This is a great book, written by successful growth capital investor and partner in Lead X Capital Partners, one of Europe’s largest portfolios of B2B and B2C tech companies.
The book is primarily for entrepreneurs who are running start-ups or are planning to launch new firms. In this reviewer’s opinion, this book could be equally valuable for investment portfolio managers who are investing in start-ups.
We have previously reviewed the book Blitzscaling, by Hoffman and Yeh (see Lorange Network platform Insights section regarding this). Further, Mr. Yeh was featured in one of our Webinars (see also the summary notes in the Lorange Network Insights). Dr. Flesner recommends that a venture should go through a preparatory stage before entering ultra-high growth, in contrast to Hoffmann and Yeh, who suggest Blitzscaling more or less from day one. According to Dr. Flesner however, this may simply too much of a gamble, too high risk taking. This reviewer tends to agree with the former.
This is a must read. But even so, there are a few general small problem areas. While the author recommends measuring extensively, might there perhaps simply be too much measuring? Time to do business might become too short, due to all of this. And equally when discussing how to successfully hire new colleagues to join the start-up, chapter 13, in particular he seems to make recommendations which could be more appropriate for larger corporations rather than start-ups. Finally, all quotes at the beginning of each chapter come from US-based sources. Where is the European perspective?
The book provides a systematic approach first to build a growth foundation, for then, in phase two, to go into fastscaling. So, it is not only a matter of top line growth from the very start! At the early, preparatory stage, eclecticism and focus on several “lenses” of fit are discussed. And to burn cash in unnecessary ways is of course an old dictum here repeated.
The harder one works, the luckier one also might tend to become. This is to focus on “crawl, walk, run”, i.e., first do the necessary preparation before scaling up. As a venture grows, its main focus will tend to evolve from concentrating on a product to becoming relatively more distribution focused. To keep strong focus on what makes customers successful is key.
The first of five classes of groundwork preparation is therefore to generate a good product/market fit. To find must haves for one’s major customers are decisive here, i.e., solving critical customer needs and getting high customer satisfaction. As already noted, the author recommends extensive measuring, such as the net promoter score (NPS) which assesses the degree to which customers will recommend one’s product, a customer health score (CHS), to avoid too much dissatisfaction and churn, as well as to check how important continuity might be.
A good product/channel fit comes next. Stability of the channels chosen as well as solid predictability seems paramount, and various measurement approaches are recommended.
To develop a healthy so-called unit economy comes next, i.e., the extent to which one is actually making profits on a given product. A long-term view is recommended for measuring such customer lifetime value (CLV). The payback time for acquisition costs should be relatively short, however.
To develop a technology for one’s business that is readily scalable is important. This might call for particular approaches to IT development, going for separate costs for various aspects of one’s business: sign ups, bookings, payments, and so on.
To make use of the cloud, and having good documentation are givens. Regrettably, more start-ups often seem to follow more monolithical approaches, typically making scalability harder after some time. A virtually overwhelming complexity may result.
To go for large markets is of course crucial, especially if competition does not seem to be too hard. Again, the author recommends measurements, such as to try to determine one’s total addressable market (TAM) as well as serviceable addressable market (SAM). Here the following equation seems to universally apply: SAM < TAM.
So, with all of the five building blocks being addressed and hopefully under control, phase two, the rapid growth phase, fastscaling now comes about. Again, to focus on the customer and on what makes him successful is the point of departure. A key, personalized focus on target customers is sine qua non, involving a deep understanding, and the realization that customer preferences almost always evolve, calling for dynamic mind-sets for entrepreneurs.
Ongoing assessment of how things are going are of course critical at this phase, i.e., to predict and measure not only sales (top line growth), but also cash flows (position; in- and out-flows).
To grow efficiently thus means a focus on both sales and on cash burn! Again, measurements might be called for. And one must avoid extravagant spending!
The chapter on the leading high growth organizations is one of the central ones in this book, but unfortunately seems to contain several rather obvious recommendations, at times close to trivial. Execution, execution, execution is of course a must. The leader must be impatient. To lead by example is needed, and so is clear communication. Patience is always necessary, despite of the realization that only strong talents may have been hired to join the organization.
When it comes to building effective growth organizations, a challenge also closely associated with what was discussed regarding effective leadership of growth organizations, it seems to be all about assembling a group of “right” people, in contrast to “yes” people. Such persons typically expect proper salary compensations and also meaningful incentives when deserved. In-house search and hiring efforts may be more sustainable in the end!
Now to the board of directors. Trust seems to be central, and nothing might break down this more than self-optimization - essential is not to be too fast, but to build team behavior. How might a board member be able to “help” the CEO, if no such trust exists? Experience, as well as being well connected might help them.
To raise additional capital to enhance the rapid growth is often a task that must be handled well. A successful “pitch” should contain the various steps discussed so far, as well as a few more: the two issues of fit (product/market, product/channel), technology, unit economies, market size, competition, financial, timing as well as exit. The valuation that is being proposed should be realistic, with a long-term focus. Too often, a short-term focus might lead to a higher valuation, and, in the end, this might be damaging. Investors may develop a sense of “being burnt”!
And, finally, the exit. There seem to be three alternatives:
IPO
Sell to private equity
Trade sale
A founder may typically get a relatively lower price when selling to a private equity firm than through any of the other two options. To be open to an acquirer seems vital under any of these options, always with an updated “deal room”. To understand the acquirer’s motive seems fundamental! And one’s timing should be right, i.e., to exit “when things go well”. To bring in outside experts, such as M&A lawyers and bankers that specialize in exits might be advisable.
This brings us to the end of this book. While many of the recommendations might come across as rather self-evident, it is nevertheless useful to be able to encounter a complete set of issues, i.e., applicable to every stage of a venture’s evolution. The “handbook” dimension is given a lot of credits by this reviewer. In general, the various recommendations seem to be sound and realistic. The author clearly knows what he is talking about!
The reviewer recommends this book highly – a must read for venture-managers and business portfolio managers alike!
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