Progress: Gradually then suddenly

Imagine a block of ice in a cold room. Your objective is to melt the ice, but you have imperfect information about the temperature of the room. You are able to warm the room up, but it’s costly, so you progress gradually not to overshoot. You increase the temperature by 1 degree at a time and observe what’s happening. Nothing, no reaction. You’re confident you’ve progressed towards the melting point, but you still don’t know how much further there is to go. You pass that magic zero degree point. Still nothing happens. The room is now warm enough but you need time to see a change. You’ve passed a threshold in this simple system, but have no idea change is happening. So you keep increasing the temperature, overshooting by a few degrees above zero. Finally you start to see something happen. Some evidence of melting. This is the inflection point. And if you wait long enough the ice will melt completely. If you were to plot this process on a graph from -5 degrees to 5 degrees you would see a step function, from frozen to liquid. On a graph it would look like a sudden and dramatic change, but in reality your experience of it would have been a mixture of uncertainty, frustration, gradual progress and then sudden change. This is the essence of a startup’s growth journey.

As a startup grows the nature of the challenge changes, and so it must change if it wants to continue growing. Founders will see inflection points in growth indicating both the need to change, and the result of change. In-between are the critical thresholds that must be overcome, and the reinvention needed to unlock the next frontier of growth.

Not the same business

Is it possible to step into the same river twice? The river is in a constant state of change, so is it the same river, and are you really the same? Similarly, does a founder set up a business and then grow it, or is she managing fundamentally different businesses through time. At Notion Capital we take the view that a startup changes so fundamentally on its journey from $1m to $100m in revenue that it’s more akin to a series of different businesses than one business that grows.

“They are not improving the business they have known and loved, they are devising a new business of unknown characteristics” - Stafford Beer

To demonstrate the point, look at man’s progress in traveling at increasing speed. If you were to plot it on a graph you would see the below. No progress for most of human existence. Then explosive growth throughout the 1900s.

The reality is that the increase in speed is driven by completely different technologies. Each with their own sigmoid curve. A new technology is introduced, to start with it is inferior to alternatives, it then rapidly improves, driving progress overall, before diminishing and then being superseded by the next big innovation.

Source: transportgeography.org

What we see here isn’t so different to what’s happening under the surface of a startup’s $1m to $100m journey. A founder adds new capabilities to the business over time, unlocking new growth frontiers. New capabilities take time to build. Hence we shouldn’t be surprised to see times of sluggish growth and then sudden change. In Notion Capital’s Start, Build, Scale framework Stephen Millard describes the key thresholds every startup needs to navigate. Major thresholds exist as a startup tries to find product-market fit, go-to-market fit, and then as it scales and needs to manage rapidly increasing complexity.

Each phase of the startup is fundamentally different. The founder must adapt, the management team will be levelled up, the complexity, scope and focus is different. The things that make a startup successful in one phase will make it unsuccessful in the next, leading directly to its failure. Failing to recognise this. Failing to adapt. Failing to evolve the leadership team. Failing to reconfigure the business to meet the key challenge of each phase is the primary reason startups get stuck.

It’s inaccurate to simply say that a startup grows. I’m not advocating for changing the language we use but it’s simplified terminology that doesn't reflect what’s going on under the surface. Growth, a comparison in revenue generated in period t and t-1 is the result of the system of capabilities built in each period - revenue is an output of and a perfect reflection of the system created. If revenue is very different in the two periods it’s because the system is fundamentally different (or the market has fundamentally changed). This doesn’t mean that many parts of the system aren’t essentially the same, but it does mean that as new capabilities are added the whole is very different to the sum of the parts.

“We can see how the whole becomes not only more than but very different from the sum of the parts.” - Philip Anderson

Sequencing investments

You can start to see how delaying investments into new required capabilities, which could be a mix of technology, people and process, or investing too early in capabilities leads to delays in growth as the startup runs out of steam on its current configuration.

What can’t so easily be shown in my charts are the dependencies between these changes. There is a natural sequence to adding new capabilities. For example, investing in a sophisticated partnership strategy when the business has not yet achieved a high degree of product-market fit won’t generate additional growth, and could very well achieve the opposite whilst accelerating burn.

Regarding talent, failing to address the need to move from a team of generalists to specialists and then professional leaders of leaders in sales, marketing and customer success will cause growth to stall. Conversely, making these changes too soon will have a similar effect.

Key insights for founders

• Startups don’t grow, increasing revenue is the result of reinvention by adding new capabilities and overcoming thresholds in performance
• Progress towards a threshold can’t be observed in outputs, this can be frustrating and creates uncertainty in whether the strategy is right or execution is flawed
• Underinvestment in key capabilities will delay growth, whilst overinvesting or investing out of sequence will accelerate burn without increasing performance