Strategy for Startups: A Primer
Strategy for Startups: A Primer
The role of strategy in navigating a startup's journey from $1m to $100m
What drives performance
Tactics are in vogue, Strategy isn’t. Tactics are easy to market; do X and you’ll get Y. Strategy feels less concrete and too idiosyncratic to be usefully discussed. In Phil Rosenzweig’s ‘The Halo Effect’, through rigorous research he dispels the common delusions of business performance concluding that there are only two things we can reliably say impact a company’s performance - Strategy (aka making important decisions) and Execution (following through on those decisions). Other factors may contribute, but it’s hard to say how much, and many are attributes of good performance rather than drivers.
An important consideration is the difference between drivers of performance vs. attributes of performance, something Rosenzweig demonstrates very clearly:
Culture: Businesses that grow and are profitable are more fun to work for than businesses that aren’t. But, did ‘culture’ drive that performance or does performance drive employees' assessment of culture?
People: Great people drive great performance, particularly when in key decision making roles. That’s hard to argue with. But what happens when a business stops performing or the nature of the role changes and individual performance drops? Are they no longer great people?
Diversity: More successful companies tend to be more diverse. But does diversity drive performance or does performance drive greater diversity?
The nature of growth
We all know that getting Strategy right matters. But what does it mean for a startup on a growth journey from $1m to $100m in revenue. At Notion Capital we believe that journey is really quite special. It isn’t smooth, there are steep climbs, plateaus and valleys of death. It is a step function, not a linear progression. A well known VC that shall remain nameless published ‘research’ that a startup's growth rate tends to degrade by about 30% per year. That implies a smooth journey from one year of performance to the next. That simply isn’t reflected in what we see and what founders experience.
Working with the Partners at Notion Capital and the Founders of our portfolio companies as they navigate their growth journeys has been invaluable to my understanding of Strategy. It’s been fascinating to combine that insight with two additional sources; i) the works of leading Strategists such as Porter, Helmer, and Rumelt and; ii) insights from complexity scientists and systems thinkers such as Donella Meadows. I’ve boiled that expertise down into seven key insights that reflect a startup’s journey to provide a useful lens through which to view performance.
Systemic: A startup is a system - its performance is a perfect reflection of the system it has designed for its environment.
Focus and Fit: The market is a selection mechanism; performance is a function of how well the system is designed for the market and challenge at hand.
Thresholds: To keep growing a startup needs to overcome thresholds, inflection points at which the nature of the challenge changes and greater fit is needed.
Reconfiguration: To overcome thresholds and unlock the next stage of growth a different configuration of people, process, technology and focus is needed.
Flexible: The environment is chaotic and new emergent orders are hard to predict. The combination of a strong vision and flexible yet excellent execution is needed to navigate an unpredictable environment.
Capital: Startups operate on borrowed time, if they are unable to overcome thresholds with the runway they have, they are unlikely to secure the capital they need to fund new emergent orders.
Power: Long term success depends on a startup’s ability to generate power which requires sound strategy and effective execution.
The nature of systems
A daily battle takes place in the Notion Capital office. We have two sets of colleagues, one group loves the office a little cooler, the other a little warmer. Instead of everyone agreeing to a temperature we can all live with (which through careful experimentation I’ve found to be 22.5℃), we oscillate between temperatures only found in the South Pole and Furnace Creek. One of the key reasons for this is that there are delays between changing the temperature on the thermostat and the impact in the room. If the room gets too warm, the thermostat gets adjusted to 16.0℃, then as the room cools too much someone else changes it to 27.0℃ in an effort to get to a sensible temperature faster. This results in the Notion office experiencing all four seasons multiple times within an eight hour period, constantly overshooting and undershooting that sweet spot of 22.5℃.
The Notion office is a simple system, a startup is much more complex, requires more information to function properly, and experiences more significant delays between analysis, decision, implementation and effect. This leads to large oscillations in under- and over-investment which can be fatal to performance.
