How startups grow quickly without imploding

Why acceleration? A few basics about hypergrowth strategies before it goes any further (and gets faster) 34 This book is about growth The art of growing very fast 8,339 percent: This is the growth rate that the youngest tech company with the strongest growth according to the Technology Fast 50 Award from 2016. This ranking, introduced by Deloitte in 2001, evaluates only one irrefutable criterion: the percentage growth in sales of the candidates over the last four years. At the top of the ranking is Horizontal Software. This start-up company that publishes software for human resource management has nothing horizontal except in its name, as its growth profile is anything but flat. Its founder Hervé Yahi, whose start-up achieved sales of 5.5 million euros in 2016, is aiming for sales of 25 million euros in four years. "Fast and furious" The Technology Fast 50 Award honored technology companies with the strongest growth in France in the last four years. The 502 companies that were included in the Technology Fast 50 National in 2016 recorded an average growth rate of 230 percent. 35 He is closely followed by Chauffeur Privé, Uber's competitor in France, who was satisfied with 7,020 percent growth in the same period. Four years after its start, the company had a turnover of 20 million euros and plans to increase it in four years Reach 200 million sales. We met these start-ups to find out what the strongest growth a company can sustain. The growth depends of course on the stage of development of the company (initially it is easier) and the industrial sector, too If the company specializes in product innovations and is capital-intensive, it is a Double-digit annual growth is already exceptional, while an Internet platform based on breakthrough technologies can achieve three or even four-digit growth. In this work we will give preference to the term “scale-up”. It corresponds to the development phase of a start-up, in which it gains in efficiency in order to ultimately be able to offer its products or services on a larger scale. This means that there is a difference between the initial phase (start-up) and the subsequent phases, in which you grow and increase the number of customers, offers and markets as much as possible (scale-up). It cannot be compared with the established companies that use a mature business model and show at least a linear development. A scale-up is therefore a start-up that has already come a long way and has proven that its business model is useful, that has a recognized product / market fit, knows hypergrowth and also seriously strives to acquire abroad or internationally to expand. 36 And about hypergrowth! Unicorn start-up raise ponies and turn them into unicorns. Many companies strive for hypergrowth, relying on extreme imbalances by opting for extremely rapid growth rates in terms of employees and sales. A scale-up aims to become a unicorn. The term was coined in this area by the American venture capital specialist Ailen Lee. She dubbed the 0.1 percent of companies with a market valuation of over a billion dollars as unicorns. Ailen Lee chose this term to emphasize the rarity of these valuable companies, because the unicorn is a mystical animal that everyone chases after. An image that portrays the idea of ​​start-ups and growth very well. This approach is particularly interesting because the yardstick by which everyone is guided - company valuation - sometimes deviates completely from financial reality. Start-ups are valued mainly for their fundraising, which has nothing to do with stock market valuation, the indicator that is commonly used to assess performance. In addition, the startups' financial information is not public, which makes it difficult to obtain verifiable figures. As a result, many experts regularly question the ratings of some of these unicorns (private car taxi services are a preferred destination in this regard). Above all, they emphasize the fact that, despite extremely strong growth, profits are not always generated, which may make some capital increases unjustified. 37 We also encountered this problem in choosing the growth strategy of the entrepreneurs we met. There two simple strategies seem to oppose each other. The aggressive pursuit of traction. (Traction - means quantitative evidence of customer demand.) There is a simple idea behind this tactic: to find an indicator that justifies that sooner or later you will have a large market share and then you will be able to will develop a profitable business model. So the motto is to grow at any price, and to do it as aggressively as possible, and to dominate a market almost completely before trying to become profitable. This is the famous “the winner takes all” principle. According to this, one would have to invest an enormous amount of money through frequent capital increases in order to become the biggest fish on the market, to dominate the competition, to increase one's margins and to become profitable. This strategy is successfully pursued by Google, Facebook or Amazon. The problem with that? In order for it to work, size or long existence must offer a real competitive advantage (and there must also be a real barrier to entry, such as the network effects on Facebook). Then the competitors can actually be eliminated and the winner can drive the pricing policy they want, at least almost. Finding a virtuous business model. Instead of generating traction, other entrepreneurs choose to first find a healthy business model and then try to grow by scaling the activities, that is, changing the scale without intermediate steps and without limitation. In other words: to get bigger quickly without encountering many obstacles to growth, as the size change was planned from the start. Nevertheless, we will see that a scale-up cannot be satisfied with developing global products without considering adjustments to the markets in which it is established. 