There are no shortages of stories of great ideas and entrepreneurs that, for one reason or another, failed to achieve commercial success. Is there some secret to getting this right that is being tightly held by the winners in this Darwinian race to startup glory?
Jim Collins investigated this phenomenon in his book, ‘Good to Great: Why Some Companies Make the Leap and Other’s Don’t’ more than a decade ago. He selected 11 publicly traded US companies from the ‘Fortune 500’ that consistently out-performed the market by 30% for at least 15 years after an initially lackluster performance of 15 years. He compared these ‘breakout’ companies to their industry matched (same size, market, revenues in the previous 15 year period) counterparts to see what was behind these company’s’ incredible success. Mr. Collins and his team used publically traded US companies since there was a wealth of publically available data for him and his team to use to figure this puzzle out.
A look at the stock market valuations of the ‘breakout’ companies compared to their market average counterparts shows that any two comparison companies tracked one another for at least 15 years and then the graph of the returns for the breakout company would just skyrocket up consistently for at least 15 years (some showed even more dramatic growth both in size and duration). This is the type of financial performance and success that every startup team dreams of achieving as well. However, this study was originally done with well-established companies whose revenues were high enough to rank them as the top earners in the US. What, if any, of the findings here could be relevant to a startup?
The Secret Sauce
The answer: Many of the ‘Good to Great’ findings are a perfect fit for startups as well. Many of the principles that drove the success of the ‘breakout’ companies in Jim Collins’ study are applicable to startups today. The following insights are inspired by the findings of the ‘Good to Great’ team but have been adapted for startup stage companies.
- Selecting your leadership: The ‘breakout companies’ were all lead by top performing CEO’s that many had not heard of before. This is because they were not celebrity CEO’s that were interested in driving their own ego’s and compensation, but passionate ‘get-it-done’ leaders. Startup CEO’s rarely have this issue. The reason is that entrepreneurial leaders are passionate for transforming their startup into a successful company. The only ‘watch-out’ here is that sometimes investors will insist on the placement of an experienced executive (well-known outsider) at the helm based on the misconception that this will boost the chances for success. When this occurs, it is important to make sure that this leader shares the passion for driving the company’s success (rather than their own) first. In other words, a leader that has an enviable track record of creating long-lasting successful companies rather than just a big name in the industry.
- Building your team: The ‘Good to Great’ findings showed that all breakout companies spent some time making sure that they had the right team in place before they worried about their strategy for transformation. The startup is spared the need of ridding the team of ‘dead wood’ if it focuses on only hiring the very best from day one. The reason that this effort precedes developing your strategy is that you need the input of a top performing team to come up with the best strategy here. Another benefit of hiring the very best even before you fully know exactly what all of your needs are is that they will require much less care and handling and help to create a culture of excellence from day one.
- Facing the music: All great ‘breakout companies’ had some moments of truth were they discovered that they were in the wrong business or that the market had changed in such a way that they could no longer count on being number 1 or even 2. Once the truth has been faced, the team can then rally to develop a strategy to redirect the company into a more successful and profitable direction. Startups with a good leader and a solid team can face the realization that they might have a great technology that has no compelling market early on. This team , working from these facts, is now in the best position to make the necessary pivots in the early days (before too much cash and time) is wasted to direct the company in a new and more promising direction.
- Refining and sticking to your focus: Jim Collins called this the ‘Hedgehog Concept’ (The Fox knows many things but it is the Hedgehog that knows the one most important thing). This is all about focus and not being distracted by outside interests that do not serve your central strategy to succeed. The ‘Good to Great’ team found that this central guiding concept (The Hedgehog Concept) was composed of 3 things that are roughly 1) identifying what you are best in the world at, 2) what you are most passionate about and 3)what business model will best transform this passion and world-class talent into financial success. The startup concern will need to do the same reckoning and this is not always an easy thing to do. Insight will come from both an honest assessment of the capabilities and talents of the team as well as a reasonably good estimate of how you can successfully commercialize this. Focus is usually not an issue in the early days for the startup. This becomes more of an issue after the company has enjoyed some commercial success. The key here is to stick to this central focus of the company (The strategy for taking you to number 1 in the market) when exploring opportunities for growth from everything from product line expansions to strategic partnerships and acquisitions. Anything that does not contribute to your core strategy should be ignored.
- Nurturing a culture of discipline: Remember that we recommended hiring only the best people for your team. If you have done this well, you will already have built a culture of discipline. Many of us have seen the gimmicks and marketing efforts that companies use to ‘motivate’ their employees to do more for the company. If you have the right people in the company in the first place you won’t waste one minute or one dollar on this since everyone is already aligned with your goals for the company. Essentially with a culture of discipline, you will not need to find ways to get your employees to get the job done as they will likely already be well on their way to completing this. Make sure that you continue to follow the high standards you used in the early days as you continue to grow the team. ‘Quality People’ over finding the cheapest person to do the job will always be more valuable in the end.
- Turning the ‘Flywheel of Success’: Success does not come overnight. The ‘Good to Great’ team found that there was never one event or decision that lead to the company’s success. It turns out that it was the accumulation of a thousand little things being done right that lead to breakout. For a startup, this is about meeting challenges every day and working together to achieve that one central goal of first getting the company to market and then building its fortunes after a successful launch. This last point is kind of a recap of all the others in that with the right leadership, the right team will be hired and with the right team and leadership the right path to success will be found and then the team will work hard together to achieve this goal step by step every day. Judicious and frequent use of refining and following your central strategy will easily allow the team to determine if a given action or decision will be a push that increases the momentum of the ‘flywheel’ or not.
Putting it all together
It can often look like ‘breakout companies’ just popped up out of nowhere. Whether they are the next Apple Computer or Genzyme, startup or well-established, this comes about more from the way that the popular press covers these companies than reality. Jim Collins and his team found this to be true in his study and it is true for the budding startup as well. The ultimate factors that best predicted for success turn out to be with those companies that are fortunate to have a passionate and capable leader, strong ‘results focused’ team and a single minded discipline and focus to do what is most important for the growth of the company. The road to success may be long but following these great insights will insure that you stay on track.
- Jim Collins, Good to Great: Why Some Companies Make the Leap…and Others Don’t, (New York: Harper Collins Publishers, Inc., 2001. – While some companies on the original ‘Good to Great’ list have since faltered, they only did so when they drifted from the concepts identified in this book.