Platt Perspective on Business and Technology

Building a startup for what you want it to become 18: moving past the initial startup phase 4

Posted in startups by Timothy Platt on September 8, 2016

This is my 18th installment to a series on building a business that can become an effective and even a leading participant in its industry and its business sector, and for its targeted marketplaces (see Startups and Early Stage Businesses and its Page 2 continuation, postings 186 and loosely following for Parts 1-17.)

I wrote in Part 17 about innovation in effective, efficient businesses, and on taking a lean and agile approach to business development and execution, as a best practices approach for achieving that. And while a number of the points that I made there are more generally applicable and regardless of the stage of development that a business enterprise might be in, much of my focus was on startup and early stage businesses: new ventures that have yet to reach a level of reliable revenue generation to become consistently profitable.

Then at the end of Part 17 I stated that I would continue its narrative here, where I would discuss the transition from early revenue generation business, into that first early growth stage where real if still modest profits are coming in too. And I begin that by repeating the bullet point list that I began Part 17 with, as the issues that I would address starting there:

• How you can come closest to reaching audacious timeline goals in developing and growing your new business venture while still maintaining sufficient fiscal and organizational prudence to be able to sustain your effort?
• How can you more effectively organize and plan and operationalize your basic business processes, so as to reach your goals there, or at least approach them as closely as possible?
• And I added that this is where the issues of lean and agile enter this narrative, and eliminating process waste and inefficiencies. And along with developing and maintaining an effective organizational focus and a corresponding system of priorities, this means developing the communications and other capabilities that would be required to make all of that work.

These points and the issues that they raise apply in general, and in initial startup and pre-revenue business ventures, and in pre-profitability ventures as they begin to develop markets and a customer base for what they offer. They apply as those ventures begin to create profitable revenue streams too. So I will address this posting and its line of discussion from that last business category’s perspective too, simply addressing their issues and challenges from this next-step business development perspective. And I begin that narrative, by noting one of the most important challenges that a new business can face as it turns that crucial corner and begins its way past breaking even financially, and into actual, realized and seemingly stable profitability: its potential for facing a loss of fiscal focus from its early success.

I have seen founders make this type of mistake earlier on than there, in developing and building a new venture. And I have noted, by way of example of that, how at least one founding team for a still very early stage startup that I consulted with, would argue about who would get how many stock shares and how many such shares they should issue overall – and even before they could clearly articulate in brief, succinct elevator pitch format what their new business would do and what would set it apart from its competition in doing that. Needless to say, they still had yet to fully develop a marketable offering and they definitely had yet to make as many as just one completed sale, but they were already arguing over how to divide up their gains! (Note: see Structuring an Effective Elevator Pitch. That posting addresses this type of marketing tool from a job seeker’s perspective, but the same principles and issues that apply there, apply to any context where this type of brief summary presentation would offer value.)

This type of fiscal focus problem is much more likely to arise as a real issue and challenge when a business starts to really take off and succeed, and when it has a developing customer base and market share and a real inflow of profits to prove it. The issue here is in what that business’ founders and owners can come to assume, as to their new venture’s likely trajectory moving forward, and how aware they are of potential growing pains and setbacks that can still arise.

I take a standard three scenarios approach here, in strategically and operationally planning forward. And I start out by questioning how stably reliable incoming revenue above costs: profitability is here as a key element to this.

Scenario 1: a normative, baseline scenario in which revenue received expands at essentially the same rate that costs of business and overall expenses do, as the business starts to grow. This means profits as such staying modest and stable in scale, and it means that most if not all of this would be rolled back into the company, and both to facilitate here and now growth and to start building reserve funds. Owners in this type of scenario would be expected to take salaries from their new venture in compensation for the work that they put into it, but they would take modest salaries that are in line with those of the members of their employee teams. This is not a time in their business’ life, and this is not a performance trajectory for it, that would readily prudently support excess spending and of any type.
Scenario 2: a poorer performance scenario in which some months might show a profit for this new venture but any assumption of having reached a point where profits are stably reliable is still premature. So according to a strict definition of “early growth stage” this new venture has probably not actually reached that yet – and its financials are still correspondingly less settled, and with the reserves still present, still essential as backup if nothing else for meeting current ongoing needs. Under these circumstances, the owners of this venture have to be very careful – and very prudent in their expenses and in the decisions they make and certainly where this would cost their venture from its incoming revenue and/or reserves. And that definitely includes funds that they would personally take out as salary. I have seen early stage businesses that set out to bring disruptive novelty to market succeed and even tremendously so, but particularly for the more game changing and innovative of them it is not unexpected that they might spend a difficult span of time in this scenario 2, before really taking off. I sometimes refer to this as their time in the early stage wilderness.
Scenario 3: a more favorable early growth contingency that might for example arise if a larger client signs up for significant product or service purchases with them and on an ongoing basis. The positive side of this is that a new venture that has entered into such a contractual agreement is essentially guaranteed at least this client’s level of business with them, and as a minimum for what they will be bringing in as they work with other clients too. And as an at least potentially negative side here, this can create what amounts to a single point of failure vulnerability for a new business, and certainly if they do not diversify their client and customer base by developing other customers as well. Their risk here is that if they find themselves having just one main client, and if keep their business reach at that for the bulk of their marketing and sales activity and then lose that one client and for whatever reason, they are going to be in real trouble. Scenario 3 can lead to what amounts to overconfidence here. And one way to acknowledge that possibility is for owners to draw a salary essentially exactly as they would in Scenario 1, and at the same levels as they would there – and roll the excess revenue received, back into the business to among other things more securely ensure that they can meet their side to their customer contracts in what they provide and when they provide it – while maintaining or even improving quality of product and service offered. And of course, scenario 3 results can support more rapid growth for the business too.

And this brings me to a crucial question that I have reached a need to ask in this discussion, but that I have not explicitly addressed:

• How can you know when a new business has reached a point where it is stably, reliably bringing in sufficient revenue and on an ongoing basis, so as to consistently generate genuine profits?

Here, profitability simply means that revenue received, exceed all expenses that have to be paid out: salary and other personnel expenses included. And this can mean money taken out of the business and going to the owners, but it can also mean money rolled back into this venture for business growth or reserves growth purposes – or some combination of these options.

I am going to continue this posting’s discussion in a next series installment, and with that question. And after that, I am going to address the issues of optimization and of communications as touched upon in the three to-address bullet points at this top of this installment. Meanwhile, you can find this and related material at my Startups and Early Stage Businesses directory and at its Page 2 continuation.

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