Start-up CEOs struggling with scaling seemingly promising products is a tale as old as time. Even products with demonstrated early traction and proven product-market fit get stuck in this too-small-/too-expensive-to-scale purgatory. Companies inevitably end up ramping up their go-to-market spend, only to realize that “buying customers” is going to shorten their runway significantly without improving their odds of achieving viable scale.
Although a cogent GTM strategy is crucial, it is also important to overcome talent and product challenges – especially in today’s tight labor market – while scaling your product. Let’s dive in.
Markets today change on a dime. It isn’t enough to just have a short time-to-market, it’s equally important to be so flexible in your approach that you could pivot your product roadmap with minimal friction. Start-ups are typically good at the former – because their raison d'être is clearly defined as that one, singular idea. However, the same prototyping adeptness introduces a tremendous amount of friction come pivot-time: the PMs may be too in love with the product roadmap, engineers may not have the right skillset required to pivot, the CEO may find the new business model too big of a change.
Scaling a product successfully means listening to the market to build on the initial successes. This inevitably involves redesigning your product roadmap to prioritize features in Quadrants I and II and deprioritize features in Quadrant IV. Although seemingly simple and obvious, this exercise will require deep introspection and being true to the company’s mission to correctly map your existing feature set to these four categories.
At this point, you may wonder – is it then easier for larger organizations to be nimbler when it comes to their product roadmaps? Larger companies already have several teams tuned in to the market, so they should logically be better at redesigning their product roadmaps for scale. However, that is seldom the case. In larger companies, product roadmaps are often rigidly established and focusing on pure scale (vs. indulging in competitive responses or “fast-follows” of features takes courage. Larger companies typically try to build what their “number 1 customer” wants, because that’s what the sales, marketing, and engineering echo chamber tells them to build.
It’s interesting to see how the people dimension intersects with a company’s product strategy, and that’s where we will go next.
People strategy – solving for the right incentives
A 2022 Gallup study of ~13,000 US workers asked them what was important to them when deciding whether they would accept a job offer. A staggering 60%+ said they were looking for better pay, benefits, or work-life balance. However, interestingly, the next most important thing to these workers was the “ability to do what they do best”, at 58%. It tells us that through a sensible mix of above-median compensation and empowering people to do what they like and what they’re good at, companies could attract and retain talent for the long haul.
Typically, the founding team has their incentives fairly well-aligned. They all draw meager salaries but are usually well-positioned to make a significant payday through their equity grants, assuming the company does well. The situation changes slightly as the company grows and hires its first employees.
Employees, though likely passionate and interested in the success of the company, seldom have the exact same interests as the company. Furthermore, because of the inherent illiquid nature of private stock-based compensation, they tend to discount the equity component by nearly 90%. The best way to align incentives is by offering liquidity in the equity component every year. Here’s an illustrative example of how a startup could accomplish that:
· Sanjay joins DharmaCorp, a startup, as a Software Engineer. Sanjay has another offer from OsCorp for $150,000 + 20% bonus + $80,000 in restricted stock over four years. The total compensation of his other offer is $200,000 per year.
· DharmaCorp could offer Sanjay:
Stock options on 1% of the company that’s valued at $25M, vesting equally over 4 years
This would bring the total compensation for Sanjay at ~$225,000
· However, DharmaCorp is not listed, and therefore should offer Sanjay “liquidity windows” every year, in which Sanjay can sell back his options. A buyback window could function the following way:
Let’s say the company was valued at $35M in a year’s time.
The company opens a “liquidity window” that allows employees to buy/sell shares of the company to each other or even to the company itself
The company could make markets with a ~30% spread (sell new stock to employees at $40M valuation and buy back at ~$30M valuation) and ensure that employees have liquidity
Sanjay’s 0.25% (first year vest) could be offered to be bought back by the company for $70,000 (~20% discount to the valuation).
Such a “liquidity window” strategy could be a great equalizer for start-ups and ensure that they can attract and retain talent just like big companies do.
New employees are, finally, employees. They look at their time with the company as a job, and likely don’t have the same degree of financial and emotional ownership as the founders. They are likely not personally invested in the dream of the founders. Finally, they want to see personal growth more than the growth of the company.
To ensure that such employees remain interested and invested, it is important for the company to show growth even to its employees. It’s critical to try out new products and markets, and to move employees throughout the company to grow their skills and oversight. Employees love mobility – and they will stay longer at a company that’s willing to invest in them by moving them around.
After the initial successes, an aggressive plan for continuous expansion is what is required for scale. Mediocrity of outcomes can be largely attributed to the lack of a cogent GTM strategy, whether such lack was created due to unwillingness or inability. An average product may thrive with the right GTM strategy, but it’s hard for even an excellent product to scale if not accompanied by a strong GTM motion.
If we sift through startups stories of success and failure, two common themes emerge that are common across most successful startups: being deliberate and ambitious about their GTM motions, and investing in sales capacity early and regularly.
It is important for founders to realize that incremental sales are not going to suffice in their pursuit of viable scale. They need to ask themselves “how do I double my sales every quarter for the next five years” than “how can I find another million dollars in sales this quarter”. Embracing the former requires a seismic shift in mindset. Unless the founders or product managers have a Sales background (they usually don’t), they will be loath to embrace this mindset, often to their detriment.
This change in mindset requires the founders and product managers to realize that their product chops and engineering aptitude are no longer going to get them from A to B. They need sales expertise, and fast. Although their first hires were likely technology professionals, now they need to stand up a strong sales org, likely outpacing their Engineering hiring. Those that make this pivot in a timely fashion multiply their chances of hitting viable scale manifold.