Phases of Business Building

Its been far too long since I’ve posted here on my blog.  Its not like I don’t write.. just not here all the time.

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I’ve been traveling a bit (too much) lately mostly in an effort to keep the growth pace of the business.  Traveling always gives me time to pause and reflect a little.  These past few trips got me to thinking about the phases we’ve gone through along the way here.  Not coincidentally these phases correlated to financing rounds, which it turns out tie back to tangible value proof-points (milestones) and ultimately led to an exit where we sold Lijit to Federated Media about a year ago.

In every business there are distinct phases that the company goes through.  Sometimes things stall out and the business goes “sideways” which is nearly never good.  In each phase people get dropped off the back as the rest accelerate into the next arc of things.  I’ve met very few that can adapt and thrive at every phase along the way.  Each requires a slightly different skill profile and process for execution.  I recently read on Fred Wilson’s blog about burn rates for different phases along the growth path.  The rule of thumb to me is the +/-$500K per month gross burn.  Over $500K you’ve got it figured out.

“Great man”.

This part of Lijit’s evolution occurred mostly before I arrived on the scene.  My business partner for the past several years deserves all the credit here.  The bet was simply: he’s a great entrepreneur; he’s bound to do something interesting.  Now, it’s not 100% fair to say the bet was just on Todd. There had to be some nugget of a compelling idea.  But ultimately the “great man” phase the company goes through is predicated on the innerworkings of the mind of the founder.  His newest venture likely has the same basic thesis.

Milestone Goal:Attract a quality team with nothing more than a good idea.

“Figure that shit out”.

This is where the real ‘shit testing’ begins.  Figuring out if the idea everyone is jazzed about actually has legs.  It’s not the same as the economic model.  In fact, this is one of the dangers of successfully passing the milestone; too much concentration on a false idol of an economic model can be a killer. Rather, this is the real world research to suggest there is a robust market for the idea.  Seldom does an existing market exist for breakthrough ideas, so this is more about obviating the economic potential: can you prove a market exists even if the would-be customers don’t know it yet?  This phase takes being smart and keeping your head down.  Marketing and PR are for suckers and only cloud the path.

Lots of companies die a slow painful death in this phase, mostly because they can’t (or refuse) to see the answer. Too much PR work in this phase has a distinctive negative effect of misplacing hype where real market motivations should exist.  The main thing here is to get to the answer on customer value creation.

Milestone Goal:Prove that an authentic market for your idea exists.

“Economic model”.

This phase isn’t simply about figuring out whether or not you can make money.  Instead, this phase is about how you make that money.  More importantly, can you do it in a way that the costs of making that money will decrease as you increase revenues. 

Obviously every business is unique, but all carry certain coordination costs to address whatever market we’ve staked out in the first couple of phases.  The trick here is to determine an economic model that keeps those coordination costs in check as you grow.  That’s hard, particularly as you scale customers, partners, employees, and expectations of return to investors.

Milestone Goal:Prove the business can be profitable as it expands.

“Execution”.

Entering this phase is about the time that we sold Lijit to Federated Media.  We had gone through all the phases above and could clearly see in the model a profitable and fast growing potential.  We had not yet realized that potential and that “early but logical path” made us an attractive asset to FM – and one that could be acquired at a reasonable value.

This phase is where more defined processes start to become necessary and focus (or lack of) can be a killer.  This is also the time when early employees can chafe at the notion of becoming more “position” players.  It’s a natural growing pain as their jobs get bigger, but their daily focus gets more refined and disciplined.  Hiring and firing happen more often.  What binds the company together is focus on the mission.  Momentum, winning, and business cadence rule.

Milestone Goal:A going concern that continues the growth trajectory.

“Scale”.

A bit more than a year after our sale to Federated Media we’re now headlong entering the scale phase.  This will test the team for sure.  It’s another acceleration in the peloton, and there will be some people that can’t make the jump and get dropped.

How many startups ever reach $100M in annual revenues?  Answer: Not very many.

In order to scale, and I mean really scale (i.e., clear the $100M annual revenue mark), there not only has to be top-flight execution and management, but the business has to find the lever-points that can accelerate growth.  This can come through biz-dev or corp-dev, and sometimes rarely through organic paths.  The trick with truly scaling is that it has to align to the economic model and be absorbed in the execution processes of the company.

Milestone Goal:Profitable business where the scale “lever-points” are well understood.

As I sit here watching the sun literally set on 2012, it’s obvious to me that 2013 will be the breakout year for us.  It’s going to come down to team, execution and discipline.  If indeed the business is as sound as I think it is, we’ll see the path to $100M.

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