in Musing, Startup

Every business – however large and however profitable – is a startup. Or is about to be. The big WTF is that they just don’t realise it yet.

This epiphany struck me recently and life hasn’t been the same since. I am eternally grateful to Massimo Lucchina for stating the simple truth behind this and triggering the idea that follows.

A Successful business model is a non-loss making one.

Steve G Blank, in his book – “The Startup Owner’s Manual” – defines a startup as ‘ an organisation searching for a repeatable and sustainable business model’.

When I first read this and applied Steve’s ideas to my own startups, I made the rookie mistake of thinking it was a one off search. I committed my time and resources to validating my idea and doing customer development, sure, I needed to do that – every startup does. The mistake is thinking is was a one off activity and this thinking can lead to unsustainable behavior.

When you are going from zero customers and revenue to something enough to quit your day job for, it can seem like you only have to do this searching thing once and yes, it can take ages.

Whilst searching, you might twist and turn as you try and find that seam of gold in a grotty old mine. If you take the right kind of risks, you might find enough of this seam to generate some revenue and gain early customers. You might even make enough to print some decent business cards, move out of your parents’ garage, hire some people and get into business.

What you soon realise is that a business model is a relative thing. The model needs to generate at least as much – if not – more revenue than your costs – hence profit. The trouble is that as you grow revenue, gain new customers, expand your market share – possibly with the same products and services – your costs grow too.

So a business model is about the relationship between revenue and costs and a successful one is where revenue trumps costs most of the time.

You die because your heart stops

Just as the heartbeat is proof of life, so it is that consistently not making a loss – in the case of successful non profits – and consistently turning a profit – in the case of for-profits – is the indicator of life in business. Many things can kill a business, but how it dies is that it becomes increasingly loss making and ultimately insolvent or euthanised before that point.

What happens when revenues do not grow as fast as costs are rising?
Or when costs remain constant or daresay, even drop, but so do your revenues?
Quite simply, what does your business do when revenue does not  match or even outpace costs and your once successful model is losing steam?

There is some value in understanding how this might happen because there may be some learning into what the next twist, turn or pivot that your business needs to take to regain its mojo. I’ll write another post that delves into the various ways this slow failing model can happen.

Suffice to say, every business will encounter this problem and will continue to encounter it whilst they exist. In fact the reason they cease to exist will be singularly because their business model fails and they are unable to find another one quickly enough.

Whilst the triggers for a previously successful business model starting its descent from profitability to oblivion can differ between business and industries, the symptoms are always the same – declining profits.

Every business hitting a growth ceiling will either hover around it , drop from it or crash through it.

So, let’s assume for a moment that you get from zero customers to current break even – hurray you are officially an unofficial non-profit. You might tick along for a while. What this looks like in real life might be that:
You don’t gain any more customers,
Or don’t charge your existing customers any more for the same offering.
Or you charge them more for something new, but still only matching costs.
Or you are gaining as many customers as you are losing

Basically what you have is equilibrium. This business has found a ceiling and is hovering around it. It is not simply a revenue ceiling. It is a growth ceiling – honouring the relationship between costs and revenue.

This situation is actually identical to a company that has grown from $100m to , say, $1bn revenues. Heck, some of that growth might even have resulted in profit. Though now they find themselves steadfastly unable to break through that revenue ceiling, often falling just below it or even accidentally crossing it momentarily.

Both business are hovering, simultaneously trying to stop dropping away whilst unsuccessfully trying to break through. But only one of these is in a worse shape than the other.

Can you work out which one and why?

The only difference between these two examples is how far each has to fall and how much it has at its disposal to both prevent it from falling and propel it crashing through the ceiling.

To break through a ceiling *always* requires a search for a new business model i.e becoming a startup.

This sounds drastic – and it often is. Though in practice, the new business model is a variation of the previous one. Business models are merely versions of each other – each iteration a new version beyond the previous one.

Businesses hovering beneath a growth ceiling must – quite simply – find a different way to make money. This may be new product or service offerings; or the same products in new markets or radically change the revenue vs costs relationship – usually by slashing costs, because revenues aren’t budging.

I believe though that this last option is really one of the dumbest things a business in this situation can do – especially if it is not *yet* in dire straits. Ahem , Yahoo.

Why reducing your search capacity during a search a dumb idea.

If you buy into my assertion that breaking through the growth ceiling is a search problem, then it becomes clear that a search often benefits from having as many eyes involved in coordinated search effort as possible.

Imagine a search for a chest full of pure gold doubloons in the Atlantic Ocean.
Can you imagine starting with 100 people with skin in the search and then firing them , reducing the search effort down to 50 people. Clearly to search the Atlantic, you need as many people and vessels to search the space as possible. Why would you knowingly reduce that effort?

Costs aside, the only reason I observe that this might be done is because those doing the reducing do not have the skills to effectively coordinate this many people in a search. This assumes they even recognise that searching is what they need to do.

Once you have broken through a ceiling, the clock is reset and starts ticking again.

Just when you thought it was safe to put away the search lights and whistles because your new business model has been found, you discover that you simply are now on a countdown to reaching the next ceiling. The most prudent thing you can possibly do is to recognise this and begin to explore and create options for the inevitable next growth ceiling.

I am discovering a new passion and it is that beyond each growth ceiling is a new way of thinking and approach, to get momentum to make the next ceiling easier to crash through and to make the next hover as short as possible.

Look around you and see if you can identify the ceilings in the companies you know. Can you observe how they are trying to crash through the ceiling?

I would really love to hear your views and experiences around this idea – I’m still developing it. Tweet or comment and make my day!

Featured Image By: Jan FidlerCC BY 2.0

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