by Frank Gruber
—Julia Margaret Cameron
At the mature age of 19, Matt Mullenweg founded WordPress. None of the other publishing platforms out there could do what he wanted, so he didn't just sit around and complain. He decided to build his own platform—scratch his own itch. It was a project fueled by passion.
Fast-forward to today, and Mullenweg is 30. The company he founded around WordPress, called Automattic, is celebrating its ninth birthday this year and has grown to about 230 team members. WordPress, the platform that started it all, is now powering about 21 percent of all websites.
Automattic has clearly reached product-market fit, and now the team is scaling. Scaling, also called the growth stage, comes after you've validated your idea and figured out the fundamentals of your business. You know people want what you have to offer, so it makes sense to push down on the gas pedal, ramp up your distribution, and grow! You spend money more quickly, but hopefully your revenues are growing even faster.
Mullenweg's first challenge was scaling the team—particularly because Automattic's culture is so democratic and flat. Most of the team works remotely, there are no set work hours, and employees can take as much vacation as they want. To make that work, Automattic takes the time to hire self-sufficient, passionate team members.
When Automattic hit 50 people, they split everyone into teams of five with a team lead, as author and management expert Scott Berkun recounts in the book The Year without Pants. These days, some teams at Automattic have up to 10 people. To ensure that everyone is collaborating, team leads who are working on the same project (like WordPress.com) get together and chat every few weeks.
Automattic has made about eight or nine acquisitions so far, which present their own challenges. To keep the company culture healthy, they mix up the new team with the old team. The companies they've added are never too big—less than 5 percent of the Automattic team, says Mullenweg—so they've never had a problem with clashing cultures.
Another interesting fact about Automattic is that the company barely uses e-mail. (Yes, I'm jealous.) Instead, they communicate on blogs called P2s, where they can post mockups, start discussions, and keep each other informed. That might not seem scalable, but Mullenweg insists it is. “This structure, I feel like could scale to 1,000 to 2,000 people before we had to have a major change,” he says.
On the product side, Automattic is still figuring out how to evolve its processes as it grows. WordPress used to release a new version every six months, but Mullenweg realized that things were slowing down. So at the end of 2013, he and his team were experimenting with releases every two months. One of the dangers of scaling is slowed growth and innovation, and this is the tactic they're using to prevent that.
Your scaling experience will probably look different, but you'll have the same challenges: among them, growing your team, communication, and product releases. After that, you may be looking toward an exit. This chapter explains how to navigate the later stages of the startup journey.
Scaling
When exactly do you scale?
Unfortunately, it's not an exact science. The general strategy is to start scaling when you've hit product-market fit. That means that you've tested all your hypotheses about the business, your business model is sound, and people are giving you money. You know what your process for sales and customer acquisition looks like, and you're ready to start ramping it up. Recall that marketer Sean Ellis believes you've hit product-market fit when 40 percent of your users would be “very disappointed” if your product went away.
When you think it's time to scale, here are some of the elements to think about.
Human resources (HR): Have you heard the saying “Don't work in the business; work on the business?” Well, now's the time to do that. If you're the chief executive officer (CEO), you should be extricating yourself from day-to-day operations and focusing more on strategy and overall direction. One area you might also devote your attention to is culture. The more people you hire, the higher the risk of your company culture derailing. As I mentioned earlier, if all the new hires understand the culture, they can make decisions faster without always having to ask for permission.
Mark Suster of Upfront Ventures suggests that scaling companies hire an office administrator to relieve the CEO's duties and a vice president of finance to help with operations, legal, office space, board meetings, and fund-raising. Whomever you choose to hire, start keeping documentation of employee knowledge and processes—if someone leaves, you don't want the whole company to collapse.
Mark Suster
Mark Suster is a Los Angeles–based serial entrepreneur turned venture capitalist. After selling two companies, he became a general partner at Upfront Ventures in 2007. He also founded the accelerator Launchpad LA and blogs about entrepreneurship at BothSidesOfTheTable.com.