38 Growth can happen quickly We take a critical look at acceleration Which engine do companies use to accelerate that get started quickly, very quickly? Why do some companies stop growing? Sooner or later, however, all companies - even those with great success - will find their growth opportunities diminish. When analyzing the Standard & Poor's 500 Index (the stock index comprises 500 large companies listed on the American stock exchanges), we notice that the average length of time a company has stayed in this index was 56 years in 1957 and was 15 in 2017 Shortened years. This is due on the one hand to the fact that the newly incorporated companies are displacing the older ones, but also to the fact that some were simply not able to grow permanently. They are bought out, merged, bankrupt, or simply stop growing. That raises two questions. First, what is the growth of the companies included in the index based on? (That's the subject of this book.) Second, what are some reasons why some companies stop growing? 39 This curve shows the average length of time that a company was included in the calculation of the S&P 500 Index ‘between 1957 and 2017. Source: Innosight / Richard N. Foster / Standard & Poor’s In 10 years, 75 percent of the companies listed in the Fortune 500 will have been replaced by others! 60 50 40 30 20 10 0 1960 1970 1980 1990 2000 2010 2020 56 years years15 From Nokia to Kodak, no company and no sector is spared the dizzying speed of change. If you ask yourself why some companies stop growing, you quickly realize that in almost all cases this happens for reasons that are controllable. In their work “Stall Points” (Yale University Press, 2009) the authors Olson and van Bever cite the results of a study on growth stagnation and point out that there are serious limits to the growth rate of a company above a certain size. Basically, many companies stop growing when their thinking, that is, their basic understanding of how an industry works, begins to deviate from the reality of that industry. As a managing director of a hotel chain, one does not necessarily come up with the idea of ​​considering private apartments or seasonal rentals as new sources of income. That's human. We simplify things to make them easier to understand. This situation is exploited by an actor who has not previously been active in the market to siphon off some of the income that the other could have made (in the case of hotel reservation platforms, almost 25 percent of the value is deducted). Incidentally, this will lead us later in the book to contradict the common view that legacys are exploiters and start-ups are discoverers. 40 There are limits to corporate growth and the factors responsible for this can in principle be controlled. Uncontrollable External factors Economic crisis Being trapped in a position of power Unadjusted innovation management Strategic factors The sudden appearance of a newcomer shakes the balance within the organization and the market. In 13 percent of the cases, a slump in growth amounts to an economic crisis. A research and development department that has been outsourced too far and development cycles that are too long slow down innovation. 41 Lack of talent Lack of management flexibility Failed diversification Organizational factors Controllable The company is trying to enter a new market that is already saturated. Since the organization is dependent on special key qualifications, it struggles to attract talent. The established key figures and management forms hinder flexibility. 42 If slumps in growth can generally be controlled from the outset and the little new ones manage to overthrow the long-established players in the Standard & Poor’s 500 rankings from the throne, you could see how these young companies manage their growth measures, right? If one looks at the development of the evaluation of certain companies, one can observe quite astonishing results, which not only concern the GAFA (Google, Amazon, Facebook and Apple), whose evaluations taken together are more than the total values ​​of the CAC 40 (French leading index of the 40 highest-turnover figures French public companies) and fluctuate between 15 and 20 percent of the S&P 500. Even if this growth can be explained relatively easily by factors of the environment, which we will deal with here in the first part of the book (“scalability” of the platforms, network effects, etc.), this does not change the fact that these companies have demonstrably accelerated rapidly in record time had to cope with and that there is a lot to learn from it. The technology giants are valued at several billion dollars just a few years after they were founded. Source: Blitzscaling / Reid Hoffman. Google Tencent 19981995 1999 Alibaba Group Amazon Salesforce ebay 432003 2004/2005 FacebookTesla Google Amazon Facebook Tencent Alibaba Group ebay Tesla Motors LinkedIn youtube 650 510 490 280 230 64 58 38 26 26 Company reviews * (in billion dollars) Linked In you tube * Values ​​estimated in July 2017 (which can go much higher). 