Dr. Patrick Flesner is a partner at the German growth capital fund LeadX Capital Partners, where he built one of the largest portfolios of B2B and B2B2C tech companies active in consumer industries. He has a PhD in law from University of Cologne and holds an MBA from INSEAD. He has recently published a high growth handbook, FastScaling: The Smart Path to Building Massively Valuable Businesses.
An initial issue might be to clarify the difference between FastScaling, as opposed to Blitzscaling as Hoffman and Yeh see it. The main difference seems to be that while blitzscaling implies going all out to achieve ultra-rapid top line growth virtually from the start, FastScaling, in contrast, implies a two-stage process – first to prepare a venture for future growth by ensuring that the venture’s business model seems to be in order, for then, in a second phase, to enter into an ultra-rapid growth phase. Flesner calls these two stages establishing the FastScaling foundation and FastScaling.
Thus, there seems to be a dose of common sense here. Most venture investors as well as start-up entrepreneurs might generally seem to consider blitzscaling as the way to go. But Flesner warns us not to go too quickly, although sees the two growth techniques as complementary. A validity test should be conducted first. As an example, Flesner cites Airbnb, which was also featured in the book Blitzscaling, written by Hoffman and Yeh. Flesner claims that Airbnb spent several years testing out its business model, making important modifications in their approach, before eventually gearing up to blitzscaling because of market dynamics, especially the threat by the well-financed German Rocket Internet clone Wimdu.
The five building blocks of the fastscaling foundation are:
Generating product/market fit (i.e. satisfying a market need and solving a significant customer pain).
Generating product/channel fit (no success without a working distribution channel).
Developing strong unit economics, i.e., are you expected to make money from what you sell, even if the life cycle has to be long before you go in plus?
Striving for market leadership in a large market: size, margins, dynamics, competitive environment, potential market leadership?
Ensuring tech scalability (is one’s technology able to cope with a subsequent rapid growth phase?)
Elaborating more on the initial foundation/validity testing phase, the following two issues are seen as particularly key:
Are the unit economics ok? How are you expected to make money on the units you sell and the customers you acquire? Have patience, show you make money and that you can acquire customers on attractive economic terms. The unit economics concept also helps to understand whether product/market fit and product/channel fit have been generated. If you achieve strong unit economics, you can assume you have validated the viability of the business model.
The length of the pay-back period – this should be relatively short. If too long before going break even, then this might be seen as a potential “red light” – again, check the unit economics concept and is the product/service’s price appropriate? The shorter the payback period, the earlier you can reinvest in further growth.
Moving now to the fastscaling phase, this includes focusing on customer success, growing predictably, growing efficiently and strong leadership. The following considerations seem particularly key:
According to Flesner, the number one priority is customer success. If the business model has been validated and tech scalability been ensured, businesses can accelerate growth. Accelerating growth requires more than heavy investments into marketing and sales. Customers preferences may change over time, and customers may congregate at different places. Product/market fit and product/channel fit may be short-lived, unless businesses focus on customer success throughout their growth journey. Businesses must put customers first. They must ensure a great customer experience and a strong return on their customers’ investments. If they make their customers incredibly successful, the customers will not switch to competitive products and will refer the products and services to potential new customers.
Are we able to create predictable revenue as we grow so rapidly? Predictable revenue is the result of a thorough prediction process, in which all departments must be involved. If businesses plan the growth journey thoroughly, they cannot “only” predict where and how much they need to invest in order to grow revenues. They can also assess what this means in terms of costs, EBITDA, and cash burn.
As businesses that FastScale thoroughly plan their your growth journey and have a good understanding of the cash they need, they can also carefully balance cash burn and growth and scale more efficiently than companies pursuing a more aggressive growth strategy like blitzscaling.
The fastscaling approach can also apply to non-high-tech firms. The key is “crawl, walk, run”. This may perhaps be particularly key when assessing ventures which might be found in very early stages. Is the “crawl” function working? Particularly, are we avoiding burning too much cash?
Germany is well-known for its so-called “Mittelstand” companies, many of which are family owned. Also, many have rather long-time horizons. And many are in the well-established B2B space. Are such companies able to spin off new businesses? A problem here might be that the initial testing phase might simply take too long – too many persons might be involved – “too many cooks in the kitchen”. And while the leadership in most “Mittelstand” firms tend to be smart and accomplished, there might also be an element of “we know best”, to fall into the trap of resisting in fact “not invented here”. To have a better chance to succeed in these circumstances, there should be a distinct “distance” between a new venture and the established business. And those involved in the business should be agile and flexible, with a high propensity to learn! Testing, testing, testing – and learn fast (often from startups themselves who are speed and innovation oriented)!
When attempting to FastScale in many contexts one should perhaps try to find a balance between “too fast” and “too slow”, i.e., to settle for something in the middle, by balancing growth and generation/burning of cash. We might perhaps denote this “high growth efficiency”. Key will however, always be to build a solid growth foundation before fueling the growth engine.
Flesner also sees businesses that pursue slow scaling approaches and do not turn cash flow negative at all, but he deems slow scaling a dangerous approach in the rapidly changing tech environment. Scaling too slowly comes with the risk of being overtaken by rapidly evolving fast followers and copy cats.
It should be pointed out that some types of businesses require more investments at their early phases than others. Software firms and so-called network/subscription firms come to mind. To keep a strong discipline regarding the growth/cash burn rate ratio is perhaps particularly critical here.
