 Many in the startup world simplify the entrepreneur journey into three stages – Build, Scale & Exit. However, it helps the entrepreneur to look at the process more granularly - more definition provides more direction. For this post, we break the startup lifecycle into six actionable stages from ideation to value realization, with each being an essential part of the journey on a company's growth curve. By delineating and defining the steps along this curve, the entrepreneur can better understand where they are on their journey, where they must go, and what must get done. In turn, this assists her in acting and communicating more succinctly and clearly with her team, investors, and other key constituents about what steps to take to achieve her goals. This engagement then helps the company build a stronger foundation from which to scale the business, deploy capital, and create value for investors. Stage 1: (Ideation) Innovation & Customer Development
The entrepreneur journey starts for real during this stage. It is where potential customers, for the first time, are exposed to the product or service idea. Here the entrepreneur tries to determine whether its product addresses the need of its potential customers. The lean startup model tackles this stage well and provides many useful tools to help the entrepreneur navigate this leg of the journey. The lean startup principles state that the entrepreneur should, during this time, have an eye on sales, but focus on the product while testing customer interest. This approach helps the entrepreneur determine if its product connects with its target audience as well as helps her gauge, early in the life of the company, the viability of this connection. Stage 2: Product-Market Interest Here the entrepreneur and her team work to determine the level of connection that the product has with its target market by engaging in activities where there is an exchange of real value for the product or service. Product-market Interest (PMI) is the most important step in a startup's life. To move on in your entrepreneur journey, you must find PMI and ultimate Product-market fit (PMF). The number one company-killer is the lack of a market and demand. An indicator that you have PMI is when and only when you have sold multiple deals, and they provide you with a measure of your key value proposition, or Super Power, and are representative of the market opportunity. Ultimately, with a degree of PMI, money changes hands during this stage to a point where the company realizes this is not a singular event, but potentially a repeatable one. (Note, in most cases, at this stage, the company has not refined or manufactured a repeatable sales model.) Once you have deal success as indicated above, you size the market that you have identified to see if it can support the aspirations of the company. If you have the deals and the market can support the goals of the enterprise, you have PMI and likely Product-Market Fit but still have not achieved go-to-market (GTM) fit. Another way to test PMI is to assess demand for your solution. If you have PMI, then you have something people want and will pay for. There exists a need for what you have; therefore, with some simple demand testing, you can gauge market interest and use this to project whether your target market can support the business. PMI is not denoted by a couple of pilots and a nominal exchange of money, but by the straight-up exchange for cash based on the value promise of the product, not once, but multiple times in a market that can support the aspirations of the company. This repeated sales success and the combination of these deals provide you with a strong understanding of the larger business opportunity for your services and product, and it provides the signaling of a broader market opportunity for the product, technology, and team. Once you've reached product-market interest, it means you've got the innovation piece nailed. You've figured out how to take an idea and package it into a product and deliver it to market and gain early traction. Now comes the challenging part, expanding on these efforts to penetrate a broader market (1). Stage 3: The Gap Stage The gap phase builds on the entrepreneur having achieved a degree of PMI and securing a handful of Lighthouse deals and moving to PMF. With these in hand, the company is ready to move on in search of a repeatable sales and distribution model and get to the next gate which is GTM fit. It is at this stage that the company transitions away from the sales magic produced by the founding entrepreneurs and develops a predictable, professional sales process. This step positions the company for growth and scale. If the company recognizes that it is at the Gap Stage, it understands that the sales process is now a key focus of the firm. At this stage, a startup focuses on developing its business foundation and building out its sales and marketing engine that will power it forward and upward. If skipped, and the company transitions right to the process of scaling the business or selling without a process in place, its sales foundation will be weak or non-existent, and it will not have the tools to produce predictable income on its own and will likely burn through its cash reserves. If this happens, it would be forced to seek additional investment dollars and dilute current shareholders, or if it cannot get funded, go out of business. At this stage, the company should work through key steps of what is called the sales learning curve (SLC). If the company gets through this learning curve, when it exits this stage it will be poised to take big leaps up the growth curve . During this phase, the product development group should be focusing on adding features and functions to the product that gives it a more cohesive fit with its target customer. The team should also begin to focus on developing a sales-ready-product (SRP). This stage is not binary but does have a definite ending. It comes once the firm develops a trackable, measurable, and predictable sales process that is tested and proven. If the company has