Startup strategy is like Kung Fu. There are many styles that work. But in a bar fight, you’re going to get punched in the face regardless.
I can only teach you my style. Others can only teach you theirs.
This is my style.
“MVPs” are too M to be V. They’re a selfish ploy, tricking people who thought they were customers into being alpha testers. Build SLCs instead.
I don’t like freemium; I want to learn from people who care enough to pay, not from the 20x more who don’t.
Founders almost never have a real strategy. They say things like “we have a unique feature” and “the incumbents are dumb,” which might be true, but isn’t a strategy. They don’t know how to analyze a market or competition, so they make it up instead learning how to do it. This is a common but largely unacknowledged reason why companies fail. Founders explain failures with things like “our two main competitors did [thing] to us” or “customers didn’t understand [our point of view].” The implication is that this was unknowable or bad luck, but the truth is, this was a predictable result of not understanding the market.
All startups are screwed up. Even when they’re succeeding they are screwed up. (HT Mike Maples Jr) Corollary: A startup has to be so excellent at one or two key things, that they can screw up everything else up and not die. Sometimes that’s airtight product/market fit. Sometimes that’s defensible distribution channels. Sometimes that’s product design so thrilling that every customer spreads the word to five more. Sometimes that’s a market insight that takes competitors five years to understand. Sometimes that’s a dream team that weathers the storm that sinks the other boats. The bad news is, you don’t know ahead of time what that thing will be. The good news is, it’s OK that most things are screwed up.
Another Corollary: Your competitors are screwed up too. Don’t assume they’re smarter than you, faster than you, more strategic than you, growing faster than you, making better decisions than you. They are doing that sometimes, but you are too, and all of you are screwed up. When you look at them, you’re seeing their best, exaggerated projection, which isn’t the truth. Every time a company dies, read what they were writing a week earlier: proud, confident, optimistic, possibly even arrogant and boastful. Ignore all of it.
It’s better to complete 100% of 8 things than of 80% of 10 things. (HT Dave Kellogg)
Too often, decisions are made “because a competitor is doing [something]” or “because a competitor might do [something].” Occasionally, that’s the right motivation. But usually, you should focus on what’s best for the customer and your company.
Churn needs to be lower than you think; 3% monthly churn is too high, and means you’re either not delivering recurring value, haven’t found product/market fit, the market stinks, or some other critical problem.
There isn’t one most important SaaS metric. Priority depends on your goals (e.g. profitability versus size) and on what, at this moment, is so out of whack that ignoring it is fatal.
You’re not allocating enough costs to gross margin or the cost to acquire a customer. You think this doesn’t matter because you’re not a public company or didn’t raise money, but it does matter because it means you don’t understand the financial mechanics of your business.
Fermi estimation is a good way to figure out whether a startup or product could even theoretically be viable. Beware: people tend to round up to the better power of ten because they don’t want to face the truth. Real life usually rounds down.
Being focussed on SaaS metrics is not incompatible with valuing employee fulfillment and customer happiness. In fact, the latter two is crucial for producing the former.
I know you got profitable in three months, but you didn’t.
Telling the truth to customers and employees, especially when it’s difficult, is how you earn trust and loyalty.
The best business model in 2019 is “doing good.” It attracts and retains talent even when salaries are low and risk of failure is high. It attracts customers even when prices are high and quality is low. It’s also the way to marry capitalism with morality.
Find and focus on one reliable distribution mechanism before diluting your time diversifying. If you can’t find one sizable sustainable source of customers, the solution won’t be found by piecing together three small unsustainable ones.
The shiny new fad is hyper-competitive, temporary, and money pouring in means crappy companies can mess about for years, poisoning the market. The “boring” but established, large market is where revenue is easy and competition is old, slow, and has something to lose.
The only time you need “truly unique” tech and “an impossible-to-cross moat” is when your goal is to build a $1B+ company, which almost no one is (or should).
You can start by selling to small customers and evolve to larger ones, because you’re starting with a low cost-basis and then maturing your product and service. Or you can start selling to enterprise — nothing wrong with that — but then your high cost-basis of marketing, sales, and service will not scale downward.
If you think Biz Dev is the solution to a difficult problem, you’re wrong. If you think it’s a way to add incremental value, then maybe, but still unlikely until you’re at $50M+ in ARR.
Great products don’t sell themselves, but they can cause customers to talk about it to other customers. You still have to get the first customers, and most of the rest, yourself.
Most “customer discovery” is really a founder in love with a product, trying to justify to herself that there is a market. She does this by selling for forty-five minutes instead investigating and disproving. And by talking about cool features instead of asking about price. And by remembering confirmatory evidence while conveniently forgetting or explaining away the rest, even though “the rest” is where the real learnings reside.
It’s hard to get 1000 paying customers. It’s easy to get to 100 if you have a real product. Price so that 100-200 is enough for all the founders to work full-time. This means you have to charge $50-$500/mo, and make something of genuine value.
Most of the time, real pain points addressed by great products are not a business. Which is why founders confidently begin and are surprised when it fails. A business also requires that there are many potential customers, who realize they have the problem, who you can reach at a reasonable cost, and then convince to convert, at a profitable price, against existing market dynamics, and last for years. Early on, your job is to validate that there’s a business, not to validate that your idea is good or that a pain exists.
“Sales” is not a dirty word.
A reliable paid acquisition channel results in a somewhat stable business. It’s boring and doesn’t make you famous and doesn’t play into the false but common narrative that SEO and viral content will launch your startup into the market with almost no money. So people run after the false narrative instead of the thing that’s most likely to work.
People don’t value their time. They will do crazy things to save $2. Don’t sell a product that saves time to people who don’t care about saving time. Businesses often don’t care just as much as consumers don’t care.
