Scaling Your Startup: Mastering the Four Stages from Idea to $10 Billion

279 Pages·2019·2.6 MB·English

by  Peter S. Cohan

Scaling
Your Startup
Mastering the Four Stages
from Idea to $10 Billion
—
Peter S. Cohan
SCALING YOUR STARTUP
MASTERING THE FOUR STAGES
FROM IDEA TO $10 BILLION
Peter S. Cohan
Scaling Your Startup: Mastering the Four Stages from Idea to $10 Billion
Peter S. Cohan
Marlborough, MA
USA
ISBN-13 (pbk): 978-1-4842-4311-4 ISBN-13 (electronic): 978-1-4842-4312-1
https://doi.org/10.1007/978-1-4842-4312-1
Library of Congress Control Number: 2019930174
Copyright © 2019 by Peter S. Cohan
This work is subject to copyright. All rights are reserved by the Publisher, whether the
whole or part of the material is concerned, specifically the rights of translation, reprinting,
reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other
physical way, and transmission or information storage and retrieval, electronic adapta-
tion, computer software, or by similar or dissimilar methodology now known or hereafter
developed.
Trademarked names, logos, and images may appear in this book. Rather than use a trademark
symbol with every occurrence of a trademarked name, logo, or image we use the names, logos,
and images only in an editorial fashion and to the benefit of the trademark owner, with no
intention of infringement of the trademark.
The use in this publication of trade names, trademarks, service marks, and similar terms, even
if they are not identified as such, is not to be taken as an expression of opinion as to whether or
not they are subject to proprietary rights.
While the advice and information in this book are believed to be true and accurate at the
date of publication, neither the authors nor the editors nor the publisher can accept any
legal responsibility for any errors or omissions that may be made. The publisher makes no
warranty, express or implied, with respect to the material contained herein.
Managing Director, Apress Media LLC: Welmoed Spahr
Acquisitions Editor: Shiva Ramachandran
Development Editor: Laura Berendson
Coordinating Editor: Rita Fernando
Cover designed by eStudioCalamar
Distributed to the book trade worldwide by Springer Science+Business Media New York,
233 Spring Street, 6th Floor, New York, NY 10013. Phone 1-800-SPRINGER, fax (201)
348-4505, e-mail [e-mail], or visit www.springeronline.com. Apress
Media, LLC is a California LLC and the sole member (owner) is Springer Science +
Business Media Finance Inc (SSBM Finance Inc). SSBM Finance Inc is a Delaware
corporation.
For information on translations, please e-mail [e-mail], or visit www.apress.com/
rights-permissions.
Apress titles may be purchased in bulk for academic, corporate, or promotional use. eBook
versions and licenses are also available for most titles. For more information, reference our
Print and eBook Bulk Sales web page at www.apress.com/bulk-sales.
Any source code or other supplementary material referenced by the author in this book is
available to readers on GitHub via the book’s product page, located at www.apress.com/
9781484243114. For more detailed information, please visit www.apress.com/source-code.
Printed on acid-free paper
To Robin.
Contents
About the Author                                            vii
Acknowledgments                                             ix
Introduction                                                  xi
Part I: Exploring the Scaling Model                 1
Chapter 1: Introduction                                       3
Chapter 2: Creating Growth Trajectories                        21
Chapter 3: Raising Capital                                     53
Chapter 4: Sustaining Culture                                 89
Chapter 5: Redefining Job Functions                           123
Chapter 6: Hiring, Promoting, and Letting People Go              153
Chapter 7: Holding People Accountable                         179
Chapter 8: Coordinating Processes                            201
Part II: Implications for Leaders                  229
Chapter 9: What’s Next?                                     231
Appendix A: Notes                                           243
Index                                                       267
About the Author
Peter S Cohan is Lecturer of Strategy at Babson
College. He teaches strategy and entrepreneurship
to undergraduate and MBA students at Babson
College. He is the founding principal of Peter S.
Cohan & Associates, a management consulting
and venture capital firm. He has completed over
150 growth strategy consulting projects for global
technology companies and invested in seven
startups—three of which were sold for over $2
billion. Peter has written 13 books and writes
columns on entrepreneurship for Forbes, Inc,
and The Worcester Telegram & Gazette. Prior to
starting his firm, he worked as a case team leader
for Harvard Business School professor Michael
Porter’s consulting firm and taught at MIT, Stanford, and the University of Hong
Kong. Peter earned an MBA from Wharton, did graduate work in computer
science at MIT, and holds a BS in Electrical Engineering from Swarthmore College.
Acknowledgments
This book has benefited greatly from the help of many people.
I could not have embarked on this project without the enthusiastic support of
Nan Langowitz, who chairs the Management Division at Babson. My Babson
colleagues Alana Anderson, Renee Graham, Alexandra Nesbeda, and Sam
Hariharhan provided helpful suggestions.
Without Apress this book would not exist. I am most grateful to Shivangi
Ramachandran for her enthusiastic support of the idea for this book and for
the outstanding editing and project management help from Laura Berendson
and Rita Fernando Kim.
Finally, I could not have completed this book without the help of my wife,
Robin, who patiently read and commented on many of the chapters and my
children, Sarah and Adam, who always make me proud.
Introduction
I wrote this book because there is nothing more important to startup success
than a leader’s ability to scale it. I came to this realization while writing Startup
Cities (Apress, 2018) where I saw that what makes the difference between the
few startup hubs and the many that aspire to be is the relatively high propor-
