Why every business is a startup or soon will be.

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

What the Croods taught me about #Startups.

Know when to use a search party and when to form a kill circle.

There is a great scene in the movie The Croods where the following exchange took place between Grug — the father of the neandertal Croods family — and Guy — their homosapien travelling companion, as they are confronted by a huge maze of tunnels that lay between them and their destination.

Grug: Are you saying we should split up?

Guy: We can try more paths at once, it’s the fastest way through!

Grug: We stick together, your way isn’t safe!

The challenge selects the strategy

What has an animation got to do with startups?

Well, as I watched this movie a few times over — my kids made me do it — I really appreciated the lesson this scene was teaching me.

This maze was a new challenge — a search through a bunch of potential options for a sustainable route to their goal. Everything that had gone before was business as usual — avoiding falling rock and a menagerie of exotic beasts with really sharp teeth. For those challenges, the existing Croods family strategy of a ‘kill circle’ — where they form a circle and basically kill whatever threatens them — worked reasonably well.

But the new challenge of the maze requires a different strategy — something that was pretty foreign to what the Croods had experienced thus far.

To Guy it was clear — to get through this maze we need to spread out and ‘try more paths at once’.

This is just the same with startups. It is a maze with many tunnels — some are dead ends, but there are a few ways that lead you out of the maze to the goal. In the case of startups — the goal is product-market fit and repeatable/scalable business model.

For this maze you need a search party, not a kill circle.

Why is this important?

Knowing this can save your startup huge amounts of wasted time, effort and opportunity and can avoid prematurely forming set piece company structures.

Knowing and accepting this idea of what a startup is can help you focus and it guides where investment — what little there might be — is directed.

It also helps direct the energy of everyone to a single purpose — not building stuff or hiring specialists or getting fancy addresses and furniture — but doing whatever you need to do to search for product-market fit and repeatable business model.

Knowing this also makes the job of leadership in any startup much clearer and simpler — recognise the challenge and mobilise the strategy. Both these things clearly take a particular set of skills that startup founders would be well advised to develop — perhaps before they rush into product making!

Searching. Execution considered harmful

If you lost something really valuable in a field, how might you find it?

Consider if you could invite all your various specialist friends to come help you search for it, how might they do that. What special skills would the doctor bring? Or the plumber? Would it be out of place for your friend — who is a butcher — to set up shop selling sausages while you search for your missing treasure?

The point is when you are searching you need 3 things.

  1. Tactics and leads about where to search and how to conduct the search. Diversity is key here, how do you use the unique skills and talents of your team to devise tactics and leads? Do you even know what they unique skills and talents the individuals on your team have?
  2. People actually doing the search — the more the better — remember “we can try more paths at once”. Everyone should be involved in this — it doesn’t make much sense for them not to be.
  3. Finally you need an effective and, preferably inexpensive, way to keep the search coordinated and information flowing. In the Croods, Guy gives everyone a seashell which they must blow to attract attention if they find a way out or get stuck. Simple but effective.

If you are focusing on anything other than this — in my opinion — you are wasting time, money and opportunity.

I see so many startups with their engineers busy looking at building stuff, creating coding standards, scaling infrastructure and impressive, resilient frameworks and they delegate the search to their marketing person or growth hackers.

What does ‘searching’ look like in startups

The trouble with any metaphor is that it has its limits.

So the key message I learned from the Croods is that to explore a maze, split up to explore more paths and options faster and do it in a coordinated way.

But how does that apply, in practice, to startups?

That will be the subject of my next blog post on the subject.

The still from The Croods is copyright of Dreamworks Animation 2013. All Rights Reserved.