Bet on things which are true today, and will be even more true in five years; not on your guess at how the future will be different. (HT Jeff Bezos) You want to argue that the future is unknowable, but that’s just an excuse for not having a strategy.
The “long tail” can sound appealing, but it sure is easy to sell vanilla ice cream at the beach even when you’re right next to another ice cream stand.
Yes, marketplace businesses can be valuable and defensible. But their failure rate is much higher than product businesses, and they require copious venture funding. They have to work with 10 people in the system, not just when there’s 10M.
If someone deploys a code change and brings down the entire system, the fault is with the brittleness of the system, not with the person.
Corollary: If a talented person at your company does something “dumb,” the next question is: What did you fail to do as a leader? Did that person not have the right information, or enough context, or were they worried about something, or what?
One-on-ones are never a waste of time. Agendas are optional and sometimes even counterproductive.
If you’re the smartest one in the room, you’ve made a terrible mistake. Either you haven’t hired great talent, or you have but you’re disempowering them. This is the opposite of what a great leader does, and minimizes the success of the organization. Andrew Carnegie wrote for his own tombstone: “Here lies a man who knew how to bring into his service men better than he was himself.” Ignore the gendered language but heed the lesson.
If someone at your company has no way to grow into a new role, they will leave, as well they should. “New role” can mean sophistication, management, or a different job. “No way” can mean because they’re unable or because the role they want cannot exist.
Founders are caught by surprise by the scaling phase. If you haven’t operated at the executive level at a scaling startup, you don’t appreciate how different and difficult it is. There are not enough blogs or books about this phase; often leaders go underground. Founders arrogantly believe that the beginning is the hardest part, because it is hard. But many startups top out between $5m-$20m in revenue. That’s fine if you don’t wish to scale. But if you do, your arrogance prevents you from the necessary transformations. What got you to $20m is very different from what gets you to $100m. You need help, new sorts of employees with a different organization, and you’d better surround yourself with people with more experience and skills than you have. How will your ego cope with that?
If you can’t unplug for a month without adversely affecting the business, then you have a brittle business. If the business is young, this is inevitable. Otherwise, this is a failure of organizational development.
Management systems, whether about performance management, or leadership, or healthy teams, or product strategy, or one-on-one interactions, or meetings, or productivity — are like deciding between coding styles. They’re all pretty good, so just pick one system you can stick to, and maximize it.
Make important decisions by optimizing for the one or two most important things, not by satisfying a dozen constraints. Maximize opportunity rather than minimize down-side.
Leave money on the table. The customer should derive 10x more value than it costs them. You earn loyalty and future upgrades. Karma works.
If you can’t double your prices, you’re in a weak market position. Determine the causes and address them purposefully.
Your product must materially impact one of your customer’s top three priorities. Otherwise, they don’t have time to talk to you. (HT Tom Tunguz)
A good strategy is to be the System of Record for something. (HT Tom Tunguz)
If your sales and marketing expenses are high, that either means your marketing is extremely competitive, or that people don’t naturally believe they need your product. If the latter, they might be right. If the former, you need large differentiation — more than a feature or two. If you don’t solve this problem, the company is ultimately unsustainable.
No one will read the Important Text in your dialog box.
Design is important, yet many of the $1B+ SaaS public companies have poor design. So, other things are more important.
Operate on cash-basis. Analyze on GAAP-basis. Don’t cheat on GAAP — you’re only lying to yourself.
“I don’t have time” actually means “I don’t want to.”
The only cause of Writer’s Block is high standards. Type garbage. Editing is 10x easier than writing.
Vitriol online usually comes from that person defending self image or impressing others. Either way, it’s about them, not you. Often there’s a constructive learning inside which you should take to heart, but discard the petulant packaging.
“Desire to seem clever, to be talked about, to be remembered after death, to get your own back on the grown-ups who snubbed you in childhood, etc., etc. It is humbug to pretend this is not a motive, and a strong one. Writers share this characteristic with scientists, artists, politicians, lawyers, soldiers, successful businessmen — in..
You roll down the windows and wear a helmet when you take your car to the track. This does not make me less terrified of a fiery death.
The American Autocross champion was sitting in my passenger seat screaming at me to not let my foot off the pedal until I bounced off the RPM limiter. She was properly intense. I didn’t know what I was doing, but it’s fun to power through curves in a high-speed tenuously-controlled skid in my Mini Cooper S (plus Cooperworks).
The proper driving strategy for Autocross is bizarre. It is possibly the worst-case scenario for wear and tear on a car. The strategy solves for the spaghetti-like pattern of the track, which is composed mostly of turns and banks, so that the winner is the one who can best negotiate a complex path, rather than which car is fastest on a straight-away.
(The actual track I was on)
Driving strategy hinges on this constraint: a car can accelerate quickest when it is not turning. “Accelerate” means getting faster or getting slower. Mashing the accelerator pedal or brake pedal while turning, results in a spin-out.
So, you do this strange thing where you aim the car at a particular point near the first section of the turn and accelerate as much as possible in a straight line, as if you’re going to fly off the course. As you near that point, you break with just as much vigor. Still without turning the wheel. Then you turn and (more slowly) accelerate at just the right pace such that you’re gently skidding, but still in control. Until you can see the next point on the next turn that you full-accelerate straight towards.
What point should you pick? That depends on the curve, but drivers will find what they believe to be optimal points, and will often put small orange cones there as visual guide, especially during practice runs.
While this results in a unnatural, jerky, discontinuous motion, it is also the fastest way through the course.
Intuitively, it seems like there would be some smooth, efficient, graceful path, but that’s the slower way. And the goal is speed, not grace. (Of course, there’s a certain grace in speed, but not for the passenger being thrown about the cabin.)
