The first step in restoring growth momentum in a scaleup company is to focus the energy. Focus on the one product-market that the company has the biggest chance of dominating.
This focus is not self-explanatory. Most scaleups have entered five to ten markets, but have only obtained a weak position in any single one of them. This dissipates growth momentum, energy and traction.
Restoring growth potential to a scaleup is all about rebuilding market power. Leadership needs to focus on building one big, defensible stronghold. This means divesting from all other areas, except those that vitally protect the primary franchise.
Hedging is for Established Enterprises
Many CEOs and scaleup executives are reluctance to place all their eggs in one basket. They would prefer to be active in several markets at the same time. This allows them to the hedge future growth potential and feel less exposed to risk. This mindset is especially common with executives that have come from large companies.
In large established enterprises, hedging is the name of the game. Unlike in scaleups, the strong franchise at the basis of all cashflow is already given. Most management attention goes to market and product expansion.
The established enterprise needs to be present everywhere. Whether for growth potential or to prevent others from building up new strongholds. But you can only find success in so many markets in parallel with a vast number of people at your disposal. As we said before, the technology may scale, but the go-to-market doesn’t. So only giant enterprises like Oracle, Microsoft, SalesForce and IBM can afford to be present in many different markets. And manage a portfolio of several business units that each have their own peculiar go-to-market and products.
For Scaleups, Hedging is Too Risky
Trying to mimic this hedging structure in a scaleup company is folly. Geoffrey Moore explained that in a scaleup company, hedging is far riskier than putting all your eggs in one basket. This is because a scaleup’s speed and agility are the only ways it can compete with large enterprises. Speed and agility are a direct function of how simple the decision structures are. The more complexity it embraces, the faster it will lose its competitive advantage. Different go-to-markets, channels, products, geographies etc. etc. all add to this complexity.
So the more the scaleup tries to mimic a large enterprise, the faster it will lose. After all, every scaleup still has factors fewer people than the large competitors in their field. Some founders will challenge this with the superstar quality of their hires. But these superstars are unlikely to thrive when their work adopts as much complexity and bureaucracy as corporates have.
Taking the First Steps to Focusing
So what is a scaleup founder to do? The first step is for the executive team to commit to focusing on one stronghold. That means stepping away from the hedging strategy. And from all the sales or product “tries” that have taken the company into new territories.
It means defining the core purpose of the scaleup company. The core customer that it wants to serve. And the core value proposition the scaleup will compete with. How to do that will be the subject of the next post.
The Right Theory of Growth
Many of the ScaleUps I start working with are scrambling to reach former rates of growth. But are they using the right methods? More often than not, I suspect they apply what Chris Zook calls “The Wrong Theory of Growth”
The first thing to realize is that there are several root causes for stalling growth. So restoring growth momentum requires different solutions depending on the problem. Dealing with a growth stall is situational, there is no one-size-fits-all. It is one thing if you are trying to respark growth on the basis of low and shrinking market share. This would suggest that customers are not very happy with your product. You should increase your Net Promoter Score. But if you have reached domination and your share is growing, expansion into a new category is solid.
Small market share
The large majority of scaleups I work with have a small market share, at least when we get started. It does not worry me as it is a normal starting position for all startups. What worries me is scaleups expanding beyond their core before dominating that core. Many scaleups are building footholds in several markets, while dominating none. The technology may scale, but the go-to-markets never do. It is very simple. When your marketshare is small, your job is to make your market share bigger. In fact, to make it dominant. Startups who invest in an adjacent field before dominating their core market commit a serious strategic mistake.
Large market share
When your market share is already large, i.e. you are one of the top three players in your given product-market, you are in a more comfortable position. When you aren number two or number three, your job is still to become number one and a lot of the advise off the previous action still holds for you. But when you are already number one, your strategic options change. If you are the leader and your market share is shrinking, that is catastrophic. Most likely, some competitor has found a way to appeal to a customer needs that you haven’t discovered yet. You need to neutralize this as soon as possible to maintain your dominant position. I usually recommend a deep dive into your the net promoter score system. This helps you figure out how customers are disliking your product compared to competitors’. Only if your market share is large and it is still growing, shoulld you start expanding into a new product or category. It is notable how few of these that self action on this slide actually lead to this new product or category. A new product or new category is the intuitive solution to many startup problems, but often not the right one.
Market share unclear
I will bet you cannot imagine how often clients tell me that they do not know their market share. Or that they are active in so many markets, that it all depends what markets we are talking about. In both cases, I suppress a massive frown. Not knowing your market share, or not even being able to estimated, betrays a naïve approach to growth that always leads to failure. Making a growth company successful is or about building a large market share, or building market power in other words. If you cannot even measure the degree of power you are building, then that betrays undisciplined growth projections. You can be sure that you are applying the wrong theory of growth. Even worse is when you are active in several markets and you do not know the market share of any of them. Or, you tell me that the market shares are so different from market to market that it is impossible to draw generalized conclusions. I guess it is already clear that I do not hold this argument in high regard. The job of the scaleup is to build extraordinary market power in an attractive segment. If you have no data on how well you are doing, then you’re not doing your job.
