In the past, growing a business was a far more linear process. If you opened a restaurant chain, for instance, you would build one store, then another and another. Growth, as a result, was incremental.
We refer to this old way of growing as the “staircase” model.
Today, however, market conditions are different and companies can grow exponentially.
Doing so requires a different approach.
The larger market trend we’re seeing is that while startup companies accelerate their annual growth rates, they do so by first perfecting their PMF (product-market fit) and operating model, then rapidly accelerating.
If healthy growth in the past was similar to climbing a staircase, today you want growth that is closer to taking off in an airplane. Essentially, you have to spend enough energy on the ground building the plane and its momentum, so that you can achieve a successful liftoff and start growing vertically.
We’re not recommending this approach simply because it worked for us one time. If you follow the business media, you’ve probably seen a number of companies that sit in two cities for a while, then suddenly take off like a supersonic jet plane.
It’s the operationalization of the speedboat strategy.
It may sound easy, but in order to take off properly, it’s a delicate balance. You need to have a sense of what your plane needs in order to take off successfully, but not wait too long to build the “perfect” aircraft, or a bunch of competitive “almost perfect” planes will surely take off before you, leaving you on the runway.
Let’s look at some companies that took the airplane and not the stairs.
Dollar Shave Club is an excellent example. Founded in 2011 by Michael Dubin and Mark Levine, the company became the second largest razor company in the United States, selling to Unilever for $1 billion in 2016. Dollar Shave Club used its first year to do what we recommend you, as a founder, do: determine PMF, ensure that your value proposition resonates with customers, and establish proper unit economics. Once everything was in place, it took off at an unprecedented speed.
The Honest Company is another example of a business that could have easily been tempted to scale too quickly. Instead, it worked out its operating model and PMF before superscaling successfully. The Honest Company first existed only online, through word of mouth and by leveraging Jessica Alba’s celebrity power. During that initial phase, the management team had the discipline to control its growth and say no big-box retailers.
They focused on learning what customers wanted and how to source those types of products. That also helped them spend efficiently, as they didn’t need to spend money on advertising too early. Once they knew they’d developed killer product lines that consumers loved, they decided to enter Target, where the first purchase order was in the stratosphere. They nailed it perfectly and were ready to scale it.
Without such discipline, it’s easy for entrepreneurs to get caught up in a rush and fail as a result of going wide before going deep. One business we recently passed on investing in was a fast-casual pizza chain similar to Subway. You choose what you want on your pizza, they put it through a machine, and it cooks in just a couple minutes. It’s a hot trend.
The business had three stores; one was making money, one was breaking even, and one was too new to tell. The company recently signed a deal to franchise a hundred stores in Canada, with investor backing. We’re happy for it and hope that it’s a success. But we passed because we didn’t believe that the three units were fully baked before they expanded.
On the flip side, there’s a New York-based company that we really like, MakeSpace. We admire it because of the rigor with which it tested out its concept, essentially leaving nothing to chance.
MakeSpace takes items that you don’t often use, stores them, and brings them back to you as needed for a small fee. Although convenient, affordable, well-run storage businesses could be marketable in any city, MakeSpace purposely went deep into specific markets to work out its economic model.
Now MakeSpace has developed enough density in its test cities to drive productive routes and do enough pickups and drop-offs per truck to operate profitably. It also built route management software and warehouse software, ensuring that drivers made productive routes and that their system processed seamless customer requests.
This is the kind of preparation that we think separates success from failure over time and helped MakeSpace close a $30 million round. Though speed is paramount, patience remains an essential virtue!
Such companies that have been the most successful with growth have been able to strike the balance between taking their time to perfect their product and taking the offensive by superscaling in the winner-take-all marketplace.
Take a page from Amazon, which did not begin to grow and expand rapidly until it found its place in the market. As we all know, it started as an online book retailer. Eventually, it became the largest Internet-based retailer in the world.
If you are thinking of starting a business, here are 3 of the biggest benefits of taking the airplane and not the stairs.
1. You minimize risk.
Although taking a little bit of extra time may sound like a scary undertaking, having the discipline and patience to “nail it” can save you time and money in the long run. We know of a lifestyle startup that ordered 10,000 mattresses once they believed they had enough of a customer base.
Three months later, customers started returning the mattresses, feeling that they became less desirable over time. The company hadn’t taken the time to get a true PMF. You can bet they wished they’d dug deeper before ordering such a big production run.
As an entrepreneur, you will have to take risks. It’s a part of the game, but working out the kinks before you go big is a way of mitigating them. You should always be thinking about how to make more educated decisions. The less risk you take on, the more stable the foundation of your company.
2. You create buzz and word of mouth.
Scaling is particularly hard when you don’t have brand awareness, yet brand awareness is built through scaling -;it’s kind of a catch-22. Our approach with VEEV, going slow in the beginning, actually made acquiring customers easier. By saturating one market or submarket a time, we started building the best marketing channel there is: word of mouth (WOM). We created a buzz and it led to virality in small pockets, such as Venice Beach, California, which spilled over to the next pocket, Santa Monica.
There’s nothing cheaper or more effective than existing consumers telling new consumers about your product and why they should buy it. Buzz means that people are talking about you and you can spend less to acquire your next customers.
It’s very hard to create buzz when you’re spread thin.
Buzz comes from density, and density comes from having a concentrated target audience. Say you’re focused, as we were, on Venice Beach, a submarket of Los Angeles. If you get thousands of customers in Venice Beach, you’re going create local buzz. Then you can concentrate your dollars on converting the people who already know about you and spread from there. Think about referral marketing: How can you get people who try your product and like it to tell at least one friend about it?
3. You sell your dream to investors more easily and increase your likelihood of success.
Nailing it before you scale it, then taking the airplane can change how much you’re able to raise from investors and the valuation at which you raise. When entrepreneurs show us vanity metrics, it’s clear that they haven’t found PMF and it’s a quick pass for us. We’d much rather invest in a company that’s serving a much smaller customer base but has deep insights.
That’s what we want to fund and scale.
Nailing solid fundamentals is crucial when you are determining when you will take off in your startup airplane because good ongoing business practices offer a greater chance to succeed over the long term. When investment capital grows, companies often find themselves putting extreme growth above all other factors, creating high burn rates. No matter how much capital your company raises, this is a slippery slope. Make sure you don’t build the airplane that runs out of jet fuel after taking flight.
Are you convinced that taking an airplane is better than taking the stairs? Let us know your thoughts as comments.