Companies in the scaling phase feel like this too.
In most ways you are moving faster than ever, particularly when you’re moving in a straight line. For example, a new incremental product will launch to your existing customer base, with immediate impact in the millions of dollars — something a small company will take years to accumulate.
But in other ways it is jerky, unnatural course-corrections. Teams reform with new people and new missions. Things that worked for seven years suddenly don’t work, and “tiger teams” assemble to fix it, while new people wonder why it was ever built this way in the first place and older people laugh knowing that in two years, future-new people will be saying the same thing about what the now-new people are building.
We all know that startups should make decisions quickly. Fast decisions leads to rapid action, which accelerates the loop of production and feedback, which is how you outpace and out-learn a competitor, even one that already has a lead.
But some decisions should not be made in haste, like a key executive hire, or how to price, or whether to raise money, or whether to invest millions of dollars in a new product line.
How do you know when your current decision should be made slowly: contemplative, collaborative, deliberate, data-driven, even agonizing?
I’ve made the following scorecard to figure out whether it’s wise to go slow:
Can’t undo. This is the classic one-/two-way door delineation. If you can’t easily undo the decision, it’s worth investing more effort into analyzing the likelihood of the upsides and risks.
Huge effort. Some things take less time to implement than to estimate or to debate. Remember that it might take two engineers a week to implement something, but a few debates and some research might itself involve an entire engineering and product for a week as well. This is one reason why small teams without process can produce results faster than larger teams with process. If the effort to implement the decision is smaller than the effort to make a decision, just knock it out. But if you’re deciding on a path that could take six months to measure results from, taking time up front to research is wise.
No compelling event. If the status quo isn’t that bad, there might not be a reason why a decision should be made quickly. Without time-pressure, it’s more justifiable to spend more time on the decision. Conversely, time-pressure means the more time you spend deciding, the less time you have for implementation and unanticipated problems, so you’re adding risk by dragging out the decision.
Not accustomed to making these kinds of decisions. Online marketing teams are accustomed to throwing creative things at the wall, with new technology and platforms, because that’s the day-to-day reality of their job. Because they’re good at it, they don’t waste time hang-wringing over whether or not to try an advertising campaign on the latest social media platform; they just do it. Conversely, most organizations have no experience with major decisions like pricing changes or acquisitions, and most founders have no idea how to hire a great executive, or how to decide whether to invest millions of dollars in a new product line as opposed to “just throwing something out there and iterating” as was the correct path at the start of the company. When the organization has never made this type of decision before, the decision is at great risk, and being more deliberate with research, data, debate, or even outside advice, is wise.
Don’t know how to evaluate the options. Even after generating the choices, does the team understand how best to analyze them? If the company’s strategy is clear and detailed, if relevant data is at hand, if it’s clear what your goals are, if the deciding team has confidence, then the decision could be easy and fast; if these things are absent, perhaps more deliberation is needed to clarify those things.
Can’t measure incremental success. After the decision is made and implementation begins, can you objectively tell whether things are going well? If yes, it is easy to course-correct, or even change the decision, in the presence of reality. But if progress will be invisible or subjective, such that you will sink person-years of time into the implementation before knowing how things are going, it’s worth spending more effort ahead of time gaining confidence in the path you’ve selected.
Imperfect information. Buying a house is nerve-racking, mostly because it is likely the most expensive and difficult-to-undo purchase of your life, but also because you know so little about the goods. What does the seller know but isn’t telling you? What will you not discover until you’ve moved in, or a year later? Often it is impossible to get the data or research you need to make an objective decision. When this is the case, it is sometimes wise to spend extra time gathering whatever information you can, maybe investing in reports or experts (which is what you do with a house). Or you could look at it the opposite way: If it’s impossible to get objective data informing the decision, then don’t spend lots of time debating subjective points; just make the decision from experience and even gut-check, because we just said that’s all you have to go on anyway.
Decision requires multiple teams who haven’t worked together before. At WP Engine we’re extremely collaborative across teams. The benefit is that we work together for a common goal, taking care of the needs of support, sales, marketing, engineering, product, and even finance, rather than solving for one department’s goals at the expense of another. But this also can make decisions more difficult, because finding a good solution is complex, often requiring compromise or creativity which requires time to be realized. This effect is amplified if the teams (or team members) haven’t worked together before, and thus have less rapport, common language, and common experience. In that case, give the decision more time to breathe and develop, because really you’re giving people the time to build relationships and discover great solutions, and that in itself is a benefit to them and your organizational intelligence, which is a long-term benefit worth investing in.
Actually this isn’t a scorecard, because important decisions aren’t a Cosmo Quiz. Don’t use this as a rubric; don’t score it 1-5 and add it up with a spreadsheet.
Rather, this is a framework for thinking through what needs to be done. Honestly answer these questions, and by the time you’re through, you’ll have a good sense of whether a light touch, quick decision is fine (which should be the default answer!), or whether you’ve justified taking more time.
And, depending on which pieces are problematic, you’ll have a guide for what needs to be done next.
For example, if “Can’t undo” is a big problem, can you rethink the solution so that it can be undone, maybe by investing more time, or creating a disaster recovery plan of action, or splitting up the decision so that part of is is undoable?
Or for example, if “No compelling event” is a problem, maybe the best answer is to “not decide,” i.e. don’t spend time on this right now, since you don’t have to. Some people will be disappointed in the lack of a decision, but it’s better to honestly state that “we can’t figure out the answer right now” than to make a rash decision that does more harm than good, or to invest time in a decision that doesn’t need to be made, at the expense of work that does need to be done.
I hope this helps you make the right decisions, in the right way.
As a result, repositioning can allow you to charge many times more than you think. Here’s how.