difficulty establishing a repeatable sales model, it likely never had PMI or PMF. The result of this sales and process building effort is a core set of happy, referenceable, and committed customers that have paid for the product and that the company can call on when it launches a more aggressive, targeted sales effort. Moreover, while developing the sales model, the company should be engaged in developing a Sales Ready Product (SRP), so when it moves to scale, the sales cycle is further compressed and predictable. The Gap stage is difficult and challenging! It is a trial and error period where the company iterates to a standard, repeatable successful sales process while working its way through the Sales Learning Curve. The Four Steps in the Sales Learning Curve The sales learning curve is a process most successful companies work through, whether they realize it or not. By understanding what it is and what vital steps need to be taken to move to scale, a company can be more precise and move more confidently and aggressively to scale. The Sales Learning Curve is a four-step process occurring over three of the startup stages – stage 2, 3 & 4. However, most of the sales process discovery work is done during the Gap stage. Step 1 - Sales by The Magician: Entrepreneur Generated Sales Early sales at a startup usually are made by the founder. The sales burden rests on the founder's shoulders, and rightfully so. Founders have distinct advantages critical for nurturing and bringing to fruition these first cornerstone deals. They either created the product or were involved in its creation. So, they have the key insights and product knowledge of where to market and sell the new new thing. Furthermore, in many cases, their charm, genius, or singular focus helps them overcome the many difficulties encountered when selling the new new thing. As a founder and many times, the CEO, a title that has a certain panache, doors open that would not open for mere mortals. Moreover, they don't have the traditional constraints that an ordinary salesperson has. What they sell usually becomes the product or the new feature set; hence, what they propose when closing a deal will get built into the product. (This is rarely the case with an ordinary salesperson.) This sales step is critical to getting a company off the ground. Without these early deals, there is no business. Moreover, it is an essential way to get early product feedback while the company hones in on PMF or expanding its PMF. Feature requests and rejections from potential customers are the fuel for the next phase of innovation. Founders and CEOs are uniquely skilled at interpreting this early product feedback and synthesizing what needs to be done to be productive. However, this type of sales process is not sustainable, repeatable, or scalable. Step 2 - Sales by the Sales Interpreter When the founding entrepreneur or team has successfully sold a few deals that may or may not have a pattern to them, many times he/she is tempted to say, "It's time to hire a salesperson and scale up this process," but this is a mistake, and it rarely works. Moreover, it can be an expensive mistake, very expensive. The company at this stage is rarely sales-ready. A mature company it is not; hence, it likely does not have necessary sales materials, leads, or even a clear sales target. Thus, those early deals sold by the highly charismatic CEO were not an indication of what a mere mortal salesperson can produce. What is needed next is for the company to bring on a Sales Interpreter. Her job is to run sales experiments and see how she can map the founder's successes into one that the ordinary salesperson can deliver. She needs to develop her own pitch and processes. This new hire has to be smart and humble enough to learn from previous efforts as well as able to experiment to find a successful, scalable process. This individual is not a traditional coin-operated salesperson but a unique person that likely has a multi-discipline background in product, market, and sales and likes to translate past successes into a repeatable model that everyone can follow. Step 3 - The Sales Testing Process After the Sales Interpreter has had some success and developed a testable sales model, then the company is ready to TRY to standardize the process with a few traditional salespeople. The emphasis is on "try" because even if the company has been through the first two stages, there is no guarantee of success at this stage, so the company should remember that its focus is still one of learning how to sell. Ideally, the first pure salespeople come from adjacent companies or segments. Note that the focus is on "true salespeople" and not business development individuals. The reason for this is that you want people that have been on quota all their life, and once they figure how to make a sale, you want them to go as fast as they can and repeat the process and find more deals. The first hires are often people who want to be early into a company and have honed the skills to do so. The sales rep from big enterprise companies who have been selling with that brand and machinery behind them are unlikely to be successful at this stage. Early-stage salespeople need to be natural learners and like it and able to apply this skill to learning about your product. Moreover, they must be comfortable iterating on existing positioning statements, presentations, and scripts to create an even more effective sales process. They need to be high energy and will need to make many calls into different customer types and with different pitches. While the sales interpreter focuses on interpreting the sale process himself and using his new methods to create deals, the first sales team is like the engineering team building the first factory. They employ the techniques developed in stage two, and are beginning to standardize them, and tweak, improve, and optimize them. Building from the first rep to the first team of reps (5-10 people) who are closing business and hitting their quotas is where you start to see the unit economics of sales and marketing. Once