At the onset of 2012, many start-up executives are sticking their copy of Lean Start-Up on the shelf, leaning back and bemoaning the fact that they have a new set of challenges ahead of them. Although there is a plethora of advice now being given about how to find product-market fit for your fledging start-up, there's a dirty little secret out there: Once you've achieved product-market fit, the hard work really begins. Scaling is hard.
After three or four years of jamming on your start-up, you've finally crossed a few million in revenue, gotten north of 10-20 employees, and it's all starting to click. Now the pressure really begins. Your employees start doing what I call "phantom equity math" (if this company were worth a billion dollars, I'd become a multimillionare!), your VCs shift you in their mental models from "too early to tell" to "high return potential" and your spouse starts asking about when all that hard work is going to really pay off.
Yet, 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. My partner Chip Hazard likes to refer to the broadening efforts as the "lilly pad strategy": Focus on jumping on to a lillypad next to you rather than across the entire pond. By pursuing natural adjacencies, a company can increase its TAM - ideally by leveraging existing customers (meet their needs more broadly), channels (given them more things to sell) or products (extend the current prodcut footprint with natural adjacent add-ons). I'm often surprised that companies don't think through the basics of competitive strategy when evaluating these adjacent opportunities.
At the risk of getting some eye rolls for evoking Michael Porter, I encourage start-up CEOs to think carefully about the new lilly pad's competitive intensity, entrance threats, threats of substitute products as well as the power of suppliers and customers when evaluating the adjacent opportunities.
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. On the other hand, pursuing an early exit can be appealing, particularly if the entrepreneur has never had a win before, but there are many difficult considerations here as well, which I touch on in a blog post (Walking Away From Liquidity) as does Roger Ehrenberg (To Sell or Not To Sell).
