- Three horizons is a powerful way to combine short term execution with long term vision.
- Feeling comfortable in the grey area between the present and the future.
- There can be such a thing as too much vision!
- Getting the right balance of mindset & resources between the three horizons is critical.
Setting the scene
The journey from startup to global category leader is a daunting task, for a million or less in revenues, when we might invest 100 million revenues, or more, in less than ten years. This is what VCs hope to find, and it’s what many founders plan to achieve. There are strategic challenges of balancing short term operational excellence, with long term transformation and category dominance. One of the most enduring frameworks for this is the McKinsey three horizons, which describes optimising for current performance while maximising future opportunity.
Chris Tottman is one of the founders of Notion Capital, but also one of the founding members of MessageLabs, a tech company that went from an idea in 2000 to more than 600 people and $150m in recurring revenue in eight years before its acquisition by Symantec. Amongst many other responsibilities at MessageLabs, Chris oversaw nearly every single senior hire, shaping the leadership team and organisational structure.
Since then, over the last ten years with Notion Capital, he’s been investing in SaaS founders to help shape their vision, nurture their ambition and, critically, help them hire ever more extraordinary people. An original thinker in a traditional industry, he uses the three horizon framework to help the founders that he invests in build big, beautiful and enduring companies.
Three horizon thinking
Three horizon thinking was first published in the late 90s, in a book called The Alchemy of Growth, and was picked up quite significantly by McKinsey. When I think about McKinsey, big and boring comes to mind. They had a dominant position in a market that they’d under-invested in innovation, or they’re unable to unlock the innovation. I think it was around defending core business, and then creating ways to open up opportunity in new markets, or future markets, and so on and so forth. Whereas, where I tend to play is obviously, in the startup world. I may have a deck that’s got, ten or twelve people in it, and they have very little revenue, and they’ve got a market thesis around solving a problem, and they’ve got a product or proposition that they believe solving that, and I’m thinking, that’s exciting, but how is this market going to play out through time? How are you going to build huge amounts of traction and market share? And at some point, is the market that you’re selling into or a broader market from where you end up, is that market going to be running on your rails? Do you start to consolidate a market position, so that the way that that industry is running at some point in the future is running on the rails that this startup has built?
It’s easier to think about that over different time periods or different horizons. It makes it easier to debate different kinds of scenarios in the first horizon, how are you executing on the promise of that thesis and to customers? Then, in the third horizon, are you able to imagine how that market operates? Then, there’s normally a very grey area in between the two. It also brings to bear the different types of people that are needed in order to facilitate and execute those completely different time horizons and the skills that are required to do that, and how that comes together over time. I love the sessions, it can be quite provocative, it’s very creative. Ultimately, most people are dominated by the execution that is ahead of the sprint, whether that’s more a product roadmap perspective, whether that’s from a sales market execution perspective, but as an investor, where we’re trying to build very, very big outcomes, we really need to understand how this becomes a very, very big company with a lot of enduring qualities.
What is it that engages you about three horizon thinking?
I’ve had many careers over a thirty year period, working in five different verticals and business models. I am pretty restless, and spend a lot of time thinking about how to subvert and radically change how companies work and markets operate. My natural self sits in that friction between the now and the future and it’s a space in which I thrive. The three horizon model is ideal for shaping strategy and striking the balance between short term operational excellence, long term vision and the transition between now and the future, that I find so compelling. I think as soon as I feel like the rails for horizon one are laid, and people are in execution mode, then my mind switches. I might be in the board meeting of the now but I’m actually in the mindset of the future. I think it’s really a natural area for me.
The three horizons framework was developed by McKinsey to provide a structure for companies to assess potential opportunities for growth without neglecting performance in the present. You can read more about it here.
The first problem for founders to overcome is to adopt a whole new way of thinking.
99.99% of everything a startup founder does is typically horizon one. They’ve conceived a problem in a market, they’ve thought about building a product, they’ve got some people together, they’ve built that product, they’re figuring out how to sell that product, and they’re getting different degrees of success. They’ve been doing that for a number of years, and they’ve got lots of customers and revenue. That’s who they are and what they do, which means, there’s a whole different way of thinking that’s not currently locked into their brain or booked into their diary, and a whole new way to consider how their business might evolve through time.
