I recently got introduced to Bobby Martin, serial entrepreneur of First Research and Vertical IQ fame, and author of the new book, “The Hockey Stick Principles–The 4 Key Stages of Entrepreneurial Success.” I thought he presented some really interesting views of the four stages of a startup’s typical growth curve, and he was nice enough to allow me to share it with all of you.
Bobby conducted a study that plotted the revenue growth of 172 successful startups for the first seven years from launch, covering a wide range of sectors from web leaders like Google and LinkedIn to non-Web businesses like Chobani yogurt, TOMS shoes, and video camera-maker GoPro. The data showed that all but eleven saw what he called “hockey stick growth.”
Bobby then interviewed successful founders of different startups in depth, finding out exactly how they built their businesses, from initial concepts to business model development, along with product design, how it launched, and how a customer base and sales came about. The more he delved into the founders’ stories and examined the growth curves for their businesses, the clearer it was that all successful startups experience four major stages of growth, which track along the hockey stick curve. Each of these growth stages—which Bobby calls (1) the tinkering stage, (2) the blade years, (3) the growth-inflection point, and (4) surging growth—presents founders with its own distinctive challenges.
As Bobby compared the stories of more and more founders and how they faced these challenges, the commonalities between the businesses that succeeded, including Bobby’s own businesses, were striking, as were the similarities of the mistakes that were made by founders who failed. The result is that Bobby identified a set of core principles to follow in each stage of growth, which he calls the Hockey Stick Principles. Below is a very high level of what each stage is about.
- Tinkering Stage
This is the time during which founders begin to explore the viability of their idea. They start to examine the idea more seriously, and it ends when they fully commit to developing the business. While this is the least-pressured of the stages—because most often the founder hasn’t yet quit his or her day job or committed to a launch schedule—it still presents challenges, and many aspiring founders never make it beyond this stage.
One of the most common mistakes made is that founders waste a great deal of time developing elaborate business plans, which seems essential, but is actually a terribly misguided action. Believing that you should develop a good business plan on the sole basis of an idea causes biggest fallacies about the startup process: that you’ve got to begin with a good idea and everything will flow from there. Hockey Stick Principle #1 is: you don’t need a good idea. Viable ideas for startups don’t just emerge whole from founders’ brains; they are developed over time.
This stage should be a period of actively experimenting with developing the product or service, getting out into the field and soliciting the feedback of potential customers, as well as canvassing suppliers and retailers, testing and truly challenging our ideas for the product and all aspects of your business model, and listening carefully to responses. It’s often from this experimentation and critical listening that crucial changes to initial ideas come, which make all the difference in eventual success. Reluctance to share ideas and test for feedback results in failure to truly understand the market.
- The Blade Years
This is the period of time when founders have fully committed to making the business work and are preparing to launch through to when they hit the growth-inflection point. This is a bumpy time of highs and lows, during which many founders lose heart or become overwhelmed. They’ve quit their day jobs in order to devote themselves full-time to developing the business, and they’re often not earning enough of a salary to pay their personal bills. Bobby’s study shows that this stage usually lasts 3-4 years, during which revenue is often quite low, if any is coming in at all. This is also referred to as the “blade part” of the hockey stick curve.
This lack of earnings leads many founders to focus their energy on investment capital at this early stage, however, too many founders think is the only way to fund the development process. They waste valuable time making elaborate pitches to funders, which most often fail to impress because they have no tangible results. Even if the founder does raise significant investment capital, it puts undue pressure on getting to market, which leads to its own mishaps. Hence Hockey Stick Principle #15: raise the minimum amount you need to get to launch; financing is scarce and expensive.
A better method for success is to bootstrap during this period and to develop an alternate stream of income. This frees you to throw yourself into what should be the twin focuses of your energy in this stage: developing the market you’ve targeted or searching for a different one, and simultaneously improving the product or service, so that by getting the combination of market and product right, you break through to fast growth. Key mistakes made during this stage include spending too much on marketing and sales efforts to try to bring in customers faster, whether by pouring funds into an elaborately planned publicity push and advertising campaign or setting up an expensive sales operation.
- The Growth-Inﬂection Point
This is the wild ride of a time when revenue turns sharply upward. It’s an exhilarating stage. At this point, you’ve honed your model, and sales are coming so much more easily. Venture firms and other investors may come calling, offering tantalizing deals that will allow you to leverage this growth momentum and scale your business way up. But this stage also poses many dangers; primary among them is scaling up too fast, so that rather than sustaining strong growth many startups crash and burn.
Scaling too quickly has been identified as the number one reason for startup failure. So much has been said about the need to “go big fast,” but too often this leads instead to going bust fast. In this stage, founders must always keep in mind Hockey Stick Principle #51: don’t spend tons of money to fuel fast growth until you’re pouring it into a high-performance engine. The primary job of this inflection stage is to carefully calibrate the growth of your operations so that they are in sync with your revenue growth. Otherwise, scaling up isn’t really growing; it’s inflating. Too many founders invest too heavily in ramping up staff, purchasing or renting larger office space or manufacturing equipment, and expanding retail space and facilities. Before they know it, their costs have escalated beyond their continued increase in revenue, and even though they’ve found a good market and are off and running, they’re running out of gas.
- Surging Growth
If innovative start-ups manage the growth inflection stage well, they will proceed into a stage of continuing acceleration of growth. During this period, entrepreneurs come to many crossroads. Their market is exploding, but so is the complexity of managing and leading a larger organization. Meanwhile, alluring offers to buy the company are often made. One way or another, a founder must grapple with the difficult transition from scrappy entrepreneur to corporate manager. He or she has three main choices: remaining CEO by learning how to further professionalize the business; hiring a CEO to manage the business, most often either then taking on another role, such as heading up research and development or becoming chairman of the board; or selling the company.
Many founders stumble when making the transition to corporate chief and fail to recognize that they must master the requirements. . . The qualities that were so important in taking the risks to launch the business and in bootstrapping and experimenting with new things are less called on during this time, and those of a corporate leader become primary. Too many founders fail to appreciate this and neglect to appoint top-quality managers with first-class experience to take charge of the major functions, instead often hiring from within their personal networks and promoting unqualified people from within.
Thanks again to Bobby for sharing his wisdom with all of us. Be sure to check out his book The Hockey Stick Principles—The 4 Key Stages of Entrepreneurial Success for more details on this topic.
Image Credit: CC by Lazy Like Wally