How To Switch From a Traditional To a Hyper-Growth MindsetBy Ulises Vázquez | Mon, 09/20/2021 - 09:06
With this year’s unicorn fever in Mexico, more and more entrepreneurs from traditional businesses are venturing into hyper-growth companies and, thus, I have been receiving a lot of questions that show there is a deep lack of understanding of how venture capital and high-tech companies work.
The most frequent misunderstanding is questioning why a company that loses a big amount of money is valuated so highly. Another is how a project on paper could be valued in millions of US dollars.
The reason behind all of that is growth speed. The unicorn market would not exist without technology that allows exponential growth. This type of growth has to be fueled by investors who can cope with that rhythm. Understanding the dynamics of venture capital is crucial for every entrepreneur in this area.
Tech startups, when successful, are capable of generating revenues of more than US$100 million or even billions in a relatively short time (around 10 years). Thus, in maturity, they are able to turn their losses into huge profits. The VC firms then obtain high yields that allow their own investors to receive a better interest rate on their money than with other types of assets in their portfolio, compensating for the high risk of this asset class.
Why high risk? Because 50 percent of the projects in which a VC invests usually fail, 30 to 40 percent have a modest return and, if lucky, 10 to 20 percent could be unicorns. That means that VC firms basically bet on the future adoption of a technology that a startup introduces.
Thus, the road to a US$100 million company starts with the market. If your project is intended to serve a market under US$1 billion, you are starting on the wrong side. The bigger the market, the higher the possibilities for your company to become a unicorn.
Now, how on earth can a company possibly get to that revenue in that amount of time? The answer is technology and the concept of scalability. One of my first companies was a training firm. I soon learned that there was a limited number of training sessions I could give in a month so my growth was limited. Hiring trainers was really hard because there were not many people with the right skills and the knowledge on the matter, so I grew steadily but slowly. Thus, my business at that time was not scalable. Years later, internet and video technology arrived, allowing companies to record knowledge from one person and reproduce it a bazillion times, enabling models like Lynda or Duolingo to be born and thrive.
So, what is the most scalable company? Software. Physical limitations on the real-world hinder growth while serving software to a billion users over the internet can be done in seconds. Every time your business model has to interact with physical components, your scalability decreases and so does your growth speed. Customer service, sales people, hardware and inventory are the challenges to avoid.
So, how do you build a company like that? You will need a very special team, which is one of the main components VC firms evaluate. Obviously, you will need software developers and normally a tech founder but also a founder with a hyper-growth mindset and excessive energy and passion to disrupt an industry. Entrepreneurial background, know-how in the industry and especially hyper-growth experience are valuable assets for VCs.
The main difference with a traditional business is that your main focus is growth not profits. It’s OK to lose money if that means your revenues are growing fast (don’t forget that a path to profitability is needed) because that means to a VC that the product you developed is taken well by the market. And as we are talking about a tech-product that could be consumed by millions in a short period of time, VCs are willing to put money in and support your growth. So, now, your game is not getting EBITDA but getting the numbers expected by investors to win support and continue with your company.
Thus, the growth you must achieve is completely different from a traditional company, especially from a big corporate. Investors are expecting growth of 20 percent a month (yes monthly) to run after you. This requirement deeply affects the operation of a company. Instead of trying to deliver a perfect product for your clients, you have to launch immediately to receive feedback and iterate on the run. Perfectionists don’t thrive in this environment and you will need people with no fear of failure and the resilience to try over and over again. Positions such as vice president of growth, product manager and things like growth marketing have to be your new jargon. As you go from 0 to 10 in such little time, normally you need a Gap Filler or Human Band Aids to be able to fill all the new positions and functions the startup needs while you hire the right people. And also, you have to hire people thinking about the next 12 months, not forever, as the function they serve in one year will be completely different. As you grow, you will need higher profiles and people will have to adapt to new bosses and a new organization of the team. Not that many adapt.
M&As are also part of this new mindset. One way to grow faster is to merge or acquire other businesses that either compete with you or are part of the process you cover with your startup.
Growing at this speed affects control, there will be a lot of cost waste, wrong decisions due to urgency and so on. Moreover, founders will not have enough time to really control, coach and lead the team, so you need people who can self-direct their activities and trust.
The whole organization has to be completely focused on one thing: achieve product-market fit. And after that concentrate on growing that business only. Developing several revenue streams and products will only slow you down at your early stage. On top of growing the organization, founders also have to fundraise, which is normally a 100 percent full-time job, so contrary to being your own boss at your business, here you must be ready to present the numbers of the company, convince others of the opportunity your business provides and be good at fundraising because the future of your company depends on it.
Changing from a traditional business experience to a hyper-growth mindset requires a lot of learning, resilience, and especially openness to learn a different way of doing things. The new person you will become will totally worth it.