You’ve created a marketing tool called DoubleDown that doubles the cost-efficiency of AdWords campaigns. You heard that right folks — as a marketer, you can generate the same impact, the same number of conversions, the same quality of sales leads, but with half your current ad-spend. Wonderful! Who doesn’t want higher ROI.
What can you charge for this tool? Clearly you can’t charge as much as the money the customer is saving on AdWords, otherwise the net result is no savings at all. Let’s say you can charge 25% of the savings and still find many willing customers.
Here’s what your sales pitch looks like to a specific customer who spends $40,000 per month on AdWords:
Great deal! The VP of Demand Gen will be able to boast to the CMO that she saved the company $15,000/mo even after paying for DoubleDown, and you’re raking in a cool $5,000/mo. Everyone’s happy!
Now let’s see why you can actually charge eight times as much money for the same product.
Marketers have a single paramount goal: Growth. Even indirect marketing like brand, events, and PR have the long-term goal of supporting growth. In the case of DoubleDown’s customers it’s direct: Growth through lead-generation through AdWords.
Growth is much more valuable than cost. To see why, consider the following two scenarios:
CMO reports to the CEO: I was able to reduce costs 20% this year. The CEO is happy. The CEO’s follow-up question is: How will we use those savings to grow faster?
CMO reports to the CEO: I was able to increase growth by 20% this year, but it also cost us 20% more to achieve. The CEO pumps her fists amongst peels of joyous laughter. The value of the company increases non-linearly. The additional revenue growth more than pays for the additional marketing cost that generated it. The CEO’s follow-up question is: How can we ensure this happens again next year?
It’s always 10x more valuable for a business to grow faster than it is for the business to save money.
This insight points us to an alternate pitch for DoubleDown. It’s not about spending less for the same amount of growth, it’s about spending more to create more growth.
In particular, using our example of the customer who currently spends $40,000/mo, suppose that customer is generating 200 quality sales leads per month from that spend. The sales pitch changes as follows:
You’re paying $200/lead right now, yielding 200 leads per month. Using DoubleDown, you can double the number of leads you’re generating, still at a cost of $200/lead:
The key is this: The customer is willing to spend $40,000 to generate 200 leads, and therefore is happy to spend $80,000 to generate 400 leads. It doesn’t matter how much of that $80,000 is going to AdWords versus going to DoubleDown. The key is not to “save money on AdWords,” but rather to “generate more growth at a similar unit cost.”
In the “saves money” pitch, the value was $20,000, and the customer needed to keep 75% of that value-creation. Whereas in the “generate growth” pitch, the value is $40,000, and the customer is happy to pay 100% of that value-creation to a vendor. Both the amount of value created, and the percentage of value the customer is willing to pay, is a multiple higher for the “growth” pitch versus the “save money” pitch.
So the next time you want to formulate your product as a way to “save time” or “save money” or “be more efficient” …. DON’T!
Instead, figure out how your product creates value in the way your customer already measures value, and position your product as a way to accomplish that.
Late last year we passed $100M in annual recurring revenue. We’re less than 8 years old so you can do the math on growth rates and figure out that we’re on an elite trajectory. That revenue is thanks to 75,000 customers, earned through the hard work of 500 employees across six offices on three continents. Every day, 5% of the entire online world (roughly 3.5 billion people) visits a customer running on the WP Engine Digital Experience Platform.
This week we closed $250M in financing from Silver Lake, the premier technology private equity firm. The majority of the funds pay back our early investors who believed in us enough to trust us with their money. Of course a nice chunk is primary capital, i.e. for the company balance sheet, to invest in growth initiatives, security and quality, and advancing our existing strategic priorities through acceleration and de-risking.
We have never been in a stronger position. We have never had the caliber of teams we do today, as evidenced by our award-winning 70+ NPS customer service, our historic-low cancellation rates, our security and uptime, our product and engineering initiatives, our global brand leadership, our customer acquisition through both marketing and sales, our hiring and employee experience teams, our finance, legal, and governance teams, our executive leadership, and perhaps most important of all, the strength of our culture which embodies excellence, service, transparency and inclusiveness. We remain steadfast in our commitment to continuing to increase all of the above.
And now, with Silver Lake’s investment and support, we can accelerate our growth investing even more into our strategic roadmap, and placing some new bets on ideas we’ve had but haven’t been able to find the space to explore.
I’ve always said nothing beats the high of getting that first customer to sign up. It’s the heroin-hit that hooks the entrepreneur. (The next sale isn’t quite as sweet.)
That’s still an accurate portrayal, but there are other moments that are even more thrilling. This moment in WP Engine’s saga is one of those.
Thank you to all our customers, who vote for us every month with their pocketbooks, but even more importantly, entrusting us with their brand and online success, which we treat as vitally as we do our own.
And a special thank you to Heather Brunner, our CEO for the past four and a half years. Long-time readers of this (11-year old!!) blog might automatically assume that all this success is due to my prescience and wisdom, but the truth is that although I’ll certainly take the credit for the initial construction and lift-off of the rocket, setting up an impressive and rare trajectory, the reason we are in the position we are today, with all the attributes listed above, is due to Heather’s leadership, strength, vision, and execution. Period, full-stop. And everyone else at WP Engine would tell you the same thing.
So to everyone at WP Engine, let me repeat the message from one year ago:
We’re tired of hearing how small software companies usually fail.
The data show that the two most common causes are: (1) Product isn’t useful to enough people, and (2) Problems with the team.
But what about the companies that die even though they did sell some copies of software, and where the early team isn’t dysfunctional?
I don’t have data for that cohort (tell me if you do!), but informally I’ve observed the following things, which follow a pattern that can be identified and counteracted:
The initial marketing channel quickly saturated, so growth stalled at a non-zero but unsustainably-low rate.
