Early stage, venture backed, startups have raised about $75 billion USD through Q2 2023. That’s a decline of 34% but more than the $50 billion USD Pitchbook forecasted for 2023 at the end of 2022.
Why? Economic uncertainty, inflation fears, unclear interest rate trajectory, and bank weaknesses continue to spook investors even in hot fields like AI. As Silicon Angle pointed out, “Many companies will instead be focusing on sustainable growth and cost-cutting to stay away from the difficult capital-raising market.”
VC risk radar is obviously tuned to the threat of challenging times, but even when economic skies are sunny, the likelihood of success for a new venture is low. 90% of startups don’t make it. While the experience of VCs can help, it’s no panacea: 75% of venture backed startups fail during scaleup. As the figure below from Revelio Labs shows, between years 3 and 4, startups begin to diverge.
What must early stage companies do in order to successfully scale? A review of recent research identifies 7 key success criteria:
Great talent. A recent McKinsey report put it this way: “Talent is critical. At the heart of every successful scale-up you need a great mix of skills, attitude, and resilience in the founding team, who make the time in their crazy schedules to attract, develop, and retain the very best talent.” A culture of top talent needs to be established by the management team, as McKinsey recommends: “From day one, the top team needs to inculcate the fundamental importance of hiring, developing, and keeping the very best talent possible. Time and resources need to be properly allocated and protected from competing pressures, and diversity must be valued.”
Align marketing and sales. Stories are legion about courageous visionaries that maintained commitment to their vision despite early blows. Steve Jobs with the iPhone. The Rubik’s Cube. Uber and AirBnB. But these extraordinary successes aside, founders often report that market demand is only a fraction of what they forecasted based on early sales, they’ve been trumped by competition, or left behind by an unexpected market shaking innovation. As a recent Forbes article points out, tracking usage metrics and talking to customers and potential customers provides essential insight. Smart early stage leaders ensure a tight relationship between sales and marketing: When sales and marketing are siloed, startups make mistakes by not creating a clear sales process that converts marketing-qualified leads into sales-qualified leads, and ultimately sales conversions.
Manage from values. Bloomberg put it this way: ““Every decision the company makes sends a message, intentional or not, about what they want the new platform to be.“ A standard in organization success, effective early stage companies invest time in building productive and engaging internal cultures: organization members share a set of values, goals and ways of working. It’s a critical leadership responsibility; a former CEO of J.P. Morgan described himself as ‘chief culture officer.’ Distrust and unhelpful conflict within a team is corrosive, even more so for organizations that are trying to make big strides fast. Jack Welch CEO of GE famously said that he preferred those who had the right values but needed to step up in performance over individuals who had strong performance but did not share the values.
Build lighthouse relationships. Rocky coasts need lighthouses. Early stage companies must be able to read the environment for opportunities and challenges and input is essential: from board members, advisors and experts, consultants and freelancers the company is using, and by creating more regular interaction with those who can provide an “early warning system” aiding company decision making. Boards of advisors are a popular addition at the scaleup stage, and the best boards also offer warm introductions to potential customers and investors.
Proactively manage change. Experts generally agree that the course of an organization’s life follows five core seasons: launch, growth, shakeout, maturity, and eventual decline. Each of these “stages” requires two considerations. First, understanding the operational requirements of each stage. And, second, letting go of what was required in the prior stage but is now unhelpful.
Three implications are key. First, staffing decisions must consider and meet the differentiated competency needs of the stage. Mapping talent to value is a helpful process. A recent McKinsey study notes: “Organizations that can reallocate talent in step with their strategic plans are more than twice as likely to outperform their peers. To link talent to value, the best talent should be shifted into critical value-driving roles. Second, systems and processes need to be revisited and amended as needed. As Entrepreneur wrote: “Processes and procedures should be in place before companies scale up. Break tasks down and assign priorities.” It is also the right time to consider where outsourcing and freelance options increase cost efficiency and improve service factors. Third, scaleups must attend to the importance of implementing a scalable sales model. As Forbes wrote: “The fastest way to win consistent business and the best way of cultivating a high-performing sales function is creating a repeatable sales process.” The Harvard Business Review reported that “50% of high-performing sales companies have “closely monitored, strictly enforced or automated” sales processes and 48% of under-performing companies have non-existent or informal sales processes.”
Timing matters. Timing is a critical consideration for early stage companies. A study of 200 startups identified timing as a key factor. Medium put the importance of timing this way: “Timing is recognizing which ideas are ready to be explored, which ideas aren’t, and which ideas are past their prime. Startup studios have rigorous systems of testing and validating ideas. … One of the keys to Airbnb’s success was how it used the path carved by Craigslist to grow – poaching users that were already looking for non-traditional means of finding housing. Just the awareness of Craigslist as a site – and the scams people were running on it – helped early adopters to see Airbnb as a viable alternative. Compared to the barebones look of Craigslist, Airbnb had a beautiful website using well-established Web 2.0 technologies … Airbnb capitalized on both the timing of the market (the economic downtown of 2008) and the changes in technology to vault to success.”
Build a strong management team. An HBR article reporting on early stage software companies found “Those with a more hands-on management – keeping close tabs on workers with regular evaluations, setting expectations, creating shared milestones, and tracking progress toward key goals – run better performing companies. When combined with a shared and clear vision and strategy, well-defined and inculcated cultural values, and strong competencies, the likelihood of early stage success is considerably improved.
Viva la revolution!
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