Marketing: Marketing in the scaling stage is about growth. It could include things such as testing different welcome e-mails, trying live chat on the website, making your tutorial shorter, or featuring testimonials. All these little tweaks can increase your conversions—and with a growing customer base, that could translate into real money.
RJMetrics is a business intelligence tool that helps companies uncover insights from their data. While scaling, the company did something called a golden motion analysis, trying to figure out the one thing prospects do during a free trial that best predicts whether they'll sign up for the paid plan. For the RJMetrics software, the golden motion was creating a chart (because the chart helped customers see just how valuable the product was). So RJMetrics tweaked its free trial tours and training calls to highlight the chart editing tool, and conversion rates went up (to 89 percent in November 2013).
According to lean startup pioneer Eric Ries, there are three possible engines of growth for a startup. Can you tell which engine is driving yours?
Sticky: Customers stick around for a long time. You want to focus on keeping them engaged.
Paid: You grow by buying things, such as ads or real estate. You want to focus on raising revenue per customer or lowering customer acquisition costs. In other words, your challenge is to monetize better than your competition.
Viral: Your customers advertise for you, or your product advertises itself. Early Hotmail spread to 11 million users in 18 months thanks to a tagline they added at Tim Draper's suggestion to the bottom of their e-mails: “Get your free email at Hotmail.”
Tim Draper
Tim Draper is the founder and managing director of the venture capital firm Draper Fisher Jurvetson, which has funded companies such as Skype and Hotmail. He's also known as the creator of viral marketing: he suggested that Hotmail add a “Get your free email at Hotmail” line to the end of its e-mails, helping it spread to 11 million users in 18 months. Draper also launched the DFJ global network, with venture capital offices in more than 30 cities worldwide. And he recently announced the Draper University of Heroes, a boarding school in San Mateo to teach entrepreneurship to 18- to 24-year-olds. Draper is based in Silicon Valley.
Product: You may have found product-market fit, but you're not done learning. It's just that instead of pivoting, you're tweaking. You're optimizing the features you do have and testing new ones. The search engine Bing actually tested different shades of blue for its ad links and found that the right shade of blue brought in $80 million in additional revenue.
Scaling also means expanding into new markets. If you've been local, you may want to think nationally or internationally; if you've been niche, you may want to think mainstream.
Technical: To prepare for growth, you want to make sure your technology can handle the increased load. This may be the time to scrap your code and start from scratch, if it wasn't properly built.
Metrics: When you scale, different metrics start to matter. Running Lean author Ash Maurya believes you should transition from focusing on activation and retention to focusing on acquisition, revenue, and referral. In other words, you start getting more people to find out about your product
, refer it to their friends, and pay for it.
Rob Delwo, the vice president of operations at PivotDesk, has gone through the scaling process and has seen his focus shift from the product road map to sales and revenues. “In the growth stage, the company puts the majority of [its] effort on growing the top line, marketing and positioning, lead generation, converting customers in the pipeline, win rates, lowering churn rate,” he explains.
Funding: Even if you're profitable at this point, you may choose to take funding to ramp up your growth rate.
Operations: Scaling means accelerating. You should look out for processes that your business does repeatedly and try to automate them.
Sales: Your early salespeople had to be entrepreneurial, comfortable with the uncertainty of a constantly changing product and constantly changing methods of selling it. But now, you already understand how your customers acquire and use your product. If they fit with your team, more traditional salespeople could make good hires.
Think of scaling like riding a bike. At first, before body-bike fit, you fall over a bunch of times. You try moving this way and that, leaning forward and backward, until you finally find your balance. Once you've learned the basic skill, you have a whole new set of skills to acquire: pedaling up hills and over potholes, racing with your friends, and navigating sharp turns. Get ready; now it's time to ride!
Partnerships: As you grow, your startup gains influence and recognition—and value to other companies. Scaling may be the time to start thinking about forming mutually beneficial partnerships (if you haven't already). In Miami, for example, Tech Cocktail has teamed up with the Knight Foundation to shine a spotlight on all the exciting startup activity going on there. They offered us a grant, which in turn allowed us to expand our Miami coverage and hire a local writer and community manager. The fact that we had grown into a national platform made it a win-win for both sides.