The initial marketing channel was sustainable for a while, but got wiped away due to external forces. Examples: large bidders tripled the cost per click, Google’s SEO algorithm changed, the event organizers changed the rules or stopped doing the event, the link-sharing site became irrelevant, the hot blog lost its traffic, the magazine running the ads finally failed.
The product was built on a platform, and the platform changed. Examples: A popular app drops to zero downloads after Apple builds it into iOS; A Microsoft Office add-on drops to zero sales after Microsoft builds that feature into Office; A Twitter utility breaks when Twitter removes functionality from their public API.
The company landed one big customer representing 80% of total revenue, but that customer canceled. It wasn’t a mistake to sign that customer — it funded the entire company. But sometimes you experience the adverse end of that risk.
A key employee left the company, which caused the company to fail. Early on, a 10x person can mint the company but also could be irreplaceable. A suitable replacement is too rare; it takes too long to find someone, convince them to join for almost no salary, and get them up-to-speed and productive.
When a company has revenue but is susceptible to the fatal afflictions above, I call it “brittle.” It’s a real business, but it’s easy to break.
The pattern, which suggests a remedy, is: Brittleness manifests wherever there is “One Thing.”
A technological example makes this clear. Suppose I have a single server that runs my website. Any number of things can cause this server to break — a power failure, a network failure, a bad configuration change, too much traffic arriving at once, and so on. How do you make this situation less brittle?
Let’s take power failure. Power can fail if the power supply inside the server burns up (typically because the fan inside it failed), or the power strip or power cord fails (maybe a wetware failure like accidentally unplugging it), or the power source running to the power strip could fail. You can address all this by having a second copy of the components — a second power strip with a second cord plugged into a second power supply. This is, in fact, exactly what data centers do! In short: redundancy — having two things that do the same job, instead of just one thing. It’s twice as expensive, but it buys you robustness.
But what happens if the power fails between the main power system in the data center and the cabinet where the two power strips are? That’s another case of “one thing.” So you could have two cables running to every cabinet, from two identical power units. Again this is what advanced data centers do.
But what happens if the city power fails? Data centers have their own gas-powered generators. Which means they have to stock large amounts of gasoline. Gas-powered engines that are used infrequently have a tendency to stop working, so they have to test and maintain those units. Data centers often have multiple generators. Robustness purchased at large expense.
In modern clouds we go yet another step further, because the entire data center itself is “One Thing.” So you have additional servers in other physically-separate data centers that draw power and network connectivity from different vendors.
The data-center example is applicable to all of the causes of failure above.
“One marketing channel” is brittle, because if anything happens to it, that could be the end of an otherwise-healthy company. The solution is to layer on additional marketing channels, so that variation in any one of them is not fatal.
“One platform” is brittle, because if they forward-integrate (i.e. copy you) or just fail, that’s the end of the company. One solution is to be multi-platform (which social media management tools did, and which we did with cloud infrastructure providers at WP Engine); another solution is to only build on platforms where you have a high degree of confidence that the platform owners are committed to supporting their ecosystem by never directly competing with them, and in fact promoting them. (Salesforce is currently the best in the world at this.)
“One big customer” is brittle. One solution is a long-term contract with a serious breakup clause, as insurance that pays for you to bridge to more customers. Another is to prioritize accelerating sales until that customer represents a percentage of revenue that you can stomach. Also, up-front payments, so you have the cash-flow to invest in that growth right now. The typical attitude is, “We now have a large customer, so pour extra money into development to make sure we don’t lose it,” but the right attitude is to use a lot of that money to land other customers.
“One key employee” is brittle. Not only might they leave, but what if they just get sick or need to take a vacation? The usual refrain in the startup world is that none of these are options — everyone has to work 70+ hours/week and never falter. Talk about brittle!
Solving these things takes time and money. These aren’t quick-fix solutions. You can’t just hire three more fantastic developers to create a robust engineering team, and you can’t just snap your fingers and find three new efficient, productive marketing channels.
Therefore, the right attitude is to maintain clarity on these risks and ask which one is best to work towards right now. For example, it’s cheaper and easier to experiment with new marketing channels than it is to find, interview, convince, and manage a second software developer, and plus if you can get a second marketing channel online, that will generate revenue, which in turn means you can afford a second software developer. In this scenario, the best thing is to focus all your energy on getting a second marketing channel running.
As you scale, the size of the “chunks” that create brittleness also scale, which creates new One Things, thus new risks and new investments. For example, with $260M in 2016 revenue, still growing at a blistering 60%/year, with a thousand employees, Hubspot is not brittle in any of the ways outlined above. But they recognized in 2016 that they were a single-product company. That is a “One Thing.” If there were a sea-change in the market for inbound marketing software, that could be fatal to Hubspot. It also limits long-term growth as the market matures and saturates. The way out is redundancy — becoming a multi-product company, but not where one product is 95% of revenue. They attacked that problem, and today (Nov 2017) they’re well on their way, as recognized by the media at large.
Finally, on a personal note, there’s another “chunk-level” that’s even larger than all of the preceding, and it’s a brittleness that almost all founders suffer from, including myself. The chunk of “the entire company.”
This is a component of why founders are almost always sad and sometimes permanently depressed even after a successful sale of a company. This was your “One Thing” for years. This is your identity, your life. You don’t have hobbies or even good friends anymore. You might have sacrificed family or health. Talk about a “One Thing.” Your entire life is brittle.
Rather, the solution is to realize that there were things you did and loved before and there will be things you will do and will love after. This is a chapter in a book. Even if one chapter is sad or has an unexpected twist, there’s still the next chapter which you can look forward to, even if you don’t yet know how that story will unfold.