If you take Amazon, for example, horizon one was selling books online, but that’s not where it ended. Selling books online was just a good place to start. That business has adapted and changed and disrupted many markets completely unrelated to e-commerce since.
If you take someone in the Notion portfolio, like Triptease, their original hypothesis is that 50% of all of the bookings for hotels go through online travel agencies (OTA). Therefore whilst hotels are building hotels, fitting them out, employing lots of people, a big share of their economics goes to a website simply for the transaction of the order. It makes no sense. They believed that they help convert the traffic that arrives on a hotel website to stop visitors going to the OTA, and created a product for that which drove huge market share, i.e. horizon one. But once they got about 20% market share in their defined market, they realised that they had a data advantage there, which would decrease, but there was a whole new market further up the value chain which is getting traffic to those wholesale websites. If they could build a data asset there, that would be really unique, because you’d have on site data and traffic data. So, that’s what they did and it multiplied their market size by five and drove huge amounts of growth for the businesses. This is an example of moving from a first horizon to a second horizon.
The midterm transitional phase is the hardest
To be really great in horizon one, you have to hire a bunch of people that have got great pedigree at high replication; everything that they’re doing is well thought through and designed. They’re building organisations that are more like armies. There are playbooks and high replication, and they’re building consistency and growth capacity into selling a defined product to a defined market opportunity. Those people tend not to be as good at thinking around corners.
If you think about a visionary, people would say, “well, we’ve got this really visionary founder”, and everyone’s inner voice is saying, “oh, I bet they find it really tough to execute?”, they’re good at blue sky, but they’re not so good at high replication. The mirror image of that is people that are really good at high replication but not so good at envisioning the way their industry should be operating in the future. Whichever way round, it’s a problem to bridge from one way of thinking to another.
If you take Google, even at or around the IPO, they talked about the 70 / 20 / 10 model, which is that 70% of their money would go to driving the ads business, which was 99% of their revenue. Then 20% of the money would go to horizon two, and that’s thinking about how to do adjacent products and adjacent markets. Then 10% would go on moonshots or loon shots. They embedded the model in the way that they thought about the economics of their business. They knew that if they continued to spend 99% of their money on the ads business, then ultimately, they would start to go into decline. They knew that they needed to invest in different thinking and different ways of doing business, leveraging off the asset and the market position, a strong market position that Google had.
The biggest challenge is to accept this is actually a human capital issue. Founders need to be able to reconcile the difference between the creative, inventive, innovative side of the organisation with the high execution, high repetition, high cadence side of the business, and it’s being able to get those different people, different parts of the organisation to coalesce together around creating different types of outcomes.
I bet on founders who I believe can reinvent an entire industry.
This is the sort of conversation that I have with founders: “Look, the reason why I invested in you is because you envisioned the fact that there was a problem in a market that you wanted to solve. You got some people together, and you built a product to solve that problem, and then we found each other. I backed you because of that ability to envision a different way of working, that was going to be meaningful, and that would gain critical attention and traction, and already you’ve convinced some highly rational people to do an irrational thing and join your high risk startup and go on that mission with you. Now, you’re building a very complex organisation, a very complex strategy, and you’re hiring people that have got great pedigree to crank the handles of execution. Did I invest in you because I bet on the fact that you can run highly complex organisations? Or, did I bet on you because you can envision the way that markets operate differently?” That conversation plays out on a regular basis with my founders and I’m clear that I made the bet because of the latter.
I want founders to lead complex, well run organisations, but what I really want founders to do is to find how to put even more growth capacity into the business:
- How do you create more market pull?
- How do you create market share beyond the thing that you originally did?
- How do you take that advantage in that position that you’ve got in the market and start to pick off a lot of unmet needs that that market might have?
- How do you build an architecture that is sufficiently open that when you have this dominant market position, and you have therefore this unique data, make that data open to other market participants that are desperately keen to get to market share?
Those are the sorts of questions I use to test a founder’s understanding about the sort of CEO that they want to be. I’m suggesting to them that the original reason why they were so exciting to invest in mustn’t be lost. It’s not because they were brilliant at running big organisations, it was because they were brilliant at understanding the problems that need to be solved. If they can do that from a market perspective, then you can build very, very, very big companies.
