Thursday, May 26, 2016

Lesson #237: The Hockey Stick Principles of Growth

Posted By: George Deeb - 5/26/2016

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I recently got introduced to Bobby Martin, serial entrepreneur from First Research and Vertical IQ fame, and author of the new book, The Hockey Stick Principles--The 4 Key Stages of Entrepreneurial Success.  I thought he presented some really interesting views of the four stages of a startup's typical growth curve, and he was nice enough to allow me to share it with all of you.

Introduction

Bobby conducted a study that plotted the revenue growth of 172 successful startups for the first seven years from launch, covering a wide range of sectors from web leaders like Google and LinkedIn to non-Web businesses like Chobani yogurt, TOMS shoes, and video camera maker GoPro. The data showed that all but eleven saw hockey stick growth.

Bobby then interviewed successful founders of all kinds of startups in depth, getting the details on exactly how they built their businesses, from how they came up with their ideas through to developing them into viable business models, how they designed and developed their products and services, how they launched, and how they built their customer base and sales thereafter. The more he delved into the founders’ stories and examined the growth curves for their businesses, the clearer it became that all successful startups go through four major stages of growth, which track along the hockey stick curve, and each of  these growth stages— which Bobby calls (1) the tinkering stage, (2) the blade years, (3) the growth- inflection point, and (4) surging growth— presents founders with its own distinctive challenges.

As Bobby compared the stories of more and more founders and how they faced  these challenges, the commonalities between the businesses that succeeded, including Bobby's own businesses,  were striking, as were the similarities of the mistakes that  were made by founders who failed. The result is that Bobby identified a set of core principles to follow in each stage of growth, which he calls the Hockey Stick Principles. Below is a very high level of what each stage is about.

1. Tinkering Stage

This is the time during which founders are beginning to explore the viability of their idea. It begins when they start to take action to examine the idea more seriously, and it ends when they fully commit to developing the business. While this is the least pressured of the stages,  because most often the founder  hasn’t yet quit his or her day job or committed to a launch schedule, it still presents many tricky challenges, and too many aspiring founders never get beyond this stage.

One of the most common mistakes made is that founders waste a  great deal of time developing elaborate business plans, which seems so obvious as a must-do, but is in fact, as  we’ll explore more fully, a terribly misguided action. Believing that you should develop a good business plan on the sole basis of an idea lends support to one of the biggest fallacies about the startup process: that you’ve got to begin with a good idea and everything  will flow from  there. Hockey Stick Principle #1 is: you don’t need a good idea.  Viable ideas for startups don’t just emerge whole from founders’ brains; they are developed over time.

This stage should be a period of actively experimenting with developing the product or service, getting out into the field and soliciting the feedback of potential customers, as well as canvassing suppliers and retailers, testing— and truly challenging— your ideas for the product and all aspects of your business model, and listening carefully to responses. It’s often from this experimentation and critical listening that crucial changes to initial ideas come, which make all the difference in eventual success.  Reluctance to share ideas and test for feedback results in failure to truly understand the market.

2. The Blade Years

This is the period of time when founders have fully committed to making the business work and are preparing to launch through to when they hit the growth-inflection point. This is a bumpy time of highs and lows, during which many founders lose heart or become overwhelmed. They’ve quit their day jobs in order to devote themselves full-time to developing the business, and they’re often not earning enough of a salary to pay their personal bills. Bobby's study shows that this stage usually lasts three to four years, during which revenue is often quite low, if any is coming in at all, showing up as the blade part of the hockey stick curve.

The lack of adequate earnings leads many founders to focus a  great deal of their energy on the quest for investment capital at this early stage, which too many founders think is the only way to fund the development process. They waste valuable time making elaborate pitches to potential funders, which most often fail to impress  because they have no tangible results to point to. And if they do raise significant investment capital, it often puts undue pressure on getting to market, which leads to its own common trip-ups. Hence Hockey Stick Principle #15: raise the minimum amount you need to get to launch; financing is scarce and expensive.

A better method for success is to bootstrap during this period and to develop an alternate stream of income. This frees you to throw yourself into what should be the twin focuses of your energy in this stage: developing the market  you’ve targeted, or searching for a different one,  and simultaneously improving the product or service, so that, by getting the combination of market and product right, you break through to fast growth. Key mistakes made during this stage include spending too much on marketing and sales efforts to try to bring in customers faster,  whether by pouring funds into an elaborately planned publicity push and advertising campaign or setting up an expensive sales operation.

3. The Growth-Inflection Point

This is the wild ride of a time when revenue turns sharply upward. It’s an exhilarating stage. At this point,  you’ve honed your model, and sales are coming so much more easily. Venture firms and other investors may come calling, offering tantalizing deals that will allow you to leverage this growth momentum and scale your business way up. But this stage also poses many dangers; primary among them is scaling up too fast, so that rather than sustaining strong growth many startups crash and burn.

Scaling too quickly has been identified as the number one reason for startup failure. So much has been said about the need to “go big fast,” but too often this leads instead to going bust fast. In this stage, founders must always keep in mind Hockey Stick Principle #51:  don’t spend lots of money to fuel fast growth  until  you’re pouring it into a high-performance engine. The primary job of this inflection stage is to carefully calibrate the growth of your operations so that they are in sync with your growth in revenue. Otherwise, scaling up isn’t really growing; it’s inflating. Too many founders invest too heavily in ramping up staff, purchasing or renting larger office space or manufacturing equipment, and expanding retail space and facilities. Before they know it, their costs have escalated way beyond their continued increase in revenue, and even though they’ve found a good market and are off and running, they’re running out of gas.

4. Surging Growth

If innovative start- ups manage the growth inflection stage well, they will proceed into a stage of continuing acceleration of growth. During this period, entrepreneurs come to many crossroads. Their market is exploding, but so is the complexity of managing and leading a larger organization. Meanwhile, alluring offers to buy the company are often made. One way or another, a founder must grapple with the difficult transition from scrappy entrepreneur to corporate manager. He or she has three main choices: remaining CEO by learning how to further professionalize the business; hiring a CEO to manage the business, most often either then taking on another role, such as heading up research and development or becoming chairman of the board; or selling the company.

Many founders stumble when making the transition to corporate chief and fail to recognize that they must master the requirements . . .  The qualities that were so important in taking the risks to launch the business and in bootstrapping and experimenting with new things are less called on during this time, and  those of a corporate leader become primary. Too many founders fail to appreciate this and neglect to appoint top-quality managers with first-class experience to take charge of the major functions, instead often hiring from within their personal networks and promoting unqualified people from within.

Thanks again to Bobby for sharing his wisdom with all of us.  Be sure to check out his book The Hockey Stick Principles--The 4 Key Stages of Entrepreneurial Success for more details on this topic.

For future posts, please follow me on Twitter at: @georgedeeb.



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