44 Start-ups versus large corporations Reconciling growth visions In the context of rapidly changing power relations, two types of companies are usually contrasted in the literature on the subject of innovation: those that exploit an existing market and those that enter a new market. In the first case, we are dealing with established players who are perceived as not being very innovative (typically companies that belong to the CAC 40, DAX or Fortune 500) and, in contrast, more agile players whose innovations are currently at a high experience (typically start-ups). This view is somewhat exaggerated, as large corporations can have an “explorer” attitude (that's exactly the job of the innovation directors) and, above all, because equating start-ups with explorers is not necessarily appropriate. If one examines this fact a little more closely, one finds that many large corporations were involved in the creation of new market areas. The reason for building infrastructures that are sometimes cumbersome and that can prove to be limiting for the future is the legacy systems we spoke of in the introduction. Anyone who is called Krups or GRDF (Gaz Réseau Distribution France; largest gas supplier in Europe) and has been developing physical sales for years has a harder time converting all processes to digitization than a young, newly founded company. This does not mean that these actors do not understand the importance of digitization or that they do not want to develop further in this direction. To regard such companies as simple market “exploiters” is too one-dimensional. They were all once "discoverers" and will continue to be so in their own way. 198,886 kilometers. That's how long the pipeline network GRDF laid to deliver gas. It goes almost five times around the earth. Investing in complex infrastructures may seem obsolete in view of the new possibilities offered by the Internet of Things, big data and cloud hosting, but it is obviously not. Discovery safaris are becoming increasingly popular. Some are already talking about the exodus of open spaces. 45 As already mentioned, start-ups often arise from the provision of services. As a result, they have far fewer hurdles to overcome when entering the market, and above all they have a low CapEx (abbreviation for Capital Expenditure): These are indispensable capital expenditures for the storage of products and their physical delivery to the customer. By focusing on the referral of end customers to one or more service providers, mostly via a digital platform, the costs are also reduced to a minimum here. This enables them to develop quickly with little startup capital. Doctolib, for example, connects doctors' diaries on a digital platform and offers registered patients real-time access so that they can reserve free appointments online. Doctolib's main asset is its algorithm, which more easily brings together the doctors who have canceled appointments and the patients who are having trouble getting an appointment. But that doesn't mean that these actors won't one day give up the platform in order to interact directly. Asset light, the bulk of a startup's assets, consists of algorithms, data and interfaces / user interfaces. To imagine start-ups as nice explorers is just as simplistic. For the most part, these build their activities on existing branches of industry or their infrastructures, some of which were developed by others. The success of Google is due, on the one hand, to the existence of a long-standing and well-established market for advertising and, on the other hand, to the existence of a communication infrastructure that was created by others (the Internet service providers). Perhaps it would be more correct to view these companies as collectors, than organizations that have managed to find valuable niches or that wanted to transform them within an industry. After the key economic good to be delivered has been identified (such as shortening the delivery time or making an appointment), they have organized themselves in order to get hold of them as quickly as possible. Startups focus on part of the value chain or a clearly identified bottleneck. In doing so, they fall back on what the traditional actors have built (the picture above shows a traditional model where the order is taken in the traditional way by the person who also produces).* “Sugar?” - “No, thank you!” 46 Instead of exploiting and discovering, we prefer to speak of “winemakers” - those who know how to build wealth and generate capital from it by constantly improving it - and of “grape pickers” - who have the ability to recognize the right terrain and draw the strengths necessary for their growth from the assets and business models of others. 47 Vintners Grape pickers Daily OKR * tracking Cross-industry competition Beginning with one activity, then many changes of direction Merger of cross-industry start-ups Form and improve assets Get hold of a valuable grape Strategic planning for the next 5 years Competition within the same industry Structuring around a core activity Regrouping within the industry * OKR: Objectives and Key Results, see p. 130. 