tion of CEOs who can turn a business idea into a large company. More specifi-
cally, I noticed that cities vary in their mix of three kinds of business leaders:
• Amblers (who start and run businesses that employ
friends and family),
• Sprinters (who can turn a business idea into a company
that grows fast and is bought by a larger firm), and
• Marathoners (who turn an idea into a huge, fast-growing,
publicly-traded company that supports the creation of
local startups).
While there are a few marathoners with no prior startup experience, such as
Amazon’s Jeff Bezos or Facebook’s Mark Zuckerberg, who reach this pinnacle,
most sprinters and marathoners learn their leadership skills through a series
of corporate and startup jobs that help them gain the skills they need to turn
an idea into a large company. What’s more, within those categories there are
finer gradations of leadership skills. More specifically, startups go through dis-
tinct stages in their growth from an idea into a large company, whether they
are acquired or go public. The three kinds of business leaders relate differ-
ently to the four scaling stages. Amblers are not interested in scaling and are
happy to sustain themselves at stage 1. The sprinter wants to get to stage 3
and then do other things, and the marathoner wants to participate in stages
1 to 4.
But regardless of how leaders define these stages, quite frequently, the found-
ers of these startups cannot lead the company through each stage. In most
cases, founders swallow their pride, realizing that they can either remain CEO
and not raise the capital their company needs to survive, or they can give up
the top job. Sometimes those founders leave the company when a new CEO
joins and sometimes they stick around as chief technology officer and report
to that new CEO. Often such deposed founders learn from the experience,
either by role modeling from the new CEO or by consulting mentors about
xii Introduction
what they could have done more effectively, so they become better leaders.
If that happens, they might become a CEO of another company where their
newfound know-how can help them achieve a successful exit.
Simply put, scaling skills are important and they are in big demand among
entrepreneurs, investors, and cities. As a teacher of entrepreneurship, I need
good material on how to scale effectively to prepare students for the real
world. As we’ll see later in this book, there is good material on parts of the
scaling process, such as how a startup can win its first customers. However,
there is no comprehensive framework that explains all the stages and tools
available to leaders seeking to turn an idea into a large company. Creating such
a framework is the goal of this book.
Who Will Benefit From This Book
Scaling is of primary importance to entrepreneurs, employees, customers,
partners, and capital providers and of secondary interest to government poli-
cymakers and universities. Here are the reasons for scaling’s importance to
each group:
• Entrepreneurs. Founders want to turn their ideas into
companies that change the world. They also want the
economic benefits that come with owning a substantial
piece of a very valuable company. Both goals can only be
realized if the company’s CEO is capable of scaling it.
• Employees. A startup’s employees are generally enthu-
siastic about its vision, want to learn from outstanding
leaders and peers, and according to my interviews with
Silicon Valley executives and investors, are increasingly
impatient about cashing in on their stock options. These
outcomes can only be achieved if the company scales.
• Customers. A startup’s customers may have a mixed
attitude towards scaling. If the startup can lower its costs
and boost the value of its products for customers, then
customers are likely to benefit from the startup’s effec-
tive scaling. Moreover, if the company grows to the point
where it can go public, then the customer may benefit
since the capital provided will increase the odds that the
startup will survive. Scaling could have a downside for
customers if it keeps the startup from developing new
products and delivering excellent service.
xiii
• Partners, particularly suppliers, may benefit as a startup
scales. In general, the bigger the startup, the more sup-
plies it will purchase. If the supplier can satisfy the grow-
ing demand and become more efficient in the process
of scaling, then it may pass along some of the cost sav-
ings to the startup in the form of lower prices. On the
other hand, if the supplier becomes too dependent on
the startup for its revenues, the startup may use its bar-
gaining power to force the supplier to slash prices.
• Capital providers can only realize a return on their
investment if a startup scales to the point where it is
acquired or goes public. If the acquirer has a record of
boosting the sales of acquired startups’ products, the
investor may be better off accepting the acquirer’s stock.
However, if the startup’s CEO has the potential to be
a marathoner, capital providers will be better off if the
startup can keep scaling after its IPO.
• Universities can benefit from developing courses about
startup scaling, particularly if they already sponsor incuba-
tors and startup competitions or teach entrepreneurship.
If universities can provide scaling skills to more graduates,
their alumni may achieve greater career success. This
would burnish the university’s reputation and potentially
enrich its endowment (if the successful entrepreneurs
donate to the university).
• Government policymakers may benefit if more of
their local entrepreneurs became sprinters or marathon-
ers, an outcome that would be more likely if local founder
were better at scaling.
Scaling Research
To gain a deeper understanding of how to scale successfully, I set out to answer
the following questions:
• Are there specific traits typical of CEOs who will become
sprinters or marathoners?
• How do such CEOs define the revenue tiers that their
startup will reach as it scales? (My interviews with CEOs
revealed that each CEO has different revenue tiers.
Therefore, I reframed the question to focus on the prin-
cipal business goals of each scaling stage.)