I recently saw a cartoon that parodies a famous 1879 illustration from The Evolution of Man by Ernst Haeckel. While Haeckel's drawing shows the evolution of humans, from ape to man, the cartoon in question shows an entrepreneur evolving.
The stages of entrepreneurial evolution, according to the cartoon, are volume, revenue, profit and cash flow. While it's a little cheeky, I actually find a lot of truth in the cartoon, at least for the startups I mentor. Founders seem to be always running, but the goal line keeps changing. If success is your destination, then you need to know both the race route and where along the route you currently are. Here's how it works:
The Five Races
- Race to Volume. In the beginning, a founder is trying to find a solution to an inelastic problem held by a large and growing customer segment. Proof of concept here is volume: how many users, files, images, or customers you can get interested in your solution. This stage is often self-funded.
- Race to Revenue. Having users is great; having revenue is better. This race is all about finding who will pay for your solution. Sometimes users are paying customers (think: Apple, Sony) and sometimes customers and users are different (think: Google, Facebook). The difference is that users consume and customers pay. Hitting revenue is often seen by investors as proof that your venture has found a problem worth solving, and a solution worth paying for. This will often be seen as a prerequisite for millions in funding.
- Race to Scale. This stage is missing from the cartoon, but still important. This is the hunt for product/market fit, which is reached when a business model's value proposition, customer segment, relationship, and channel are fixed without requiring additional pivots. Put more plainly: it's when a company is able to acquire customers at a low cost, yet generate revenue that is multiples of the cost of customer acquisition. This is what venture capital is for.
- Race to Profit. Profit is revenue minus expenses. Once you start scaling, your mindset shifts from volume and revenue to profit. Unlike the early days of your startup, now you must figure how to grow exponentially fast. The race to profit is mostly about doubling down on what works (sales, marketing, and other go-to-markets) and doing so while making more money than you spend. The idea is to get so large that you have economies of scale and can use that as a competitive advantage.
- Race to Cash Flow. The last stage in the cartoon shows the entrepreneur fully formed and fixated on cash flow. While profit is defined as revenue minus expenses, cash flow refers to the actual inflows and outflows of cash for a particular business.
All in all, I think the goals above are valid and pretty accurate, but knowing your focus and executing that focus are very different things. Here is how I help my startup founders stay focused.
- Take a read. Assess where you are in the startup life cycle. Knowing the starting point is the only way to finish a race.
- Determine the KPIs. Key Performance Indicators are measures that materially reflect your business's health and trajectory. They include things like revenue per user, daily active users, and assets under management. Each startup must find the one that is most informative. By focusing on lines, not dots (in the parlance of investors, dots are single data points, while lines are trends made up of many dots), startup stakeholders ensure they are trading vanity metrics for true KPIs.
- Explicitly and mindfully agree on the next goal (volume, revenue, etc.). Post that goal for the entire team to see. Update it regularly and have weekly accountability sessions where key team members share their progress and how they're impacting the KPIs.
- Celebrate wins. Any material impact to the KPIs should be celebrated. This reinforces the goal and helps everyone stay focused.
- Review regularly. Quarterly goal setting is my recommendation.
By mindfully and explicitly focusing on one race, one goal, and one KPI at a time, the most successful founders can drive the evolution of their business.