded believe to improve the world from scratch in a new domain. That dream about your purpose is actually all you have yet. From here on the journey is uncertain, because how can you know that this dream will lead to a sustainable business?
The start-up phase takes years with some companies and only months with others. It is best defined by making clear what the definitions are for a start-up to become fully grown and becomes ready for the next stage.
A start-up is a tech company that has a dream to pursue, but does not yet have…:
- …a proven clear customer definition. So who exactly buys the product? Whether you are focusing on consumer apps or business to business software sales, there are always specific types of people that have to be persuaded. What is the exact value you bring to them? Why do they get persuaded? Is it just features or also culture? Etcetera.
- …a proven (‘bandwith of’ at least!) cost and result ratio related to onboarding a new customer. And beware, cost of sales need to be about all stages of customer on-boarding like sales, conversion and activation/implementation. So be sure about how to get viewed by 100 potential clients, which percentage of those clients will be sold to and what is the cost of getting them actually to use your solution after they made their first purchase?
- …a positive cash flow result per marginal sales. What is the return on your invested cost of sales? When your cost of reeling in a new client is lower than the subscription fee that they pay (or whatever payment they throw your way) you earn a positive result for every marginal sale you make. You are able now to invest earnings in new sales and thus keep some momentum.
The moment that you know who to target and what it takes to target (and win) them is important. When you earn enough money to replenish the customers that decide to leave your product at a yearly basis, that this is the point that you can graduate from start-up class.
Being successful as a Start-up is usually all about the people in the team. When they have the skills it can be built, when they are trusted customers will come, when they pull all-nighters the effect is felt. They have to keep pushing as long as it takes to reach that Start-up graduation into being a Scale-up.
Main definition of a Scale-up: treating your business as a machine that has a relentless focus on customer and cash
The moment you have a clear and clean confirmation of your value opportunity and your growth engine, your scale-up phase knocks on the door. In this growth period everything in your business is about optimizing your product development, sales, delivery, customer-success-management, etcetera with only one goal: maximizing the bang and minimizing the buck that you get that bang for. Because the lower the cash you spend on delivering great features to an enthusiastic market that keeps on adding to itself, the larger your growth potential becomes.
To give this optimization foundation, you need the results from your start-up phase. You can only call your business a proper Scale-up when you thoroughly went through the Start-up phase of getting clarity on ‘who’ buys your product and what it takes to get it bought. Within the Scale-up phase you need to be very sure to cling to that ideal customer. You need to be constantly looking for more places to find those people. For this you need to make sure that your full team is aware of that ideal person and your whole company is breathing the match with that client. Who is it that the developers built the solution for? Who is it that the marketeers try to struck a nerve with in the marketplace? Who is it that the servicedesk has to answer to on the phone? When everyone in your company is prepared for that fit, you will deliver better fitting solutions and service to the marketplace and this will automatically lead to an upward trend in sales. On top of that it will become easier to grow into new marketplaces (additional business domains or geographies for instance) as long as that ideal type of person is available there.
Let’s make better tech business
An example: when you have built an accounting solution for tracking Carbon Footprints and your core market have been accounting departments in the US services industry it is safe to say that your core customer is an environmentally focused accountant. A very specific breed of animal. It will be easier to expand your sales into other market verticals or for instance the same vertical in the Canadian market and keep focusing on that same type of accountant, than that it will be to differentiate your product into Carbon Footprint reducing production planning and try to target the Industry Operations Executives as well as the accountants. Why is that hard? Because it is a completely different type of people, although they work in the same company. It will be easier to find the same type of person in a different company.
Growth sucks cash, and this is, next to finding the ideal core customer, the second reason why you need such an optimized engine. Every sales transaction asks for cash to be executed. The sales agent needs to get paid, the online marketing that drew the client in took a paid ad, the consultant that spend hours supporting the customer in the configuration options, etcetera. It all takes cash. The margin on the previous sell funds your next. So the more optimized your engine becomes, the harder you can grow on your own levers. When you got your whole organization tuned into the core customer, all processes will become easier to focus on margin. Finding the customer will be easier when you know who to look for, having that customer accept your solution (and thus boost your conversion!) will be easier when the software is developed solely for her needs, service processes will be cheaper to operate when everything is tuned to a fit, etcetera. And the cherry on the pie? That is the fact that this customer will feel so overwhelmed that it is perfectly willing to pay a premium subscription fee, finishing off your margin to grow!