Free yourself up to project yourself into the future
I encourage founders to build senior teams and free them up so that they can work on the problems of the future. Whether that’s the 20% mid term or 10% long term at Google, it’s up to them, but they definitely shouldn’t be focused 100% on horizon one.
Look at a board meeting, how much of the board meeting is based on how we’re doing? It’s like a checklist scorecard. How’s the product roadmap going? How are sales going, relative to what we said we were going to do? How is that machinery? Is it cranking towards forecast?
Whereas, in the board meeting is the section about the future. How are we trading off adjacent markets? Are we selling an existing product to existing prospects? Are we selling an existing product to new markets that we haven’t gone into yet? Are we building new products for our existing customers? Or, are you building new products for new markets? Where is all that kind of conversation in the board meeting? Quite often, I just don’t see enough of that from a lot of the companies that we analyse.
Get big or get niche
When Amazon got into books, what happened to the rest of the book market? Imagine trying to sell books, competing with Amazon. I did some research on this and I came across a bookseller that has the Royal Warrant in the UK (that’s the bookseller the Queen buys her books from). How did they pivot? After more than ten years of online book selling and price erosion, how have they survived and even thrived? It’s very interesting as they are the very opposite of being the large dominant business, they are very niche.
This bookseller, with their Royal Warrant, has pivoted to selling first edition libraries to very, very rich people. So, instead of selling a single first edition book for maybe £5,000 or £10,000, they’re selling £1-5 million libraries of first editions. I find that absolutely amazing that in all of this disruption, there is always a place for a smart entrepreneur to carve out a piece of ground that they can defend. Not everyone can build these huge global businesses. It’s not a crowd of people that can pull this off, it’s a small bunch of outliers. But even those that are on the wrong side of the equation, there is room for them to be extremely entrepreneurial and carve out a brilliant and unique business for themselves. Three horizon thinking can, again, play a massive part here, so long as you can move your thinking beyond the here and now.
There can be such a thing as too much vision, too much horizon three.
Here, people sometimes get the balance wrong. It’s where you’ve got too much vision and horizon three thinking, occupying too much of people’s time. Don’t forget horizon three is the vision that quite often you never get to. Drones are still not delivering to my doorstep, and no one I know has a self driving car. So, some of the horizon three vision about how things are going to operate in the future never turns up, and that’s OK.
I think where it’s wrong is when there’s an imbalance between the amount of time, money or people assigned to operating in those different horizons. There’s no cookie cutter way to build companies. To be an entrepreneur, you have got to find your own way. I think it’s generally when it’s out of balance, it’s all horizon one, which I think is fundamentally flawed. Clearly, I’m designed to build highly repeatable execution into the businesses that we invest in and that’s part of the mission, but it’s also how we adapt things through time to take advantage of that market position, to make gains in unmet needs of existing customers or take existing products to new markets. Sometimes those steps change the most commonly understood errors, which is the inability to execute in new markets. So, selling an existing product in a new market is quite often a bit of a graveyard, but it’s that imbalance of focus, either too much or too little, that’s the problem, but not necessarily the intention.
An example would be MessageLabs. We built MessageLabs as an email security provider and ended up with a product architecture, which had something like seven or eight different products in it, but when we looked at our revenue, 95% of our revenue was from two products. There’s a lot of product innovation, which may have helped our win rate of the core product, but actually the new products never really made a massive impact on the revenue. Whether that’s success or failure, I don’t know. Without them, the win rate may be a bit lower, so it’s sometimes difficult to tell. But generally, the expectation of those new products is far greater than the revenue that they actually achieved.
If you want to learn more
The original book, The Alchemy of Growth, still has a lot of relevance today. The stuff on the web is mostly for larger companies, and the go to blog that I would recommend is SkyLance.org, ‘How to use three horizons’. To me that is the closest I’ve got to something that is the fool’s guide to three horizons.
You can find this article here: https://www.skylance.org/blog/the-three-horizons-of-growth-and-innovation
Notion has another article on this topic with Dennis Fois, who was formerly the CEO of NewVoiceMedia, a Notion company acquired by Vonage and now CEO of Copper. Dennis is a self professed strategy geek and has a very interesting take on this topic with a bastardised version of three horizons you can find here: https://notion.vc/resources/radical-simplification-and-the-beauty-of-execution-with-dennis-fois/