The Five Elements of Startup Success
By Afam Edozie
“Success is a process.”
― Alex Noble
“If you put good people in bad systems (processes) you get bad results.”
― Steven Covey
You win some, you lose some. That’s true in life and in business—especially start-ups. I have been involved in successfully scaling four high growth business start-ups with combined revenues of over $3 billion. I’ve also been involved with over a dozen where we failed to scale.
With hindsight I learned more from the failures than the successes. When you fall, you pay attention and you remember where the trip wires were. As Bill Gates said, “It’s fine to celebrate success but it is more important to heed the lessons of failure.”
How do you know when a business is going to be a success or a failure? Success seldom looks like success at first; it’s fairly non glamorous when the ball gets rolling. Though, what it lacks in glamour at the start, it makes up for with impact, a sense of accomplishment and often riches, at the end.
- I helped to start MTN Nigeria and spent over five years as the Chief Marketing and Strategy Office; 12 of us started working out of a three bedroom house. We had no customers, no systems, no processes and no network and our CFOs office was in the corridor between bedrooms. Within five years, we had over 2 million customers and US$3 billion in revenue.
- When I co-founded Virgin Biznet, it was a little more glamorous, Sir Richard Branson gave the two of us four cubicles in Virgin Nets grand offices in St James’s Square, plenty of room for expansion. we went from nothing to over £10 million over the space of two years.
- When I made a seed investment in Courteville we didn’t even know what business we were in, we IPOed five years later.
- When I first met with Swift Networks, they had 97 customers and had lost count as to how many people had turned them down for financing; We developed a new strategy and business plan, a few years later we had a purchase offer at $400 million.
Regardless of the glamour or lack of it at the beginning, I have found that the businesses that were successful did and focused on five things, and that the startups that never scaled failed to do one or more of them.
These are the five things that I have found made the difference between failure and success:
Design is key. Of the companies I worked with, those that successfully scaled had been designed to scale from the outset. Of those that did not, at least a couple failed because they were poorly designed.
When I speak about design, I’m focusing on three things.
First, the value proposition. Even though they all started off with what we thought was a winning value proposition, in a number of cases it was only the founders and investors who thought so and the customers disagreed. We were too confident and jumped in the market only to realise we did not really understand the customer. One company started off with a good value proposition, but failed to innovate fast enough when the market and competitive circumstances changed quickly.
Second, clarity in planning. Specifically, alignment as to the size, scale and time frame to get to where we were going, and what that meant in terms of effort, resources and processes. I was involved in a fashion services business that was trying to scale from a single salon to seven salons, but never fully committed to the changes in HR or the capital commitment that was required. As we expanded, we struggled to recruit and retain the same quality of technicians, no one really paid attention, quality dropped, targets weren’t met and we came under severe cash flow pressure. Eventually we had to close down five salons. We lost money. In hindsight, we should have opened a second salon, reviewed our learning, and then opened two more. At the time, we were in a hurry to get to where we were going, we didn’t plan our HR processes effectively, we tracked the wrong metrics (we were looking at top line growth) rather than stuff like quality, customer satisfaction, repeat purchases, etc.
Third, choosing a market that is big enough. The market must be able to support the company’s size aspirations ―but that has also been properly segmented, and a segment chosen that the company can dominate with a 12 to 18 month horizon. At Swift Networks, the company had initially gone after the whole market internet cafes, corporates, SMEs, and HNIs and anyone who wanted broadband connections; but it had only gained about 100 customers over two years for all its efforts. We quickly refocused the business on the banking sector and with a value proposition and customer acquisition process focused on meeting their needs, we had 65% of the market within 12 months.
- Scalable Processes
The companies that succeeded were focused on building scalable processes, particularly on the customer acquisition and the product or service fulfilment processes. Many of the companies that failed to scale were overly focused on winning business, getting customers and getting the product out of the door―all important stuff, however, when you are trying to scale a business, it is developing the processes that deliver these things that enables you to win.
Things seemed to go well until they got too big (which was not very big) where making a herculean effort could no longer deliver growth. This is not to say they did not have processes; they didn’t have the discipline to focus on them, develop them and make them deliver the results.
I find that process design including the HR process is one of the key reasons that businesses that do scale to a level, fail to fully capitalise on their market position.
See my blog post – The DNA of business – which describes the four building blocks of any and every business.
- Scalable Metrics
Those that scaled successfully all understood the key metrics. Many of those where I had to pick up the pieces did not know or understand the key metrics that described their business performance.
There are many who if they had only tracked and understood the right metrics, they never would have made a scaling decision.
Of course the metrics differ for every type of business. However their are a few common metrics I tend to look at for any type of company. These include, in the marketing arena, the cost of acquiring customers, the cost of generating leads, the lead conversion rate, the customer retention rate and the life time value of a customer. On the financial side, I look at the gross margins, the ebitda margins and the net margins, as well as how long it takes for every dollar spent to be collected back from the customer. In the operations arena I always keep a close eye on the total cost of delivering the product or service.
I’m currently involved in a company (the details have been changed to protect the not so innocent) that spent a small fortune recruiting agents for a financial inclusion agent management business. When you throw in all the costs of recruiting the agents, managing them and agent churn, they were losing money on every agent they recruited. Because we didn’t have and focus on the right metrics to begin with, it took a long time for them to understand that every agent they recruited put them deeper in a financial hole.
All the companies that scaled well took the pains to identify the vital few metrics, to collect the data and look at it on a daily or weekly basis.
- Handle on the Cash
Many of the companies that couldn’t scale either didn’t prioritise cash or didn’t know how to get the cash they needed. All of the successful companies did.
As an entrepreneur, you either have a business model that is cash generative and allows your customers or suppliers to fund your business growth (which is great but is only the case for the minority of businesses), or you know how to raise the cash you need either via equity, debt or a combination of both.
At MTN, Swift and Virgin, we knew exactly how much cash we needed to spend today to support $100,000 of incremental revenue in six month’s time, and we knew exactly how much cash we would need in six months in order to support our revenue aspiration for 12 months down the road.
We were also clear as to how we would get the money, we put as much effort into getting the money as we put into our marketing and operations and we were prepared to pay the price in the form of dilution.
Several of the companies that could not scale were never clear as to how much they needed to get them where they want to go, or the founders did not give it the level of focus and priority that was required. The result growth opportunities were lost due to lack of funding and momentum just gradually ebbed away. There were also at least two founders who (I suspect) just did not want to deal with the dilution of raising additional equity.
- Scalable Team
All the companies that scaled successfully didn’t do so until they had at least two heavy hitters either as co-founders or top management and the top leaders had demonstrated prior experience in recruiting and managing high calibre teams.
Many of the companies that could not scale could not attract or retain a top layer of high caliber people.
As a venture capitalists over the past few years, this has become one of the most important criteria for making an investment – demonstrated success in recruiting and managing a high caliber team.
There is a lot of risk in start-ups, but if you have all your ducks in a row—design to scale, scalable processes, scalable metrics, handle on cash and scalable team—then you are playing closer to how successful high-growth start-ups play. As George Bernard Shaw said, “Success does not consist in never making mistakes but in never making the same one a second time.”
This is an edit of the transcript of the key note speech in November 2016 at the High Growth Africa Investment Summit.