Robustness, not in many things simultaneously, but in things serially. That’s the wrong attitude for solving tactical problems at work, but it’s the right attitude for thinking about the arc of your life.
Back to today and the here-and-now. Go list all the “One Things” which make your business brittle. Only tackle one or two things at a time — you have to manage risk, not pretend that you can eliminate all of it at once. Be thoughtful, and build steadily away from brittleness.
Forget work/life integration for a minute. How much time do you have, regardless of partitioning?
From your 24-hour daily allotment, the 1950s-style break-down is 8 hours for work, 8 for home and commute, and 8 for sleep and ablutions. So, “work” and “home” are the two things in which you can spend 40+ hours per week.
This is the amount of time it takes to tackle something huge. A career. A parent. A startup.
There are weekends and vacations and sick days and such, but those don’t add up to enough concentrated time to carry off something like a startup without causing work or home to suffer.
Of course “work” and “home” are just placeholders for “Big Things.” If you’re unattached, “home” doesn’t occupy significant time.
The rule of life is: You can have two “Big Things” in your life, but not three.
Big Things include:
Major Hobby (e.g. build a boat in the garage, become a chess master, video game addiction)
You can do a startup on the side while you have a day job, but your family will never see you. You might even lose your family. It happens. This is partly why it’s easier to start a company before you have a family or even a spouse.
You can have a job and a social life, but unless your spouse is fully integrated and agreeable to that social life, there will be strife. “Going out with the guys again?”
Yes, “kids” and “spouse” are on the list separately. Young kids strain marriages because there’s not enough time to invest in the kids as well as be there for each other.
Some people try to “have it all.” Men and women both. But it’s never true. At most two can function well; the rest do not. More often, there’s just one that receives the majority of the energy, and the rest suffers.
Note that “Sleep” isn’t on the list of options, even though it’s mathematically the same in terms of time commitment. That’s because cutting out sleep doesn’t work — then you can’t function at a high level at anything.
No, you are not an exception. That’s egotistical self-deception. Not on sleep, and not on the number of Big Things. Ask the people around you if they think you’re not failing at one of your Big Things.
Idealistic founders believe they will break the mold when they scale, and not turn into a “typical big company.” By which they mean: Without stupid rules that assume employees are dumb or evil, without everything taking ten times longer than it should, without wall-to-wall meetings, without resorting to hiring anything less than the top 1% of the talent pool, and so on.
That is, keeping the positive characteristics of a tiny organization, avoiding the common problems of a larger organization, by preserving their existing values and processes, just doing it with more people, and figuring it out as we go along, exactly as we always have.
Why do they never succeed? Why is this impossible when you have 500 employees? What are the fundamental forces that transform organizations at scale?
From Brittle to Robust
A “team of one” is the fastest, most efficient team, as measured by “output per person.” Communication and decision-making occupy the minimum possible time. And maybe the person working on that thing is a “hero” — working extended hours and experienced with the problem space. Small companies operate this way by necessity, and it works! It’s a big reason why they move quickly.
But, an illness takes the velocity of the product or quality of support from heroic to zero. And if that person leaves, you’ve just lost six months to hire and get back up to speed on that thing. Or nine months because there weren’t any processes and documentation in place — again because it was just one person, who didn’t need that stuff, because after all we’re moving so quickly!
A team of one is brittle, but fast. When you’re small, this is a good trade-off, because speed is critical for combating the things that are constantly about to kill the company. When you’re large, and you might have 15-25% annual employee turnover, not to mention illness, vacation, and family, the same structure would sink you immediately.
So, no project can have fewer than, say, three people dedicated to it, plus people management and possibly some form of Product or Project Management. But that team of four will not be 4x more productive than the one-person team; per-person productivity goes down in exchange for robustness and continuity.
On the other hand, while the small company loses 9 months to the loss of a key employee, or even implodes, the big company is the steady turtle that adds thousands of customer per month like clockwork and wins the race.
When you’re small there’s no need to predict when the feature will ship. Marketing isn’t scheduling a launch and recruiting isn’t timing the start-dates of the next 50 hires in customer service and sales. This means you can — and should! — optimize myopically for speed-to-market.
Small companies brag about their speed as an advantage, but it’s easy to see why the larger company actually has a massive advantage. Sure, when WP Engine launches a new product, the marketing department needs predictability for the launch date, but that’s because it’s a highly-skilled, well-funded group, which explodes with press, events, campaigns, social media, and newsletters, grabbing more attention in a single week than a smaller company might garner in a year. There’s also an armed globally-dispersed Sales and Support teams, so we’re selling to our 70,000 existing customers as well as thousands of new customers per month, which means we’ll end up adding more new revenue in one month than a small company will take in over a whole year.
The tradeoff, however, is predictability. We didn’t line up that press and have those sales materials and ensure code-quality high enough to scale on day one, without predictability. Predictability means going slower. Predictability requires more estimation (takes time), coordination (takes time), planning (takes time), documentation (takes time), and adjusting the plan when it inevitably unfolds differently from the prediction (takes time).
Predictability is also required for healthy team-growth. Consider the timeline of adding a technical support team member. First, Recruiting is casting about for potential candidates. Then scheduling and performing interviews. Then waiting for them to quit their job and take a week off. Then new-employee-orientation. Then classroom training. Then paired up with senior folks on the floor as they ramp up their skills and comfort. Then finally, after (say) four months, they’re up to speed.
Since that takes four months, we have to be able to predict the demand for technical support at least four months in advance, because we have to be hiring for that future demand right now. If we under-estimate, our support folks get overwhelmed with too much work, their quality of life suffers, and service to each customer suffers; if we over-estimate, we have too many people which is a cost penalty. Of course, the latter is a better failure mode than the former, but both are sub-optimal, and the solution is predictability.
