Too many fledgling companies attempt to rush the formation stage, either out of a perceived need to capitalize on being first-to-market or because scaling a company seems infinitely more exciting than early formation research.
In the past, the typical business lifecycle has been described in four stages: establishment, growth, maturity and post-maturity. According to this development process, businesses form, build a following, reach the pinnacle of their growth and then decline as new competitors enter the market.
But while this cycle may have suited the growth of traditional companies in the past, it doesn’t adequately capture the different stages startups like Airbnb, Dropbox and others have gone through in their ascent to becoming famous brands.
A new system, therefore, is needed – not just to better explain the growth of startup unicorns, but also to give entrepreneurs a framework against which to judge their own progress.
The startup business lifecycle
Drawing on work done by Startup Commons, a better model for startup growth consists of just three stages: formation, validation, and growth.
The formation stage of startup growth is characterized by ideation and conception. Long before companies can prove the almighty “product-market fit,” they must first, according to Startup Commons’s model, meet “problem-solution fit” and “vision-founders fit.”
Key questions being asked at this stage include:
1. Does our idea create value?
2. Does our proposed solution solve the problems experienced by our audience?
3. What other possible solutions should be considered?
4. How will we define our mission, vision and strategy plans?
5. Do we have “the right people on the bus”?
It’s not uncommon for business model pivots to occur at this stage, as assumptions are defined and tested. Android, for example, was originally conceived of as a smart camera operating system before its acquisition by Google.
Too many fledgling companies attempt to rush the formation stage, either out of a perceived need to capitalize on being first-to-market or because scaling a company seems infinitely more exciting than early formation research. This, of course, is a mistake. Coming through the formation process smoothly takes time, but it’s also a prerequisite for future success.
The validation stage encompasses the activities of what many refer to as a “lean startup.” During this stage, a business’s primary goals include identifying a minimum viable product (MVP) and either validating it through research and testing or iterating it based on the feedback received.
Common questions to address during this stage for startups include:
1. What is the smallest possible benefit we need to deliver to users to be successful?
2. How can we convey our company’s competitive advantage?
3. How does the market respond to our MVP?
4. What does their response tell us about our company’s future steps?
5. What additional resources do we need to move forward, once we’ve validated our MVP?
Clearly, pivots can happen at this stage as well as the Formation stage. It’s worth noting, however, that it’s significantly cheaper to pivot in Formation – when it’s just your time on the table – rather than in the Validation stage when you’ve put money, time and effort into your MVP.
Founder bias is a major issue to contend with at this stage. Data can almost always be interpreted in multiple ways. It’s important to remain as objective as possible, rather than try to convince yourself the numbers are telling you what you want to hear.
The final stage in this model assumes that product-market fit has been attained and involves scaling the young company to future growth. Though not all startups that reach this stage will go on to become famous brands, it’s also true that brands can’t become famous without going through these steps.
Questions that must be addressed throughout this stage include:
1. What KPIs are most indicative of our success?
2. What resources do we have access to as we attempt to scale?
3. How can we expand our core offering to serve more people?
4. What expectations do our funders have?
5. At what point (if any) will we exit?
Certainly, there are a number of other considerations influencing this stage, such as the need to attract and engage employees, the IPO question and the decision to enter additional markets. “Growth” as a stage encompasses everything from young companies with freshly-validated MVPs to giants like Google, Facebook, and Snapchat; as such, the specific questions being asked at any given point will vary.
Less important here, however, are the questions themselves. It is the process of continually asking them and acting on the answers provided that give startups the best possible odds of going on to become famous brands.
DISCLAIMER: This article expresses my own ideas and opinions. Any information I have shared are from sources that I believe to be reliable and accurate. I did not receive any financial compensation in writing this post, nor do I own any shares in any company I’ve mentioned. I encourage any reader to do their own diligent research first before making any investment decisions.