Leading a Startup in Stage Three: Growing Strong

Leading a Startup in Stage Three: Growing Strong
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Teaches entrepreneurship, innovation and creativity at Princeton University, author of Startup Leadership
6 min read
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You have come through stage two successfully. You’ve confirmed the value proposition of your product. You have put in place basic processes to reliably deliver it, capture and satisfy customers, and run the company. Now you must make the enterprise financially secure by making sure it can consistently produce value under changing market and competitive conditions. That means that what you did to deliver your product crudely but reliably to your first wave of customers must be rethought, redesigned, and rebuilt in order to meet the demands of new customers with higher expectations.

Wait a minute, you say. We have just gone through an arduous struggle to put processes in place, and now you’re telling me that we have to start all over. No, just that it’s unlikely that your existing rudimentary processes are sufficient for growing your fledgling company into a financially self-sustaining enterprise. For example, you may be able to produce and sell your product or service, but not at the right cost, nor in the right quantities, nor with the reliability, scalability and flexibility required.

Related: 4 Strategies for Scaling Up From a Business Guru 

Even if you have plenty of untapped demand and no competition at the end of stage two, the challenges are enormous. You must be able to produce in enough quantity and with sufficient variation to satisfy demand. And if you don’t satisfy customers’ demands quickly, they will actively encourage and help potential competition. Further, your team is probably exhausted after stage two and frightened by the amount of work that lies ahead. And, like the other stages of enterprise maturity, stage three makes distinctive organizational and leadership demands.

To be blunt: stage three is no fun. 

No wonder most entrepreneurs never make it through this stage. It’s not just the magnitude of the challenge but also the nature of the new demands. Many of the things you must do to guide your company through this stage are antithetical to the elation and inspiration you felt in the glorious dawn of your idea. And many of the requisite business skills and leadership skills may be foreign to you. Nevertheless, to put in place a new set of processes that are flexible enough to handle significant growth, meet changes in demand, and produce financial security, you must:

  • Build processes that enable the company to routinely and cost-effectively deliver high-quality products. Unless you develop this capability, your future growth will be built on a shaky foundation of ineffective, unscalable processes. Customers will soon sour on you because of your unreliability and poor quality. Your reputation will suffer. And you will waste precious resources constantly playing catch-up. 
  • Make sure those processes do not depend on any particular individuals. Effective processes are repeatable and robust. A process that depends on a particular individual for its effectiveness is neither. And it will collapse should that person leave the company. 
  • Be prepared to introduce new product and service variations. Otherwise you will be unable to keep new and existing customers satisfied. This does not mean embarking on blank-sheet-of-paper, full-bore innovation, but incremental variation and improvement. New innovative products and services can be developed only after the enterprise is financially stable enough to absorb the additional risks and costs, which occurs only at the end of stage three.
  • Create a balance in the enterprise processes between generating significant value and remaining flexible enough to meet the expectations of existing and potential customers. Finding the proper balance requires making forecasts on how revenues and costs can change with time, economic conditions, added investment, and competitive pressure and under any number of other conditions that may be specific to the market place or regulatory environment.
  • Give up being involved in some of the routine activities. Many entrepreneurs are unable to give up being involved in every aspect of their company, including the most mundane operational details. Even minor changes to processes must await the attention of the founder. Improvements lag, stunting the growth of the company. Competitors swoop in. Because of this inability to let go, founders in venture-backed companies are often replaced as CEO in stage three -- if they are still around.
  • Provide people with opportunities for professional growth and career advancement. Unless individuals can grow, your company can’t. They will either leave, or fail to create self-sustaining processes. Employees newly hired in stage three should be chosen because they are proud of their ability to perform tasks at a high level of mastery, they thrive in autonomous teams, and they derive purpose from helping others improve.
  • Lead based on continual review of operational, customer, and financial metrics and a forecast of operational, customer, and financial performance. These are business skills that many entrepreneurs often lack and, in some cases, find distasteful because they lack the excitement of product development. You can compensate for your shortcomings by hiring people with this expertise, and you can also develop a working knowledge of these areas yourself, as needed. 

Related: Find the Right Hires for Each Stage of Your Startup


The upside of your dark side.

If you are demoralized and disoriented by these challenges, if stage three seems like a grind, what can you do to persevere? Take your medicine and just soldier on? No, in my experience, entrepreneurs who ultimately succeed tap into their deepest motivations. Not the high-minded, declared motives like “wanting to do something for the world,” but the far deeper and messier motives that most people are reluctant to acknowledge -- revenge, fear of failure, a need to prove oneself to a seemingly unloving parent, a desire to recover the feeling of a particularly happy past event, and more. These successful entrepreneurs inevitably have a totally selfish reason for wanting to be an entrepreneur. And by identifying it and admitting it to themselves -- instead of feeling ashamed and sabotaging themselves -- they drive through even the most punishing demands of stage three.

Related: Dark confessions straight from an entrepreneur's heart 

The persistence is worth it, for at the end of stage three your company is able to produce consistent value under stressful competitive and economic conditions by operating with scalable processes that manage all aspects of the enterprise and with no process relying on any particular individual. You have achieved the ultimate objective of this stage -- financial validation, proof that the enterprise is secure. Where stage two was a warm-up, stage three is game time -- and you’re winning.

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