Do you have a great idea for a new business? Do you want to turn that idea into a company that will change the world? If so, I have a warning for you -- your odds of success are very low. Based on my interviews with dozens of venture capitalists, an unfunded startup has a one in five-million chance of being worth $1 billion or more.
What makes the difference between that one and the rest? The answer is whether the company can scale -- meaning it gets enough customers, employees, partners, and capital to go public and keep growing. How do you get there?
In my view, there are four stages of scaling
- Winning the first customer -- which requires a company to fit its product's features to benefits for which a customer is willing to pay;
- Building a scalable business model -- designing business processes that will make the company's costs drop and value to the customer rise as it grows;
- Sprinting to liquidity -- rapidly expanding the company until investors achieve liquidity through an acquisition or IPO; and
Running the marathon -- growing the company after the IPO so it is big enough to change the world.
At each stage, the startup's CEO must deploy seven levers of scaling -- two of which we focus on here: Creating a Sustainable Growth Trajectory and Raising Capital.
Last month I interviewed two CEOs who have made it past the first stage of scaling and they described how they deployed those first two scaling levers. On June 18 I interviewed Fred Plais, CEO of platform.sh, a supplier of application platform as a service, and on June 19 I spoke with Yaacov Cohen, CEO of harmon.ie, a product that organizes corporate data by topic to make workers more productive.
Creating a Sustainable Growth Trajectory
In order to grow, a company must design and execute a plan to win customers. As I wrote in Disciplined Growth Strategies, CEOs should base such plans -- I call them sustainable growth trajectories -- from a combination of five dimensions: customer group, geography, product, capabilities and/or culture. To win customers, companies must build, sell and service a product that satisfies a significant unmet need and do so better than rivals.
Startups -- especially in stage 1 of the scaling process -- tend to seek out their first customer from a specific group with common attributes -- such as industry or revenue range -- who have the highest need for the startup's product. Often such customers partner with the startup to test and refine ever-improving versions of the startup's initial idea. The startup hopes to turn these design partners into reference customers who will enthusiastically recommend the startup to other companies.
Platform.sh has clearly passed this initial stage of the scaling process. By June 2018 it had 650 customers including GAP, Financial Times, Stanford University, and Adobe Systems. Platform.sh spent years fitting its product to what it saw as a big unmet need.
As Plais -- a native of France who previously sold two companies he started -- said, "We launched platform.sh in 2014 and took three years to build it. We saw that companies were experience two problems: they needed to develop and deploy business-critical web applications in response to rapid changes in the market place and they had to make the transition from developing to deploying these applications without crashing their production sites."
Platform.sh's initial customers were developers who worked for retail companies. As Plais explained, "We got really good traction by selling to developers who were making the transition from building applications on laptops to the cloud. We went from retailers to media -- including the Financial Times, Slate, Le Temps, and Hachette as well as social networks. Our business model was to offer a free trial for a month followed by two paying options: the developer and enterprise offerings."
Platform.sh wins enterprise customers through a marketing strategy that builds on strong relationships with developers. "We have won customers because we focus our marketing on how well our service solves their pain points. While developers lack the budgets for our product, they are able to work through the layers of the organization to convince those who do have budgets -- such as the vice presidents of engineering or chief technology officers -- to buy our product," said Plais.
Harmon.ie is taking a more leisurely pace. As Cohen explained, "We started harmon.ie in 2008 with the idea of making enterprise software as easy to use as consumer applications. From no revenue in 2008, we reached $10 million in annual recurring revenue in 2017.We have self-funded since 2009."
Cohen rejected both the Silicon Valley and Israeli models of entrepreneurship. As he said, "We loved the energy and passion for changing the world in Silicon Valley and saw that the goal of Israeli companies was to get acquired by a big U.S. company. They looked at people as pairs of eyeballs, they don't respect my soul."
Harmon.ie sees itself as more humanistic. "Social networks are destructive -- competing for attention. I believe in focus and mindfulness -- committing to something bigger than you. It is impossible for you to concentrate when your iPhone is constantly interrupting you. To make it easier for you to concentrate, harmon.ie organizes information by the most important topics to each of its users -- the five things you care most about -- rather than by app," said Cohen.
Harmon.ie has found its first customers in government. "Our first customer was the Missouri Department of Transportation. I spent lots of time flying from customer to customer. I met with the chief information officer of Missouri and offered advice on whether Missouri should trust Gartner's roadmap for Microsoft. The CIO said, 'I feel I should do business with you and I think you care about money.' Missouri bought $260,000 worth of software from us."
To raise capital, startup CEOs must vary the source of funding with the scaling stage. In the first stage, CEOs should seek to raise money from friends and family or angel investors. And in the second and third stages, the startup should seek capital from seed and Series A, B, C and D venture investors.
Platform.sh raised $34 million in May 2018. As Plais explained, "We are in stage 3 -- we have product/market fit and we are very cash efficient. We were able to raise the latest round because we have raised product awareness and have been cash flow positive in the past few quarters -- making us much more efficient than our competitors. We have strong growth, are cash efficient, have a happy customer base, and a scalable product. 45% of our revenue is from the U.S., 45% from Europe and 10% from the rest of the world."
I don't know whether these CEOs will turn their ideas into companies that change the world. But what they've done to succeed so far could help you boost your odds of startup success.