The essence of the entrepreneurial journey from inception to scale encompasses many different facets with fundamentally different challenges at each phase, which Notion describes as start up, grow up and scale up.
When I look back at my history and journey at MessageLabs (which we grew to $150,+ in revenues in 8 years from inception in 2000) we didn’t understand the phases of our journey with such clarity, but with the benefit of hindsight and ten years investment experience it is something we now find incredibly helpful to categorise.
At MessageLabs there were some very different priorities we faced, but one thing that was critical to me, was that I and the founding team had been through previous successful startups together, and the thing I reflect on most was the massive passion that we all felt about the pain point we were facing and our desire to build something very big and very special.
In those early days, we were nowhere near as scientific as many founders are now in terms of understanding the size of our market or our unit economics, but we had masses of raw competitive spirit within the team and a desire to win. We were also good friends, and spent a lot of time together out of work as well as in, and those ingredients were all really important to our ultimate success.
This is Episode 0, of Series 2 and a summary of a recent Pain of Scale podcast with Stephen Chandler, Managing Partner of Notion and previously one of the founding team and CFO at MessageLabs, exploring, which you can listen to here.
When we talk about these three phases – start up, grow up, scale up, they are invaluable in putting shape and consistency about how we and founders think about our businesses.
At the start up phase it’s about identifying the pain, assembling a team and building a minimum viable product to address that pain. And you remain really focused on those, yes you want to identify an ideal customer profile but that will iterate and develop over time, because to really understand your ideal customer profile you need to understand your unit economics and to understand the unit economics over time, for example churn.
So it’s about keeping it simple, being very tight with costs, testing and learning, iterating, and trying to get to that elusive product market fit. And like the transitions from start-up to grow up to scale up, Product Market Fit (PMF) doesn’t happen overnight. It’s not as if one day you don’t have it and the next you do, it’s about getting increasing confidence that your product does fit wit the market opportunity, with enough data and evidence to back that up.
Start up – be efficient with your time and capital.
I made the jump from operator to investor, because I wanted to bring the skills and learnings I’d had to bear across a portfolio of companies and I believed the time was right to found Notion, and that we had a differentiated proposition because of our experiences.
Now one of my great passions is spending time with entrepreneurs and bringing our collective experiences to bear. But as an investor I’ve had to learn that trade as well. While in my earlier days I did have some experience as an investment banker, I didn’t have any experience investing in technology companies and had a lot to learn.
One of those learnings is that those early days is – the start up phase – is all about efficiency: efficiency of your time and efficiency of your capital. And if you don’t use those two efficiently you won’t optimise the creation of value and indeed may end up with a failure.
So it is really important you remain uber, uber focused, and the best way to do that is to keep things very simple, be very disciplined and narrow in on an ideal customer profile and not spending too much money until you have reached PMF.
If my first learning is around efficiency then the second is around capability.
The type of people you need at different stages of a company are different. Before PMF, it’s people who embody the pathfinder mentality, exploring all different avenues, and finding out how you can get through to different organisations to see whether there is demand for your product. You need a pathfinder or even Viking mentality across the team.
As you move beyond PMF its about being really disciplined about the qualification of leads and making sure you are spending time in the market you have designated as the one you will go after. That’s a very different mindset, and it’s not to say that founders can’t make that transition, but it isn’t entirely natural and you will need different skills as you make the change.
The third learning is to really think about investors, and what they are looking for.
If you can be clear about the stage of the business you are at and what you are trying to achieve it makes the process of raising money so much easier.
The “grow up” phase is the hard yards.
Some of the early customer wins founders can win through force of personality. Most founders are pretty creative people and incredibly good at securing the early customers, who themselves are often early adopters and buy into the early vision.
But the grow up phase is about building the foundations of a proper business that can go on to greatness.
Whereas in the early days whoever wants to buy your product buys your product, and the company is not very disciplined about that or the channels you use, as you move into the grow up phase it’s all about understanding your ideal customer profile and your unit economics.
For example, how do fixed costs as you drive volume through the business and which channels work? As you get more volume, what engagement are you getting on the product and what does that mean in terms of retention and churn? As you get this volume, you can begin to define the profitability of a market and where you should deploy your resources. This is an incredibly important lesson and one within which we have seen lots of challenges with portfolio companies who have scaled too early and gone after people who want to buy their product without really understanding the economics of delivery. Ultimately you look back and see you have acquired a whole bunch of customers that are unprofitable.
At MessageLabs we were very channel focused in the early days and it seemed very obvious to us that our product would be one that partners, for example the ISPs, would want to include in their offering. But the truth was the product was relevant, but the partners just weren’t very good at selling value add, and we had to rethink and look again at the unit economics and what we discovered was that while it cost more to win a customer with a direct approach, we had such fantastic life-time value that it was much more economically preferable to sell directly, so we shifted the business from a 90% channel to a 70% direct business.
That kind of optimisation is critical and much of that comes down to the team, with different personas with different capabilities. You need to bring in people who can operationalise your business. This is when you are hiring Heads of Talents to help you scale, it’s when you are hiring Sales Operations people to help you put in place the fundamentals around hierarchy, management and compensation.
There is also a big change in this phase for the founder themselves.
