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Getting Traction or Time to Apply the Tire Chains?

January 17, 2012

In recent days we’ve seen two terrific posts associated with the topic of entrepreneurial perseverance.  The first sheds light on the art/science of turning early success into a growing, thriving business, AKA:  Traction.   Another, appearing in the NYTimes, profiles New Market Entrepreneurs who have decided to put on the tire chains to get out of the ditch, AKA: Pivot.

The first post penned by a Boston-area Entrepreneur-turned-VC shares some great insights on the tough decisions that follow once New Market Entrepreneurs have reached proof of concept.  Here are some excerpts from Jeff’s piece:

…the hard scaling challenges and decisions that will enable true value creation, not just interim progress, are all ahead of you.  Here are a few of the top ones that I see start-ups wrestle with once they start seeing their initial revenue projections finally come to fruition:

1. Product Strategy:  Stay Focused vs. Broaden the Footprint. The initial product is working well and now the question is how broad a product strategy should you pursue? If you think the total available market (TAM) for the existing product is large enough to satisfy yours and your investor’s ambitions, stay focused. But, typically, the allure of pursuing the bigger win draws founders into ambitious efforts to broaden their product footprint through organic development efforts or even M&A.   read more

2. Financial Strategy:  Exit vs. Raise Additional Capital. Once things are working well, there is a magnetic power that demands pouring more fuel onto the fire. If the customer acquisition costs (CAC) are proving out to be $1 and the customer’s lifetime value (LTV) are $2, why not raise millions of dollars to acquire more customers? Obviously, it’s not that easy a decision. Raising capital can be a hugely distracting, draining process — and the dilution implications, as well as the choice of investors, have deep repercussions on your future options.   read more

3. Human Capital Strategy:  Hire Grownups vs. Stay Young.  There is a certain charm and many benefits to the founding team sticking together and scaling with the start-up. The culture remains true to the founding core, the young talented employees get growth opportunities, and there’s an appeal to minimizing the disruption that outsiders bring. Yet, frequently, the talented founding team that gets you to the point of scaling is not the right team to lead the scaling process. I refer to the three stages of a start-up’s life as “the jungle,” “the dirt road” and “the highway.” The team that is skilled at hacking its way through the jungle is often not as well-suited to accelerate rapidly once a dirt road has been discovered. Yet when more senior, experienced executives arrive, preserving the founding culture and maintaining alignment is critical.   read more

4. Founder’s Dilemma: Bring in a Professional CEO? One of the biggest decisions a scaling young company makes is – who should be the CEO? The founder may be one of the uniquely talented individuals who can scale from the jungle all the way through the highway but, more often than not a senior, professional CEO is hired to help take the company to the next level. This decision is truly make or break. It rests on the founder’s desires as well as the board’s confidence in their ability to transition from a product-centric, pre product-market fit world to a sales and marketing execution-centric, post product-market-fit world. Investors would always prefer to see the founder make that transition, but if the skillset isn’t there, having an orderly transition with open communication is key.  read more

Why should each of these decisions sound limiting? Because great entrepreneurs are competitive, ambitious types who attract ambitious management teams, advisors and investors. There’s a natural allure to moving aggressively to scale once the initial product-market fit assumptions become validated. Just scale wisely. Going from $1 million to 10 million in revenue is no easier than achieving that initial $1 million. And getting to $100 million and beyond, well now you’re really in the rarified air that gets the people around you excited – and sets expectations soaring higher.  read more

Next, we have frequently posted about failure and setbacks in the world of New Market Entrepreneurs.  So when a story like this,  covering the topic of start-up failure shows up in the New York Times, it suggests the concept may be ready for mainstream.   We share it here because it’s the analog to the scenario Jeff describes above… it aint workin’? What do you do?  Pivot!…  Here are some excerpts.

Every entrepreneur hopes to start the next big thing. But sometimes the first try doesn’t go as planned.

To pivot is, essentially, to fail gracefully. While the term has been in the start-up lexicon for decades, it is coming up more often in the current Internet boom, as entrepreneurs find that many investors are willing to keep the money flowing even if a start-up takes a hard left turn.

“Ideas are like lightning in a bottle, so if the company is small enough and didn’t seem to capture lightning on their first try, it makes sense to try again,” said Ben Horowitz, one of the founders of the venture capital firm Andreessen Horowitz. “The art of the pivot is to do it fast and early. The older and bigger the business, the harder it is to change directions.”

Mitch Kapor, the software pioneer who is now a partner at Kapor Capital, which invests in early-stage start-ups, said roughly 15 to 20 percent of the companies in his portfolio have gone through radical transformations.

Even so, some of the biggest Web success stories are the products of successful pivots. The photo service Flickr, for example, started out as a feature of an online game. Before PayPal became a kind of Internet currency, the company was focused on the idea of beaming money between hand-held digital assistants.

There may be more pivots happening nowadays because investors are determined not to miss out on the next Groupon or Facebook, so they are putting money into companies that have not yet proved their ideas will work, said Kartik Hosanagar, a professor of Internet commerce at the University of Pennsylvania’s Wharton School.

Pivots are not unique to the tech industry, though they may happen at a higher rate there than in other fields, Professor Hosanagar said. For one thing, it is a lot less taboo to acknowledge failure in Silicon Valley than in Hollywood, for example, where if a new album or a blockbuster movie goes belly up, it could spell disaster for one’s career.

“In the legal and entertainment industry, you can only fail so many times,” Professor Hosanagar said. “But the culture of Silicon Valley is one where failure is embraced.”

read more

Lastly, in an effort to define the epitome traction, we thought we’d share fascinating  stats behind some of today’s most successful sites and how quickly they reached 1 million users, AKA: Home Run!  Here’s a summary…

Kickstarter              30 months

Airbnb                       30 months

One Kings Lane       26 months

Tumblr                       24 months

Twitter                       24 months

Gilt Group                 24 months

Pinterest                    20 months

Foursquare               13 months

Facebook                   10 months

Dropbox                     7 months

Fab (after pivot)      5 months

Spotify                         5 months

Instagram                  2.5 months

Path (after pivot)    2 weeks

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