Particularly attractive businesses to invest in might be those where good growth has been had, and one might be steering towards a potential buy out, although perhaps not being at that stage yet. It goes without saying that to pay too much is always “no no” however. As an investor, discipline is paramount. Picking entry and exit points is critical, and there are significant differences between later stage growth capital and venture businesses.
There are always debates in “healthy” ventures, but dysfunctional conflicts should be avoided, i.e., avoid “loose-loose” situations. A typical example of the latter might be where sales blame marketing for generating poor leads when not being able to convert a lead to paying business, and marketing blame sales for not being sufficiently diligent, even lacking in competence. Situations like this might be “resolved” by having more clarity in support manuals, and of course, above all by top management being more effective. Confrontations must, thus, be ok, but it should be constructive, non-violent, conducted in a “safe” environment, with no “losers”.
Generating a compelling customer lifetime value to customer acquisition costs ratio is always key. Customer acquisition costs are of course always important. For the first paying customer and in the early stages of a business these may of course be very high. But over time, they should improve. To arrive at a realistic way of assessing customer acquisition costs, based on a meaningful denominator, in calculating this, is often difficulty, calling for realism!
To enhance super scaling, i.e., ultra-fast growth, a combination of the following four classes of “new” factors might be emphasized:
Entering new geographies (international expansion)
Targeting new customer segments
Finding new go-to-market channels
Developing new products and product features
It seems particularly important to maintain a realistic sense of simplicity when it comes to this, however. A good heuristic might be to focus on only one such factor at a time! According to Flesner, complexity is a growth killer.
Additionally, Patrick Flesner has addressed four questions that were raised by the audience:
Is Customer Success only about solving “the problem” or are there other factors involved?
No, customer success it not only about solving the problem. Solving the problem is the focus of getting to product/market fit. You solve your customers’ pains and satisfy a market need. Customer success is more. It requires a company-wide approach to making your customer happy. You want to create a great customer experience, which starts already before your customers become customers. It ranges from marketing and sales through to onboarding, activation, retention and support. Your customers must enjoy the experience of becoming a customer and being a customer of yours. In addition to a great customer experience, your customers must experience a strong return on their investment. The value you create for them must be significantly higher than what they pay to you. An extreme example, if you offer a software solution that reduces the customer’s onboarding costs by 10,000 Euro per month, it is not a very attractive value proposition if you charge your customer 10,000 Euro per month.
In a nutshell, customer success needs to be the company-wide north star and includes (i) a great customer experience and (ii) a strong return on investment.
Please read the respective chapter in my book (but if you read my book, you will also notice that customer success is a topic that pops up in many chapters). And here a link to a short blog article about this topic: https://www.fastscaling.io/customer-success/
In corporate venture capital, the essential clue is the full and continuous backup of the high-level management in order to make the start-up a success?
Corporate Venture Capital is an art. Most corporates fail. Executives may understand why they must engage in CVC, but they do not know how to do it. I have written a MIT Sloan article about how to make CVC work. Here the link: https://sloanreview.mit.edu/article/making-corporate-venture-capital-work/. The essential clue is to hire outstanding investment professionals, incentivize them in accordance with VC market practice and ensure that the corporation delivers on the promise to provide more than money. The latter point is where most corporates fail. If you want to read more on CVC, please visit my Medium side. The respective CVC articles about the Why and the How have also been published by the Global Corporate Venturing Magazine. Here the links:
I am always facing the discussion in my organization how to calculate the Customer Acquisition Costs. Marketing Directors do not agree to divide the total marketing costs by the number of new customers. They want to strip out brand and other retention marketing costs especially TV/Above the line. How would you approach such a discussion as I disagree with them and would like to consider ALL marketing costs?
You are absolutely right. All marketing and sales costs need to be divided by the number of customers acquired. This is what we investors call fully-loaded customer acquisition costs (CAC). Ask your marketing director why he or she spends on brand marketing and TV adds if it has nothing to do with acquiring customers. Would be curious to hear what he or she has to say. But there is also a time aspect to calculating CAC. Usually, there is a lag between spending and acquisition. You may invest in marketing and sales in time period 1 and harness in time period 2 and/or 3. So maybe, the costs invested in brand marketing pay off only in the long run and have to be spread across several time periods. This is something you could discuss with your marketing director, but in general you must take all costs into account.
The unit economics concept is very very important and I recommend you read the respective chapters in my book. You will also read about other ways founders, marketing and sales people try to inflate the unit economics, both CAC and customer lifetime value (CLV).
What do you feel about the growth of ESG / Impact Funds & how can they harness FastScaling for their portfolio companies given the variation in desired outcomes?
FastScaling can be applied at any company that wants to create profits. If the goal of the ESG portfolio companies is different, you may run into serious problems and loose the money you have invested in the funds (which may not be a problem if your goal is also “only” to have a positive environmental or social impact). The ESG and impact funds are very attractive from a vision perspective. The challenge is to find great portfolio companies that have a great ESG impact and at the same time pursue the goal of generating profits. Only then, you can make decent returns on your investments (into the fund). Don’t get me wrong here: ESG and impact funds are great, but there is also a challenge to investing in this area. Like every investor, you need to find great companies, companies that fit your investment scope and can return multiples of your investment.
"FastScaling – The Smart Path to Building Massively Valuable Businesses” has been published on Amazon and Apple Books.
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