“The future is inherently unpredictable,” insists the small company, spurred on by Lean and Agile mindsets. Indeed, blue-sky invention and execution are hard to predict. But this is also a self-fulfilling prophecy; to insist the future is unpredictable is to ignore the work that could make it more predictable, which of course makes it in fact unpredictable to that person.
Small companies don’t have the data, customers, institutional knowledge, expertise, and often the personal experience and skillset to predict the future, so they are usually correct in saying it’s impossible. But it’s not impossible in principle, it’s impossible for them. At scale, it becomes required. Not because Wall Street demands it, or investors demand it, or any other throw-away derogatory excuse made by unpredictable organizations, but because it’s critical for healthy scaling.
If Google launches a new product that generates $10,000,000/year in revenue, is that good? No, it’s a colossal failure. They could have taken the tens of millions of dollars that the product cost to develop, and made their existing operation just 0.01% more effective, and made the same amount of money.
At nearly $100B/year in revenue, Google can only consider products which have the potential to generate $1B/year in revenue as an absolute floor, with the potential to grow to $10B/year if things go better than expected. Things like YouTube, Cloud, and self-driving cars.
This principle is called the “Materiality Threshold,” i.e. what is the minimum contribution a project must deliver for it to be material to the business.
With a small business, the materiality threshold is near $0. A new feature that helps you land just a few new customers this month is worth doing. A marketing campaign that adds two sign-ups/week is a success. Almost anything you do, counts. That’s easy, and it feels good to be moving forward. But it’s only easy because the bar is so low.
The financial success of the larger company dictates a non-trivial materiality threshold. This is difficult. Even a modest-sized company will need millions in revenue from new products, maybe tens of millions in the optimistic case. Very few products can generate that sort of revenue, whether invented by nimble, innovative startups or stately mature companies. As proof, consider that the vast majority of startups never reach a $10M/year run-rate, even with decent products and extraordinarily dedicated and capable teams.
Yet, it’s the job of a Product Manager at that mid-sized company to invent, discover, design, implement, and nurture those products — something that most entrepreneurs will never succeed at. Tough job!
Employee #2 will join a startup for the experience. Even at a significant salary cut, and even if the company fails — the most likely outcome. It’s worth it for the stories, the influence, the potential, the thrill, the control, the camaraderie, the cocktail-party-talk.
Employee #200 won’t join for those reasons. Employee #200 will have a different risk-profile regarding their life and career. Employee #200 will be interested in different sorts of problems to solve, like the ones listed in this document instead of the ones where you’re trying to understand why 7 people bought the software but the next 3 didn’t. Employee #200 will not work for a pay-cut.
Small companies could view this as an advantage, and certainly it’s advantageous to recruit amazing people at sub-market rates. But there are dozens if not hundreds of employees at WP Engine today who are much more skilled in their area of expertise than I’ve ever met at a small startup. Why? Because after developing that expertise, they find it’s only possible and enjoyable to apply their skills within a larger environment.
For example, there are advanced marketing techniques that would never make sense with a smaller company, that are fascinating, challenging, and impactful to the top line at a larger company. There are talented people who love that challenge and would hate going “back to the Kindergarten of marketing” scratching out an AdWords campaign with a $2000/mo budget or assembling the rudiments of SEO or just trying to get a single marketing channel to work or being called a “growth hacker” because they finagled a one-time bump in traffic.
But, this has implications around compensation, how you find that talent, and why that person wants to work at your company instead of the one down the block who can pay a little bit more. Therefore, it’s critical to have a mission that is genuinely important, have meaningful and interesting work to do, connect everyone’s work to something bigger than any of us. These matter even more at scale, because they’re the anchor and the primary reason why talent will join and stay.
With four people in a company, any information that needs to be shared can be told to just three other people. Everyone can know everything. If there’s a 5% chance of significant misunderstanding, that event doesn’t happen often.
With four hundred people, it’s never true that a piece of information can be reliably communicated, in a short period of time. A 5% chance of misunderstanding means twenty people are confused. In software terminology, communication challenges scale as O(n2).
“Slack” is not the answer. “Email” is not the answer. (Your emails are probably misinterpreted 40% of the time, by the way.) Repetition is the answer, in different formats, at different times, by many leaders, and even still it’s never 100%.
Technology & Infrastructure
Managing 10,000 virtual servers in the Cloud Era sounds easy. Automate everything, then any process that works for 100 servers, will work for 10,000 servers just by doing the same thing repeatedly — exactly the thing computers are excellent at.
One is that scale makes rare things common. Rare things are hard to predict and can be hard to prevent. Often they’re hard to even identify and sometimes impossible to reproduce. This is fundamentally difficult.
Another is continuity or compatibility with existing technology. New companies get to start from scratch, but at-scale companies must transform. New companies like to make fun of large companies for how hard it is to transform, neglecting that the cause of the difficulty might also be generating $100,000,000 in revenue.
Another is bottlenecking. All hardware and software systems have bottlenecks. At small scale, you don’t run into any bottlenecks, or at least the ones you do can be solved with simple techniques like increasing capacity. Eventually something difficult breaks and you have to rearchitect the stack to solve it. Even something simple like converting HTTP links to HTTPS or updating “number of likes” in real-time, becomes a monumental architectural challenge.
Not only does this slow down development, it adds investment. There will be entire teams who focus on infrastructure, scaling, deploys, cost-management, development processes, and so forth, none of which are directly visible to or driven by the customer, but which are necessary to manage the complexities of scale.
