(Photo by Flickr user Vince Young, used under a Creative Commons license)
My two cofounders and I were in an Airbnb in Mountain View, Calif., rehearsing answers to common questions before our final Y Combinator interview. We had just had three consecutive months of 30 percent month-over-month growth, so we believed things were going really well. We went over the question, “How big can this business be?” I recited our simple answer, which was modeled based on how two YC alums encouraged us to answer this question:
This is a $10-billion market, and if we grow 25 percent month-over-month for the next three years, we’ll be a $1-billion company.
This answer is of course oversimplified, but it represents a critical mistaken assumption that we had when building Compass — that growth should be continuous.
We believed that we could continue increasing customer acquisition (and therefore revenue), and continuously automate operations (thus reducing costs).
We didn’t get into YC.
Through our own struggles, and watching the success of some of our peers, I’ve come to realize that startup progress is not continuous — it’s stepwise. Growing a startup consists of accomplishing a series of milestones, each of which nail down different elements of the business model — getting you closer and closer to a valuable, sustainable business.
Stepwise growth means that in the early stages, you’re either (1.) operating on level ground, or (2.) trying to level-up by accomplishing a new milestone.
As a founder, your strategy, goal-setting and fundraising narrative should be based on hitting milestones that level-up your business. Therefore, it’s critical to know where you currently are, be on level ground when you’re not ready to level-up, and be laser focused on the way in which you’re leveling-up when it’s time to do so.
Step 1: Knowing Where You Are
In order to know where you are, you need to realistically answer the question, “What have we figured out?” and acknowledge the things you haven’t.
With Compass, when we were raising our first angel round, we’d acquired over 50 customers and done $40,000 in sales. We believed that we’d figured out how to grow sales, which was a naive interpretation. All we’d demonstrated was that our target market would pay for the service we were providing (web design via freelancers) and that we knew how to provide the service.
“Knowing where you are” is difficult, especially for first-time founders. I wish I could provide a framework answering this question. However, founders (including me) are often too emotionally attached to their startups to objectively evaluate their progress.
The best advice is to speak with more experienced entrepreneurs in your space and be unflinchingly honest with what you’re seeing to get the most educated, objective evaluation possible. Talk to people that you trust, and listen.
Step 2: Be on Level Ground
Being on “level ground” means you’re able to continue making forward progress by operating with business as usual.
Ensuring that you’re on level ground with the current stage of your startup will enable you to be more patient and intentional with deciding how and when to level-up. More importantly, it means that you can afford to fail in leveling-up your startup without everything falling apart.
Conversely, if you’re not on level ground, then you’re more likely to choose the wrong next milestone, and you cannot afford to fail in the attempt to level-up.
With Compass, we were not always on “level ground.” Our business model had very little recurring revenue built in, so we needed to keep finding new customers just to have nonnegative growth.
We were constantly pushing a boulder up a hill and had to work our asses off just to prevent ourselves from going backwards. We tried to keep growing continuously and reach for what may have been the wrong milestones. When we failed to reach those milestones, the boulder rolled back to the bottom of the hill. We got crushed.
With my experience with Compass and seeing peer founders navigate stepwise growth, I’ve concluded that there are three characteristics that define “level ground”:
- Modest forward progress can be made without needing additional resources
- Less effort does not result in you going backwards
- You’re able to stay at that stage longer
So what are some examples of what “level ground” looks like?
Here are some examples of level ground compared to unlevel ground in similar scenarios (note: the unlevel ground scenarios are real examples from me):
|Level Ground||Not level ground|
|“I’m working on a side project, but I have a full-time job that I like and pays me well.”||“I’m not getting fulfillment from my current job, and am counting the days until I go full-time on my side project.”|
|“I’m working part-time on my startup idea, but freelance on the side to pay the bills so that I don’t need to raise money yet.”||“I’m working full-time on my startup and burning through my savings. Something’s gotta give.”|
|“We have our first few customers and are ramen-profitable.”||“With our current unit economics, we’ll need to raise money to continue.”|
|“Revenue is steadily increasing month-over-month with the marketing channels we’ve already established, and we’ll break even before we run out of money.”||“Revenue is flat and we’re burning money. We’re spread thin so the only way to reduce burn is by hiring another salesperson to grow revenue.”|
If you feel like you’re not on level ground, you should try to fix that before trying to level-up. That may mean you focus your immediate energy on refining your product, increase your pricing, or in some cases, changing your business model.
For Compass, the ways we could have ensured we were on level ground would have been to increase our prices earlier on even if we intended to reduce it in the future, or changed the business model to ensure we had significant monthly recurring revenue earlier on.
Being on level ground gives you more leverage. It puts you in a more leveraged position to pursue the next level — precisely because you don’t need it.
Step 3: Leveling Up
If you’re on level ground and looking to make a leap in forward progress with your startup, you need to identify the next milestone that will allow you to “level up.”
It’s important to note that leveling-up doesn’t necessarily mean growth. The primary goal of leveling-up is to answer a pressing, unanswered question about your business model, bringing you one step closer to a valuable, sustainable business.
While growth (e.g. revenue growth, customer growth) often occurs when leveling-up, it’s usually a byproduct, not the primary goal. For example, if your milestone is to find a sustainable marketing channel, that will obviously result in growth. However, the bigger priority that relates to that milestone is answering the question: Can we establish a marketing channel at a reasonable cost of acquisition?
In that case, establishing a sustainable marketing channel is far more valuable to the longterm prospects of the startup than a few months of growth.
Here are just a few other examples of questions that you could seek to answer when leveling-up at the varying stages of your startup (in roughly chronological order), with corresponding example milestones:
|Do people want this product/service?||Get x beta signups, or pre-orders.|
|Who is the ideal customer segment who needs our product/service the most?||Get x customers with a high customer satisfaction that fit a single persona.|
|Can we build this product (or provide this service) effectively?||Build a prototype.|
|Will customers pay for this product/service?||Get x paying customers or $y in revenue.|
|Can we affordably acquire customers?||Find a channel where we can get x customers with $y.|
|Can we sell our product/service to larger customers?||Sell and service our first enterprise customer.|
Step 4: Getting the Resources You Need
If you’re on level ground and have a clear sense of the next milestone is in order to drive the startup forward, then you’re in a great position to go get the resources that you need in order to hit that milestone.
That may include going full-time, hiring new team members, attributing a marketing budget to running marketing experiments, or fundraising.
The important thing is that you’ll have a clear sense of what resources you need, why you need them, what you hope to accomplish with them and what doors that will open in the future.
By being on level ground when attempting to get the resources you need (or even when trying to execute), even if you fail, all is not lost. You’ll still have everything that you’ve built thus far, and you’ll be in a position to regroup, re-evaluate, and attempt to level-up again. Although if you’re not on level ground and you fail to level-up, then it’s likely that your startup will go under.
In conclusion, building a startup is essentially figuring out dozens of unanswered questions and piecing that into a sustainable business model. Focus on figuring things out and achieving milestones that increase the value of your startup, rather than getting caught in the hamster wheel of continuous growth.
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