Management

Survive the Leap to Hyper-Growth with This Advice from Steve Blank

This article is by Steve Blank, entrepreneur, author and one of the founders of the Lean Startup movement.

Recently, I got a call from Patrick, an ex-student I hadn’t heard from for 8 years. He's now the CEO of a company and wanted to talk about what he admitted was a “first world” problem. Over breakfast he got me up to date on his life since school (two non-CEO roles at startups), but he wanted to talk about his third startup —the one he and two other co-founders had most recently started.

“We’re at 70 people, and we’ll do $40 million in revenue this year and should get to cash flow breakeven this quarter,” he said. It sounded like he was living the dream. I was trying to figure out why we were meeting. But then he told me all about the tough decisions, the pivots and firing his best friend, which he had to do to get to where he was. In short, he had been through heck and back.

“I made it this far,” he said. "My board bet on me to take it to scale. I’m going to double my headcount in the next 3 quarters. The problem is where’s the playbook? There were plenty of books for what to do as a startup, and lots of advice for what to do if I was running a large public company, but there’s nothing that describes how to deal with the issues of growing a company. I feel like I’m just driving without a roadmap. What should I be reading or doing?”

I explained to Patrick that startups go through a series of steps before they become a large company, and that he was smack in the middle of two big ones.

Search

In this first step, the goal of a startup is to search for a repeatable and scalable business model. It typically takes multiple iterations and pivots to find product-market fit —the match between what you’re building and who will buy it.

You’ll know you’re ready to exit the Search phase when you have customer validation:

You’ve found a sales channel that matches how the customer wants to buy, and the costs of using that channel are understood.

Sales (and/or customer acquisition in a multi-sided market) becomes achievable with a sales force (or network effect or virality) without heroic efforts from the founders.

Customer acquisition and activation are understood and Customer Acquisition Cost (CAC) and Life Time Value (LTV) can be estimated for the next 18 months.

Most startups die here.

Build

At about north of 40 people, a company needs to change into one that can scale by growing customers, users, or payers at a rate that allows the company to:

Achieve positive cash flow (make more money than it spends) and/or •Generate users at a rate that can be monetized.

This Build phase typically begin with around 40 employees and will last to at least 175 and in some cases up to 700 employees. Venture-backed startups will often take a Series C or D or later rounds during this phase.

Grow

In the Grow phase, the company has achieved liquidity (an IPO, or has been bought or merged with a larger company for an exit) and is growing through repeatable processes. A full suite of Key Performance Indicators (KPIs), processes and procedures are in place to maintain momentum.

Lucky You’re Not the Ex-CEO

I pointed out to Patrick that he was in the middle of the transition fromSearchtoBuild, andI suggested that he was lucky to be encountering this problem as a 21st century startup founder rather than a decade or two ago.

In the past, when venture-funded startups told their investors they’d found a profitable business model, the first thing a VC would do is start looking for an “operating exec” —usually an MBA who would act as the designated “adult” and take over the transition from Search to Build. The belief then was that most founders couldn’t acquire the necessary skills rapidly enough to steer the company through this phase. The good news today is that VC firms are beginning to appreciate the value of keeping the founder in place.

I reminded Patrick that the reality is startups are inherently chaotic. As a founder, he got the company to the Build phase because he was able to think creatively and independently. Conditions on the ground changed so rapidly that the original well-thought-out business plan became irrelevant.

He managed this chaos and uncertainty, and took action rather than waiting around for someone on his board to tell him what to do. His decisions kept his company from dying.

Now Patrick would have to pivot himself and the company. During this Build phase, he was going to have to focus on how to thoughtfully start instituting things he took for granted during the Search phase. He was going to have to build in organization training, hiring standards, sales processes and compensation programs, all the while engineering a culture that still emphasized the value of its people.

Patrick took a bunch of notes, and said, “You know when I was figuring out how to search for a business model, I read the Startup Owners Manual and Business Model Generation, but where are the books for this phase? And come to think of it, in the Search phase, there are Incubators and Accelerators and even your Lean LaunchPad/I-Corps class, to give us practice. What resources are there for me to learn how to guide my company through the Build phase?”

Time to Make New Friends

I realized Patrick just hit the nail on the head. As chaotic as theSearchphase is at a startup, you're never alone. There is tons of advice and many resources. But in the past, theBuildphase was treated like a smaller version of a large company. Operating execs hired by investors used the tools they learned in business school or at larger corporations.

I suggested that Patrick consider four things:

Read the sparse but available literature that does exist about this phase. For example, The Four Steps to Epiphany Chapter 6 Company Building, Ben Horowitz’s The Hard Thing About Hard Things (a series of essays) or Geoff Moore’s classic Crossing the Chasm.

If he already had an advisory board (formal and/or informal), add CEOs who have been through this phase. If he didn't have an advisory board, start one.

Get a one-on-one CEO coach or join a CEO peer group.

And potentially the most difficult, think about upgrading his board by transitioning out board members whose expertise was solely rooted in theSearch phase.

Find more on The Review

ManagementCover image for Navigating the Leap from Big Tech to Startups — Advice from a Former Google and Flipkart Exec

Navigating the Leap from Big Tech to Startups — Advice from a Former Google and Flipkart Exec

Punit Soni cut his teeth as a product leader at large companies such Google, Motorola and Flipkart before venturing out on his own to found Suki, a healthcare startup. Here, he shares his observations on the differences between the two experiences, noting what surprised him, what he felt unprepared for, and what aspiring entrepreneurs should consider as they look to make a similar leap from big to small.

ManagementCover image for The Arc of Company Life - and How to Prolong It

The Arc of Company Life - and How to Prolong It

Mark Leslie, longtime executive and advisor, explains how companies can prolong their lifespan by innovating at the right time.

ManagementCover image for Drew Houston’s Morph from Hacker to Hyper-Growth CEO

Drew Houston’s Morph from Hacker to Hyper-Growth CEO

Dropbox Founder and CEO Drew Houston turned a great piece of software into a massive business. Here's how he got there.

Starting UpCover image for Looking for Love in All The Wrong Places - How to Find a Co-founder

Looking for Love in All The Wrong Places - How to Find a Co-founder

Steve Blank explains how entrepreneurs can use a tool called the Business Model Canvas to find the ideal co-founder for their startup.

ManagementCover image for To Grow Faster, Hit Pause — and Ask These Questions from Stripe’s COO

To Grow Faster, Hit Pause — and Ask These Questions from Stripe’s COO

Claire Hughes Johnson is the woman overseeing Stripe's rocketship ascent. Here, she shares a list of questions that any startup can use to guide hyper-growth.

Starting UpCover image for The First-Time Founder’s Guide to Learning Everything the Hard Way

The First-Time Founder’s Guide to Learning Everything the Hard Way

Steve El-Hage picks his head up and shares his biggest lessons as a first-time founder from the 8-year, heads-down journey of building Drop.

ProductCover image for The One Tool Startups Need to Brainstorm, Test and Win

The One Tool Startups Need to Brainstorm, Test and Win

At the heart of the Lean Startup movement, the Business Model Canvas can help early stage startups carve out a successful model.

ProductCover image for Cognitive Overhead is Your Product’s Overlord — Topple it With These Tips

Cognitive Overhead is Your Product’s Overlord — Topple it With These Tips

Google Photos' Product Lead David Lieb cut his teeth on an app that allowed users to swap contact information by physically bumping phones. Drawing from Bump and other startups, Lieb shows how user adoption and virality can come from stripping cognitive overhead from products.