48 Uber and Airbnb, the “grape-picking machines” The Uber example shows that the legal framework for the approval of taxi services for private cars was already in place; Likewise, the drivers and their cars existed before the company was set up. It was enough to create a platform to organize these components and build a new market. We are far from the emergence of a new transport economy. It was the same with Airbnb: the home-sharing market was already there. It was enough to organize it in such a way that it is geared towards renting rather than swapping. Instead of simply betting on luck, a solid growth strategy was employed to “harvest” their sources of added value and establish a new player whose valuation ($ 21 billion) exceeded that of many hotel groups that had existed for decades within 10 years. If, on the other hand, we take a look at the curve of new Airbnb users in the first few years of the company, it can be observed that the traction, i.e. the ability to attract new users, has long since not been as linear. Source: Airbnb. Here is Airbnb's growth curve. Its exponential increase is sensational. Source: Sales (in billion dollars) 0 2008 2010 2012 2014 2016 2018 2020 5 10 2.5 0.25 0.9 2.8 8.5 0 2008 2010 2012 2014 300 100 200 years New users (in thousands) 49 A nice example for start-up-style “grape picking” is the way Airbnb capitalized on existing platforms to get started: We are in 2010, the start-up has been around for two years and is far from hypergrowth away. The traditional market leaders in the industry, as well as providers of new types of accommodation, are sealing off the market, and Airbnb's communications budget is also diminishing its ambitions to get a large piece of the pie. To remedy the lack of resources, its founders decide to "board" the Craiglist website by offering to automatically publish the ads posted on Airbnb on Craiglist. Since people see an advantage in reaching more people with their ads on two portals at the same time, they don't hesitate to use it. Airbnb is still unknown and this way it can get attached to a website that has millions of visitors. However, Craiglist blocked the start-up a year later and the curve of new users was sloping downwards from 2010 onwards. But Airbnb proves its ingenuity and makes numerous creative moves ("growth hacking") in order to grow again. At the beginning of 2011 the curve is rising again, not least thanks to a new professional free photo service: Via Airbnb, private individuals can fall back on professional photographers to present their accommodation using high-quality photos. When the curve of new users fell back down in 2013, the platform launched a recommendation program: A user can secure a credit of € 50 for his next reservation for a friend. The curve is climbing again and Airbnb is growing explosively. The fact that the strategy of attracting new users of this "grape picker" worked out was because Airbnb benefited from growth-friendly circumstances: the emergence of classified ad sites and online payment functions as well as online recommendations via social networks in order to increase its awareness etc. These new, Value-added opportunities linked to a very precise analysis of the KPIs go far beyond a simple questionnaire on customer satisfaction, as it still exists in the hotel industry. They created the assurance that user behavior would drive the platform's growth. Airbnb's free provision of professional photographers helped improve referencing and the conversion rate of hosts. 50 Anyone who says “growth” also says “stages” What has brought you this far will not take you anywhere else Scale-up, unicorn or companies with exponential growth: as we have seen, the term start-up conceals a multitude different organizations that have one thing in common: the pursuit of hypergrowth. Perhaps, ultimately, the real secret of these hypergrowth companies is that they are built to grow rapidly. In other words: The company is structured in such a way that it can activate and use many resources at the same time in such a way that efficiency is increased. Instead of growing companies, it is rather companies that are geared towards growth in every phase of their development. According to Reid Hoffman, the co-founder of Linked-In - the guy who likes to jump into space without a parachute - you can't analyze acceleration without realizing that it happens in stages. He suggests dividing the latter into categories in a simple way. He explains that start-ups will develop from a family to a tribe, then to a village, to a city and finally to a country. Each of these phases corresponds to a different structure, different challenges to which one should adapt quickly. The proposed classification is of course rough and was simply adopted by us, but we will still refer to it again and again in the course of the book. It enables us to highlight the particular challenges of each phase and to show that these can only be analyzed if one takes into account how many facets acceleration can have. At each stage, the way a start-up manages its various activities - from funding to hiring and integrating new employees, to product marketing - changes just as significantly as its size. The phrase “The concrete implementation is still to come” is not popular in a start-up company. Everything has been planned to bring growth, at every single stage of development. 51 “A start-up company with ten employees is a family, a tribe counts its employees in increments of ten, a village by the hundred and a city by the thousands. A nation has more than 10,000 employees. ”Source: Blitzscaling / HBR. Family Tribe Village City Nation 1 10 100 1 000 10 000 10 000 100 000 1 000 000 10 000 000 100 000 000