Becoming successful as a Scale-up comes when you as a founding team realize that it is becoming less and less just about the people and more and more about repeatable processes and systems that are put in place. Of course these processes should still be created by the best people you can attract, but being successful is not about working late anymore. Not about that one brilliant moment, it is more about the flow that you are able to get your whole company into.
Main definition of a Tune-up: avoid derailment after a diminishing growth phase and get back to double-digit growth
Sooner or later your growth starts to fade. There is still year-over-year progress but it keeps on getting harder and harder to keep the pace that you once had as an early scale-up. The reasons for this lowering in growth are very standard and fully understandable. On the one hand, because your revenue is growing, keeping certain percentages of yearly growth is getting more and more difficult. This is simple math, because a growth rate of 20% at 1 million revenue is ‘only’ 200K additional score. Where that same growth rate at 10 million is an awkward 2 million to add. Your traditional confirmed market is simply getting too small.
This means that panic-actions become more and more common ground. Marketeers start drifting off their message just to find additional market, product owners need to keep track with that differentiation which often means a dip in the quality and/or speed of output. Etcetera. Before you know it the whole company gets out of their mojo just for finding the numbers your stakeholders require.
It is paramount that you do not let this process get the upper hand to eventually turn growth in decline. So it is time for a tune-up!
As a tune-up, you basically face the same goal as a start-up: you need to get (back) to confirmed ground on your value proposition and your growth engine. The big difference is that where a start-up needs to find a market altogether, a tune-up needs to reconfirm its potential. Roughly two directions can be chosen:
- Get back to your hedgehog and just enlarge your market by more bold geographical scope or confirmed core customer expansion
- Get to a finetuning of your hedgehog that leads to more potential in the available and confirmed market
You can get to this choice by experimentation or by available data- and team-analysis.
It sounds rather easy, just follow the new facts and expand further, but you have to be aware that your whole organization is tuned into a certain customer base following the growth focus of the Scale-up phase. When you suddenly add other core customers just because the data says so, you will have to properly address your company setup as well.
Make sure experiment in this phase just as you did in the Start-up phase. Keep in mind that you need to find out which path is the best one without depleting the cash you have available for this operation. Because eventually getting the newly tuned flywheel to start spinning again will require a lot of that again as well.
How does this approach fit the literature about business growth?
To my knowledge, the best overall view on business growth stages has been given in a 1983 article from Harvard Business Review: https://hbr.org/1983/05/the-five-stages-of-small-business-growth. In the described research they studied various growth models and came to an overarching view of five stages. The words start-up and scale-up are not yet in there but you can clearly read about struggling starting stages and tumultuous and definitive growth phases in the top of an S-curve.
It does not take a lot of fantasy to fit the start-up phase as a nowadays well-known terminology over the existence and survival steps in the model of Churchill and Lewis. Off course the wording of Success and Take-off are a natural fit with a Scale-up. But where does the Tune-up come in? In my view, the tune-up phase is the intermediate between Take-off and Resource maturity. Because I do not see this as a linear, inescapable next step. To my experience an entrepreneur or management team is very well capable of turning the ship around when that resource maturity sets in. When making the right choices then it is possible to return to the Success and Take-off phases all over again.
So you can interpret my model of Start-up, Scale-up and Tune-up as an approach to prolong the S-curve into a higher end-result.
Business terminology is there to help you guide where you are as a tech entrepreneur. Do not lose yourselves in identifying by the romantics of the well-known (or should I say well-worn?) wording of Start-up or Scale-up. Be sure to cling to the definitions behind it and be fair with yourself where you stand. Because understanding where you stand could define the most important thing to do tomorrow when you get out of bed. Do not keep hanging around in the Start-up scenes everywhere around the world when you are actually already starting to grow up into a Scale-up. It might keep you chasing after your own tail instead of tuning the engine of growth that you have already proven to yourself and your team. But even more importantly: do not keep strutting around enamoring your Scale-up when you actually see the first signs of needing a Tune-up. Keeping the growth without retuning the engine will definitely make you fail.
Being fair to yourself might eventually be the difference about a controlled maturity and maximization of success on the one hand against vanity and a certain crash on the other.