Dealing with Stalling Growth
Sustaining growth is crucial
Startup life does not get easier after Product-Market-Fit. To reach product-market-domination before competitors, your startup has to maintain ever increasing growth. Until far into the market majority.
Stalling growth may not be such a problem if you rely on internal funds. But if you need venture capital, stalling growth is a death knell. On a tricycle you can stop and sit still, but on a bicycle you need to keep moving not to fall over.
Have you raised venture capital? You have no doubt told investors about amazing growth potential in a massive market. As soon as your growth rate slow down, investors worry about losing that potential. It will not be long before they suggest new management might do a better job than the founders.
Growth is not Automatic
But sustained growth is not automatic. Founding myths often suggest growth exploded as soon as the company reached Product-Market-Fit.
But in reality, most startups experience a premature flattening of their growth curve. Often more than once in their journey.
Not only is it possible to overcome a growth stall. It is also necessary that founders prepare to deal with one.
Response time too slow
For most founders I work with, the first challenge is to shorten the time it takes to respond to a growth stall. See t(r) in the chart.
It is obvious that, the longer the startup takes to respond to the growth stall, the bigger the gap they must bridge. So why is founders’ response time so long?
The problem is the Kool Aid factor. In the early startup stage, it is crucial to assemble a team of “true believers”. Following the Founder’s vision and drinking the Kool-Aid is the mark of a loyal cofounder.
When the startup finally reaches Product-Market-Fit, the vision is completely vindicated. New funds flow in and the team doubles down on Kool-Aid expectations. Soon, the organization develops cognitive dissonance and blind spots occur.
A growth stall indicates that the vision needs adjusting. It requires admitting you have a problem that Kool-Aid alone will not solve. Only founders who work hard to create a culture of debate and dissonance avoid this fate. That is why it is crucial, in the scaleup stage, to mix one part Kool-Aid with one part reality.
Waiting out the Setback?
Teams with undiluted Kool-Aid often fail to respond to the growth stall altogether. Even after the numbers have become obvious and investors get worried.
Management teams tend to explain away disappointing numbers as temporary setbacks. Waiting out the setback seems easier than making changes.
Launching a New Feature?
Tech companies, in particular, often blame the growth stall on a missing feature:
- An important prospect has been asking for something the product does not support.
- A key competitor already offers a feature that is still on our roadmap.
- But most often, the founder imagines that a key feature from the product vision will spark new growth.
Launching a New Product or Pivoting?
Some teams interpret a growth stall as a failure in Product-Market-Fit:
- We declared Product-Market-Fit too early.
- The market that the product fits in is far smaller than we projected to investors.
- Or the product we have serves a less attractive side of the (much larger potential) market.
In these situations, teams often focus on building or buying a new product. Sometimes they even step back to Lean Startup frameworks to pivot away. With the hope of finding new Product-Market-Fit.
Jumping to a Solution
So what is the right solution to dealing with a growth stall? It starts with finding out what is the root cause of the stalling growth…
[to be continued]
Fit at just 2.5% of the market
The Startup phase obsesses with Product-Market-Fit, the Scaleup phase obsesses with Product-Market-Domination. The most important reason for this shift in attention is the sheer size of the opportunity.
Product-Market-Fit represents the cusp between Early Innovators and Early Adopters. Early Innovators are those excited about the new technology in itself. They often hack together solutions or serve as Alpha or Beta users.
Early Adopters are the first group ready to buy and use the product as sold. They are beyond hacking together their own solutions. But they still experience enough excitement to be able to live with early sales or service shortcomings.
Theory estimates this cusp between Early Innovators and Early Adopters at just 2.5% of the ultimate market.
Domination established at 84%
Product-Market-Fit represents the moment when the S-curve starts rising. So the business starts feeling real growth.
Founders experience a strong growth stretch. Often they find it inconceivable that this stretch represents just 1-2% of the overall market. But if you have found great Product-Market-Fit, the size of the ultimate market is factors larger than the market you can currently serve.
Theory suggests that the battle for Product-Market-Domination takes until 84% diffusion. This is when the market reaches the laggards.
Giant Fight over 81.5%
So 81.5% of the market lies between the Product-Market-Fit and Product-Market-Domination milestones. That is indeed many factors larger than the initial established market: 32.6 times as large, to be precise.
In virtually all tech subindustries, that is a very large market. Large competitors are sanguine about Early Innovator roll-outs. Precisely because they only represent 2.5% of the market. But move beyond that, and you will find existing competitors are determined not to let your startup become a success.
Competitors’ products may represent inferior technology compared to yours. But their sales, customer service, processes and other complimentary assets are all vastly better. How do you compete with that to reach for Product-Market-Domination?