Are You a High Growth Startup or a Small Business? Decide!
After prepping yet another emerging company for their Series A, I can’t get the book “The Founder’s Dilemmas” out of my head. In many ways, Noah Wasserman is the Jim Collins of the Entrepreneurial Set – combining years of anecdotes into a cohesive understanding of why our newco brethren spin out when they least expect it. In concert with some of the other new books enveloping the management techniques associated with these organizations “dedicated to creating something new under conditions of extreme uncertainty” (thanks Eric Ries), more than ever it’s apparent that we create more uncertainty and more risk when we don’t check that box which reads “founders and funders agree on high growth approach”.
Said simply, along with all of the other items we’re quick to check off in the spirit of ‘alignment’ (pro formas, term sheets, business plans, gap analysis, legal formation, etc.) we need to make sure we clearly understand founders’ and partners’ expectations in terms of whether the company will be managed as a small business or a high growth business. From my perspective, I tend to look at a company from their capital formation backwards, a technique I learned many years ago when running White Summit. I looked at over 700 new tech companies during that time frame and came to appreciate that if money had changed hands as part of a capital injection, then the source of that funding had to discuss and agree upon the growth strategy for the company prior to funding. Or not. But either way, a strong precursor of success or failure was evident based on how this was handled.
One thing that Wasserman reminds us of in his outstanding text is that the clearly defined differences between a small business and a high-growth start up are remarkably clear and understandable, as long as they’re discussed prior to any funding event taking place. The fact that this dramatically lowers risk either way – heading forward as a small biz or as a high-growth startup – shouldn’t get lost on anybody. And yet I continue to run into confusing expectations – and the resulting ‘people issues’ – at about the same pace as Wasserman suggests. Around 70% of the newco wipe outs are related to the misaligned expectations of the founder(s) and their funding arm.
As I’ve been discussing new leadership opportunities with a variety of startup ventures, I can instantaneously appreciate whether or not there’s an issue at hand simply by understanding whether or not the check box for ‘expectations’ is in place or not. When it’s in place – let’s call it 30% of the time as Wasserman suggests – then the business feels healthy, vibrant, and focused on the collective strategy/execution process. When it’s not, there’s a clear feeling that the ‘push me – pull you’ effect of the misunderstanding is undermining the ability of the concern to actually focus on the business challenge at hand instead of the drama surrounding unclear expectations. And startups need extra drama like we all need a proverbial hole in the head.
Pete Skalla and I have discussed as of late the need to accentuate this issue with all of the startups in our collective ecosystems. Via Startup Colorado and Startup Colorado Springs, we really feel compelled to get the word out that one major risk factor can be eliminated simply by addressing the issue head on. As Pete so eloquently put it in his blog last week, the differences are clear and easy to understand – neither is wrong per se – but both require completely different mindsets, commitments, and understandings related to decision-making and approach. Without this understanding, bad things happen. His fantastic overview can be read here: Startup or Small Business?
I’d urge everybody in the process of supporting our heroic entrepreneurs to make sure that they clearly understand the differences for the sake of their company’s future. In the absence of this simple understanding, we can look forward to over two-thirds of these newcos heading through the guard rail. With an astute appreciation for what it means – thanks to guys like Wasserman and Skalla – we can lower the mortality rate and see more of these revolutionary companies through to a big win.