The evidence is clear that founder led companies are the most valuable and as ex founders ourselves we think of ourselves as entrepreneur friendly so we want the founders to succeed and make the transition to CEO, but it is equally the case that not all founders will want to continue to lead the business during this transformational period and beyond. So the founder must have the self-awareness to understand their strengths and weaknesses and therefore where they need to augment their skills and bringing in people with the experience they need. Founders should focus on the things they are good at, and enjoy, rather than trying to do everything. We will always look at the founder and the leadership team and recognise you need different capabilities across the team.
There are however some critical aspects that you must have in your founders to drive a big outcome and it’s not just a good understanding of their product and market, but also the desire and ability to hire great talent. I like people who want to hire the very best people they possibly can. I look for that characteristic quite specifically. I personally also like founders who spend a lot of time with their customers, especially in those early days, never cutting themselves off from customer engagement.
Scale Up: The mentality changes again.
There is a different mentality again as a business hits really scale, lets say $50m in revenue upwards, and it’s not necessarily the case that the talent translates across these phases. When you are in the grow up phase, you may not have the resources or profile to attract all the world leading talent you want. Some of the best people, in some of the world’s largest and best organisations aren’t necessarily going to join a startup. But once you are at the scale up phase, as long as you are still executing well and growing, you can attract some of the world’s best talent. This is something you need to really think about in terms of the development of the firm.
Many companies will achieve early growth, but too often that withers away, and managing to sustain that growth at real scale is the real challenge, and most companies fail to do this. And to achieve this you have to have that scale mentality, so that means not only executing within your core and existing markets and refining the execution and growth there, but also opening new markets – geographies, sectors and product extension – all these things are important to maintain growth.
This is when the CEO becomes the conductor of the orchestra, not just playing multiple instruments. This mindset is very different and that’s why you see so many examples of the founder recruiting the experienced operator to work alongside them, such as Zuckerberg and Sandberg.
Founders on extraordinary journeys who have inspired me and I learn from.
Tradeshift and Christian Lanng.
I was captivated by Christian Lanng, in 2011 when we led the Series alongside PayPal. What I love about Christian is that he is inspirational: the scale of his ambition is enormous and he is utterly fearless. But at the same time he comes with humility and listens to people around him, and the combination of those things is rare to find.
It’s been amazing journey with Tradeshift. It’s a unicorn valuation business, scaling very successfully, entered the US business and is now more of a US business than a Danish one. It’s been a fantastic journey with Tradeshift that shows no sign of stopping, if you talk to Christian about exit he will tell you he’s not thinking about that at all. He draws an analogy with Salesforce, which took 7 to 8 years to reach $1bn valuation and then another 5 years to achieve $100bn. So that’s the journey he’s on now, building a very large company, and its great to be part of that.
He also has augmented himself with a very capable team and would be the first to admit that the execution has not been perfect. For a small start up to sell to Fortune 500 on a SaaS proposition for a start is hard enough, but then to overlay a marketplace and financial products is even harder. And it’s been somewhat chicken and egg, in so much as you can’t build the market without the traffic flowing through, but now with more than $30BN in transactions every month it is really getting there. They probably did try and scale too early, investing in sales and marketing at a time when they didn’t entirely have PMF, but Christian has always driven the business forward, and it has not caught up with his vision.
The passion and ambition Christian embodies, that I mentioned at the start, has made me realise that as an investor you really want to see that, combined with a massive opportunity. Of all the things we consider when making an investment are a great team addressing a massive opportunity and if you have those teams you can build something really special. All founders should be self reflective in that regard: how big is the opportunity and how far can I take this business. Because there may be a great opportunity to create an enormous amount of value in a bootstrapped business but which may not be right for venture capital.
There is much to learn from Christian’s example for founders pitching me, or any other investor: they need to be selling the dream, but they must make it credible. They need to communicate the scale of the opportunity they are going after and genuinely convey their belief they have the team in place to execute against it. And then think about how they should make me feel – every time I meet a new company, I go in hoping that when they leave I will be left thinking “how can I find a way to work with this company?”.
Gocardless: an inspirational business with an inspirational leader.
When I first looked at this business it was a bunch of smart kids, who wanted to change the world and there early culture was great. But Hiroki, the founder and CEO, has learned along the way that experience is a valuable asset around the table and that while youth and energy are also valuable, having some grey hair and experience can balance that. The way that team has grown has been very impressive, and is now one of the very best in our portfolio across all the disciplines. Hiroki has recognised the importance of getting ever-better people into the organisation.
Brightpearl: building a business that is significant and special on a global basis
Brightpearl is another example of a business that perhaps scaled sales and marketing too early, without having PMF and understanding their unit economics. That isn’t meant as a criticism because sometimes you need to figure these things out – you need to see retention and churn coming through and can only do that by selling. Nonetheless they found themselves in a position where many of their customers were not economically viable. They changed strategy and became much more focused on their Ideal Customer Profile, significantly increasing their average order value. Derek O’Carroll is another inspirational leader who has driven this change, in terms of the process he’s been through, the decisions he’s taken and the people he’s hired. All of which gives me great confidence as an investor that Derek and his team can build a business that is significant and special.
As I said at the start, I made the jump from operator to investor, because I wanted to bring the skills and learnings to bear on a portfolio, what I now discover is that I learn as much if not more from every founder I meet and every company I invest in and that for me is an absolute joy.