“Businessmen don’t know for sure what other businessmen are planning to invest, or what consumers will be willing to buy, or how their products will compete. Their information about these things is incomplete and delayed, and their own responses are delayed. So they systematically under- and overinvest.”
Donella Meadows
Strategy in context
Strategy is context dependent, and so if the system needs to constantly adapt but its adaptation is always delayed, we need a way to get ahead of required investments and put constraints in place that stop over- or underinvestment. I love the now, next, later framework leveraged for product development; we can borrow this approach to help us think through how to sequence key decisions and hopefully more evenly match change and investment with need.
Now - focus
A startup’s focus, its target market and ICP have a big impact on how it needs to design its system of performance. If you don’t have clarity over the challenge you are designing for (which requires focus) and the customers you choose to serve then how can you design a system which fits the challenge? The greater the challenge the more tightly optimised the system needs to be. If you’ve ever watched the America’s Cup or Formula One you will have seen sailing boats and cars that look alien compared to what’s typical. Both are designed and optimised for very specific and significant challenges. An F1 car is fantastic at overcoming the challenge it was specifically designed for, and completely useless as a functioning car for everyday life.
Where to focus is especially important for early stage startups, but that need to maintain focus and to find new promising areas of focus never goes away. Driving focus, assessing current capabilities and redeploying resources is a permanent need of the now.
“At the core, strategy is about focus, and most complex organizations don't focus their resources. Instead, they pursue multiple goals at once, not concentrating enough resources to achieve a breakthrough in any of them.”
Richard Rumelt
Key questions for founders:
What are our current resources and capabilities?
Where should we focus (customer segment, jobs-to-be-done etc.)?
What should we stop doing, what resources should we free up to re-deploy?
Next - systems
At any point in time there will be multiple limiting factors to growth. Identifying these limiting factors, determining which ones to remove first and matching the level of investment to the need is critical. Exceptional leaders are able to anticipate growth slowing down before it happens, and then make the right investments and right changes to avoid plateaus in performance.
“Whenever one factor ceases to be limiting, growth occurs, and the growth itself changes the relative scarcity of factors until another becomes limiting. To shift attention from the abundant factors to the next potential limiting factor is to gain real understanding of, and control over, the growth process.”
Donella Meadows
Key questions for founders:
Where are the significant bottlenecks impacting our performance?
What is the right sequence of changes/investments?
How good do we really need to be to unlock growth?
Later - power
Eight years working for a strategy consultancy razor focused on driving free cash flow has made me more conservative than the typical venture capitalist. I really care about efficiency and whether a business can drive healthy margins in the long run beyond just paper valuations. The single most important factor for longer term success is the ability to generate market power - the power to grow share and charge prices that funds future innovation and investments.
Power generally takes time to emerge and depends on the structure of the industry, competitive dynamics, technological change etc. This necessitates a longer term perspective and vision from founders to help guide short and medium term decision making, ensuring that they move the business towards a position of power rather than away from it.
“A body of theory which links firm characteristics to market outcomes must provide the foundation for any fully dynamic theory of strategy. Otherwise dynamic processes that result in superior performance cannot be discriminated from those that create market positions or company skills that are worthless.”
Hamilton Helmer
Key questions for founders:
How does the structure of our industry shape our ability to develop power?
What are our potential sources of power and when and how are they likely to emerge?
What changes are we anticipating that could have a profound impact on the industry and/or our position?
References and recommended reading:
The Halo Effect by Phil Rosenzweig
Good Strategy Bad Strategy by Richard Rumelt
7 Powers by Hamilton Helmer
Thinking in Systems by Donella Meadows
A startup is a series of systems, with the output of each system a perfect reflection of its design (and execution).
As a company passes an threshold, then the system needs to be designed to address the specific challenges of the next stage.
If a company needs to find product market fit, it designs a system that is focused on discovery, experimentation and iteration until it has secured a small set of customers that generalise to a large market.
If the company then wants to start to grow, and find go to market fit then it needs to design a new system. New inputs, new processes and (often) new people, to drive a new set of outcomes.
And so it continues.