For a small company, the most likely cause of death is suicide. Usually it’s starvation — can’t get enough customers (distribution) to pay enough money for long enough (product/market fit). But also things like founders splitting up, not getting enough traction to self-fund or to secure the next round of financing, having to go back to a day job, and so on.
At scale, the risks are completely different. There is very low risk that WP Engine will not sign up thousands of new customers this month. Other risks, however, are not only possible, but likely. Addressing those risks head-on, is required for a healthy and sustainable business that can last for many years.
Take the risk of business continuity during a disaster scenario. What if all availability zones of Amazon in Virginia are disabled for a week? How quickly could we get all our customers back up and running? Would that be true even though thousands of other businesses are also trying to spin up servers in other Amazon data centers at the same time? Could we communicate all this with our customers quickly and simply, so that our support team isn’t overwhelmed by repeating the same message to nearly a hundred thousand justifiably-worried customers?
Risk-mitigation can even result in growth. Serious customers want to see that their vendors understand and mitigate risk; this maturity becomes a selling point. That’s why enterprise suppliers are constantly flouting their compliance with SOC 2 and ISO 27001 and all the rest. Small companies make fun of those things as being unnecessary at best or a false sense of security at worst, but while they’re busy making that point, the larger companies are busy signing three-year multi-million dollar clients.
Early on, you do not need a disaster-recovery plan. That won’t be the thing that will kill the business, and your customers will understand if a young business is subject to that sort of risk. Later on, this becomes critical, and worth investing in.
The fundamental challenge of scaling: Embracing and implementing the shift from Small to Large
These forces cause larger companies to be fundamentally different than small ones. This isn’t a bad thing or a good thing. It’s a different thing.
Some idealistic founders believe the root cause of scaling issues is the “command-and-control” organizational structure. But none of the examples above make reference to any organizational structure. It’s universal. This is why Holacracy and Teal Organizations do not solve these problems in practice. It could be a fantastic idea to experiment with organizational structure, but the fundamental forces above will not be eliminated through recombination of roles and organization.
Scaling is hard, the road is foggy and bendy, it lasts for years, the set of people you need might be different, and no one emerges unscathed. So, it is not a sign of disaster if you have difficulty wrestling with these forces. Everyone does.
Disaster is when a company is scaling, but the leaders don’t appreciate these forces, don’t work constantly to morph the organization accordingly, don’t bring in experienced talent, decide they can figure it all out as they go along without help. Rather, it should mean new people, new roles, new values, new processes, new recruiting, new stories, new constraints, new opportunities.
Too many founders and leaders want to believe that “What got us here is what’s important and unique about us, and thus we should preserve all of it. Other companies fail because they ‘act like big companies,’ but we’ll avoid all that because we’re smarter than they were. As evidence of our acuity, just look at our success thus far. We will continue to succeed in the future as we have in the past.”
Many founders and leaders can’t make the shift. This always hurts the company, and sometimes kills the company. The world is full of those horror stories. It’s sad, because it’s an avoidable waste of opportunity and sometimes hundreds of person-years of effort.
Customers demand an improved UX, but they don’t want to learn a new UX.
Team members want consistency but don’t want policies.
Developers want to be more efficient but don’t want to change how they work.
Strategy is ineffective if it’s constantly in flux, but a strategy that remains unchanged in the presence of new information is incorrect.
The right choice is almost always “change.” This is because change is a reaction to uncovering facts, getting smarter, or a shift in the outside environment. Death awaits any organization that chooses the comfort of the familiar over the discomfort of change.
Yet, though inevitable, change is uncomfortable and exhausting. Even we who relish change, who love bragging that “it’s hard but every day is different,” reach a breaking point after years of adaptation and fake-gleefully exclaiming that “failure is how you learn!” Yeah, but all this learning is fricking tiring.
This is important for leaders to understand, if indeed “change is the only constant” as the insipid cliché goes. Even your most stoic, change-loving mortals sometimes need a break from change. Yes “it’s a marathon” but sometimes you need to walk a mile to catch your breath. Look for signs of burnout or decision-fatigue, and address it proactively.
This is equally important for everyone in a startup, whether you manage others or not. Constant change can feel like management has no plan and no strategy. It takes careful consideration to distinguish between being rudderless and a culture of self-reflection and improvement.
This is exacerbated by the fact that not all change is for the best. Sometimes, when we try to solve a problem, we make it worse. Sometimes, when we try to make code faster, we make it slower. The difference is that we can see slow code objectively in the profiler and continue to make changes before we commit the code; it’s not so easy when the change is happening to a whole team, or a major product release, or a cross-departmental strategic initiative.
Even deciding what to change is hard. Successful companies can stall out because they lose sight of the fundamental reasons they earned success in the first place — the key insights and UX of the product, or the key culture and values that attracted their first hundred or thousand employees. But successful companies also stall out because they’re so dogmatic about their strategy or “non-consensus but correct” ideas that when the world changes around them, or scale breaks their previously-correct notions, they fail to adapt. It is not generally true that “what got us here will get us there,” and that means deep change is required.
There’s a mindset that everyone can use to address all of these difficulties:
Maybe don’t judge too harshly if your organization tries to improve and ends up not improving, or where the organization takes too long to implement change. Maybe don’t judge too harshly if the person to your left needs to work on something easy for a few sprints or take a vacation.
Edison had to try thousands of materials before finding the one that make lightbulbs practical. Would you have judged him for “thrashing?” Invention is often frustrating.
You should judge harshly if nobody is thinking about this. If nobody cares whether there’s change or not, if there’s no rhyme or reason to the company strategy, if everyone is expected to act and feel happy and productive all of the time, then you should definitely judge. An organization that isn’t striving to improve, will rot and disintegrate.
There are no straight paths in life or startups. All we can do it keep being introspective, and keep trying the right sort of change.