you have them dialed in, you are ready for the final stage, Market Rollout and are at the cusp of GTM fit. Step 4 - Market Rollout Once the company is consistently hitting sales goals and understands the unit economics of the sales and marketing process and what levers are available to influence sales activity, they are ready to move to the growth stage. With a defined and operating system in place, the company can go for the bigger equity round. The round that gives it the resources to move to hyper-growth mode. This final step is where the company: 1. Moves into the process of optimization and selling at an even higher velocity 2. Develops a hiring profile and a training and onboarding program 3. Standardizes the sales process to track deals by milestones for better forecasting accuracy. This stage is where and when systems are put in place to feed leads by the marketing and sales development team, which qualifies inbound leads and does outbound prospecting. This final stage is where significant development of all the adjacent functions start to occur so that growth and scale can occur. Sales operations develop the sales materials that are standardized, and the company can deliver consistently and efficiently. A learning approach to sales is safer and more capital efficient. Do it right, and the entrepreneur can build a great company — and one that they and early investors own much more of than they would if they took the "go big or go home" approach. Knowing where a company is on the sales learning curve will help an entrepreneur make better decisions and grow more efficiently. Moreover, investors will appreciate investing in a company that has the knowledge and a defined approach to building a sales machine. Later stage investors, who typically pay higher prices than early-stage ones, love nothing more than a "just add cash mentality" company where the go-to-market process has good unit economics and is well defined. Developing a Sales Ready Product To ever get to scale, it is essential to move the company through the sales learning process, and for more consistency and more efficient use of sales dollars, develop a sales-ready-product (SRP). Developing an SRP should always be on the mind of the startup team, but at this stage, it should take on a new urgency. By manufacturing an SRP, you built into the product predictable success that compresses the sales cycle. To transform a product into an SRP, the company needs:
Stage 4: Growth During the previous stage, the company gained a degree of control and predictability over its sales process and is seeing consistency in its sales efforts and has now achieved GTM fit. At the growth stage, it must focus on adding the additional building blocks it will need if scaling the company is the goal, and the business model allows it. During this juncture, leadership should be focused, not just on product and sales, but on building the Company engine. At this stage, systems and programs are put into place so that the corporation will not tear itself apart as it moves to scale – if it is a scalable business. Not all businesses can scale, and not all businesses that can't scale are bad businesses. Those that scale, are ones with operating leverage. Setting up a weak organizational foundation at this stage will put the company at risk of toppling over when it moves to the scaling stage if it is a scalable business. It is also here that the key-value components that produce the desired return on exit gain focus, and plans are set up to help each develop in a manner that will bring the most value to the company when it seeks to realize its value. Demand will play a significant role in how or when a business decides to move to scale, but having a competent growth strategy in place early on means scalability was built into the company's business plan long before their customer base starts expanding. Key Focus Areas:
Stage 5: Scalable Growth Scaling effectively means anticipating demand, not reacting to it. And nothing makes scaling more manageable than a simplified business model. A key component of successfully scaling is to ensure that goods and services are delivered systemically. Scalable growth is all about pairing exponential revenue growth with incrementally increasing costs. You must have a replicable system. The more efficient the mechanism is for mass production, the more scalable your company will be. At this stage, the goal is to pour on gas – test – pour more on. Also, during this time, you want to be strengthening individual value components to assist in creating great company value when you exit. Scaling is about organizational engineering and the ability to get more and more out of your organization. By the scale stage, it is essential to have set up your organization with the right tools and processes so you can move quickly and increase the pace of new product development and, more importantly, sell more. It is also a time when your team should be able to manage complexity and its changing dimensions. In other words, it is crucial to be able to change and evolve rapidly with the systems you have in place or quickly change them out. Hence, you need to understand what your systems and processes can and can't do and what their boundary conditions are. It is equally important that you and your team have a clear vision of where you are headed and what needs to get done to get you to your value realization goal. A good indication that your system is ready for scale is the de-emphasis on the individual. In other words, a good measure of a company's ability to grow indefinitely is how independent it is of any one individual's input. Along these lines, the company is now focusing on the team, not the individual. The team is accountable for success. Scaling means continuous change, so plan for that. Streamline the hiring process and formalize an onboarding process and automate everything you can. Stage 6: Value Realization (Exit) From the beginning, plan with the end in mind. A company must understand where it is headed, where the industry is going, and what and how different market influencers will behave and respond to the growth of the company. It must also anticipate when is the ideal time to exit the business to create value for investors. By this stage, you should already have in place an exit plan and are operating with it. A strong exit is the result of work done throughout many of the other stages. Tactically, an exit can be one of three events:
