Needless to say, the strategy of investing in fast-growing, money-losing companies works well until investors are gripped by the fear that such companies will bleed out.
Avoiding this danger is what's behind my four-stage scaling model:
One of the possible flaws in the market for financing startups is that some companies can go public despite losing buckets of money. In my way of looking at things, they skip the second stage in my scaling model -- which is to lower a company's costs to sell and provide service to a customers as it gets bigger -- and investors are happy to let them get away with being unprofitable as long as they grow quickly.
A good example of this is San Jose, Calif.-based data storage supplier Nutanix which has enjoyed expectations-beating revenue growth but has never managed to make a profit. However, this has not stopped its stock from rising from $16 at its September 2016 IPO to about $52 on August 6th, 2018.
Co-founder and CEO Dheeraj Pandey helped illustrate five lessons that can help you achieve greater startup success.
1. Set investor's expectations on your own terms.
Most public companies operate on the premise that they should beat analyst's revenue and earnings targets and raise their expectations every quarter. But CEOs of private companies are usually more focused on rapid revenue growth and less on profits.
A CEO who succeeds in taking a company public and runs it successfully thereafter ought not to be too shackled by the beat and raise mentality. Instead, such CEOs should offer investors a different way to think about this tradeoff. Nutanix does this.
As Pandey told me, "We believe that the right balance between the two is measured by the rule of 40: our revenue growth rate plus free cash flow as a percent of revenue should be at least 40 -- ours is 49."
2. Focus on your employees and customers.
I believe that if a company hires people who want to give customers great products and excellent service, the customers will keep buying from the company and shareholders will benefit.
Pandey agrees. As he said, "When you have to stay connected to [your customers], you have to be humble, you have to be hungry and you have to be paranoid, and be very honest about things. Because [your customer base] doesn't give a hoot about what your stock price is."
3. Redefine your job every year.
Very few get to take their companies public and keep running them. These rare CEOs I called marathoners in my book, Startup Cities. Such CEOs usually start off as product innovators and morph into organization builders. Founders who can't do that get replaced by CEOs who do.
Pandey has changed his role over the years. "In year one, I wrote 20,000 lines of code to get the product out the door. In year two, I was acting as the VP of engineering and writing code, and in year three, I was acting more like a CEO -- as a generalist. Even today part of my role is as a product manager and architect."
4. Think of every day as if it were the first.
As I wrote in my book, Value Leadership, companies must fight complacency by thinking about every day as if it was the first and putting talented people with entrepreneurial potential in charge of a key parts of the business.
Pandey says he does this. As he said, "The paradox of growth is that growth creates complexity which kills growth. We always think of it being day one -- we keep our scrappiness."
5. Build a culture that keeps you in everyone's mind.
Culture is important because the CEO can't make all the decisions. It's the values that a CEO believes are essential to the company's success and the actions it expects people to take without having to ask permission.
Nutanix has a culture. "We are launching the 12 cultural principles and putting them in the hallways and meeting rooms. Even though I cannot physically be in every room, with these principles I will be there mentally," said Pandey.
If you are not following these five principles now, doing so could make you more successful.