Of technology businesses, which are for sale, only 25% sell, and of those, only 33% sell at the desired valuation. Stated another way, less than 9 out of 100 technology companies sell for a price that meets investors' goals. After building a sellable business, most entrepreneurs fail to exit successfully. They miss the ideal time to exit and underachieve the return to their shareholders or fail to exit at all. The reason for this is that many in the business community do not understand the exit process because they don't participate in exits very often. An exit is just another business process. Correctly done, the valuation and timeline are just as predictable as other, more familiar business processes like hiring, product development, financing activities, or marketing campaigns. A good exit strategy enables a CEO and team to understand, design, and execute an optimum exit for their company. Moreover, ninety-nine percent of technology companies sell to strategic buyers. Hence, plan for a strategic sale. An IPO is possible, but a tiny probability. Thus, one key when planning for the exit is to build something that fills a need for a larger company. Furthermore, a company should design an exit strategy before seeking an investment from financial investors as this provides insight into the firm's value and informs investors of future opportunities and direction. There is a misconception in the market that focusing on an exit is wrong. You often hear that entrepreneurs should focus on the business and not worry about the exit. In reality, a focus on exit is healthy – and does not distract the team from their primary function - maximizing shareholder value. Moreover, with an exit strategy in place, a company can move faster and more aggressively because they know what they need to do to succeed in the marketplace and to create value for its investors. An exit program helps a company define where they are headed and what is needed for scale. A Company Should Continuously Develop its Business to be Sold If you are not consistently developing the business to be sold, then you have already sold it… to yourself. An exit plan locks the strategy down and drives business direction. It ensures implementation by incentivizing management as well as helps the company stay on track throughout development timescale. Don't Wait to be Bought, Plan to Sell Some think that when it's time, someone will knock on their door, asking to buy their company. While that has happened, it's seldom a good thing for shareholders. It's not just that the price will be much lower; the probability of success decreases dramatically with only one bidder. Optimum exits require strategy and planning. Exit Development Process The exit development process is set out in three phases:
Phase I – Engage An exit strategy is the development of a plan to sell the business for its best strategic value. Every company has one, even if nobody realizes it. The goal: Formulate a plan to get the business into shape for the next round of funding or M&A event. (Hence, start planning early in the company's life.) Surprisingly, an exit plan affects many daily business decisions. As a process, it typically takes six to eighteen months, depending on how quickly the company wants and can move. Most technology companies should plan to sell within seven years of their founding. (Seven years in the technology world is the average lifespan of a technology product or service, and most tech companies are one product wonders. Maximum value for a company is usually achieved around the fourth or fifth year when the market realizes its most active engagement with the product. In Phase I, identify factors affecting valuation today and then benchmark them and set a realistic target value. Look at current and forecasted revenue, profit, and cash flow, scarcity value, and market position, all the while validating and refining the strategy. ID factors that affect timing. For example: How early should you sell? You don't have to grow the company to be profitable or grow it to be larger than $X million of revenue. The real threshold is to prove the business model. As soon as you confirm the model, it is often a good time to sell. Moreover, it is always best to sell on an upward trend. Establishing the exit strategy reduces risk and increases potential value, and informs the investor pitch. It also provides a comfort level and a reality check for management and prospective investors. It confirms market value by engaging and developing several serious financing sources and potential purchasers. As part of Phase I, assure the alignment of stakeholders. Often there is a severe misalignment between critical stakeholders on the exit strategy. The only way to check is to get a "sign-off" on a written exit strategy. Set up offsite planning retreats to build full alignment and then check alignment on an ongoing basis. Phase II – Focus Phase II is about accelerating value drivers and focusing on achievable targets that form the strategic business development that drives the strategic sale. Some examples of value drivers that a company needs to focus on:
Phase III – Execution This phase focuses on execution. It is a rigorous approach that ensures that momentum behind the business direction is maintained, and the company builds value enhancement into its execution plan. Process Implementation
With proper development, the company will be ready to take advantage of the right exit opportunities at the right time. Success is a journey An exit strategy helps set the course for your business journey. It aligns the team on the most important goals:
* Quote - Kaufman Scaling
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