Knight Foundation
The Knight Foundation supports innovations in journalism and media, engaged communities, and the arts through contests, grants, and funding. Their belief is that democracy thrives when communities are informed and engaged. Officially launched in 1950, the Knight Foundation was founded by brothers John S. and James L. Knight. The foundation's most famous initiatives include the Knight News Challenge, a $5 million international contest that funds innovations in news and information.
The Exit
If your ride is going well, you might find yourself on the path toward an exit. If you have investors, the exit is what returns their money to them (hopefully with interest), which is why they invested in you. For startups, an exit means either being acquired or doing an initial public offering (IPO). Exits aren't all unicorns and rainbows—during or after. But for many companies, they're the outcome you're shooting for. And if you pull it off, it can be the proud conclusion of your years of hard work.
Acquisitions are the much more common outcome, because IPOs are reserved for the best of the best. The legal fees for acquisitions are cheaper than IPOs, and you can expect the process to take a few months.
When you do decide to think seriously about an acquisition, you might hire someone in business development to start forming connections and relationships. That way, you could end up with several potential acquirers and a better negotiating position. According to Dan Martell, CEO and founder of Clarity, you should be connecting with the potential acquirer's CEO or founder, vice president of corporate development, and product manager.
As the initial discussions start, keep in mind the psychology of an acquisition. Buyers are always thinking: partner, build, or acquire? In other words, you have to convince them why buying you is more valuable than building the product in-house or just working with you.
In an IPO, you go from a private company to a public company. An IPO essentially functions like a fund-raising round: you sell shares of your company to the public to raise money. This process usually takes between 6 and 12 months. But going public is expensive and comes with a whole new set of regulations and Securities and Exchange Commission (SEC) reporting requirements. You won't see a payout as quickly thanks to regulations on when you can sell stock.
During the process, you work with an investment bank to sell shares in your company in the public market. Pricing the shares is always a balance between making money (pricing high) and generating demand and buzz (pricing low).
Should you aim for an exit? It makes no sense to plan to be acquired by Google or Facebook or Microsoft in x years. How can you predict what they'll want so far in the future? But you might generally decide whether you're looking for an acquisition, an IPO, or neither. That will give you a general direction, without tying you down to a plan that probably won't pan out.
The Harsh Reality
According to the Startup Genome Report, a study of more than 3,200 companies, 74 percent of high-growth Internet startups fail as a result of premature scaling. Scale too early, and you could be shooting yourself in the foot.
Scaling too early or incorrectly could mean spending too much money on customer acquisition, focusing too much on marketing and press, adding nice-to-have features before your core features are set, or hiring too many people. Startup Genome found that startups that scale too early have 20 times slower growth than startups that don't, raise less money in later rounds, and make less revenue per month.
LivingSocial cofounder Tim O'Shaughnessy knows the danger of scaling too early. “The perfect business is one that doesn't raise capital and is one that doesn't hire employees before it is operationally ready to, because the tax and the cost on that is really expensive,” he says. He also knows that the scaling process is bumpy and complicated—and there are bound to be hiccups. “Things are not going to work and you're going to get frustrated by that,” he says. “Be as up front as you can with your employee base about the fact that we're going to screw up…When you scale, the likelihood of that occurring and somebody thinking that another group within the company is an idiot because they just don't know them as much anymore increases.”
Even if you scale at the right time, you may find that your team members—who were so perfect for the scrappy startup stage—can't hack it in the growth stage. “Most people on founding teams aren't well equipped to go to the next level,” says organizational psychologist Mike “Dr. Woody” Woodward. You may be forced to find another position for them or fire them altogether—and that includes the CEO.
WordPress had its own scaling challenges. In The Year without Pants, Berkun recounts his nearly two years at WordPress, where he was hired to lead a team and help the company navigate its new team-based structure. One of the issues he saw was a culture that favored making incremental improvements (fixing bugs) rather than focusing on the broad vision and user experience. As your startup scales and your employees become more specialized—not wearing so many hats—watch out for the phenomenon of “it's not my job.”
Another challenge Berkun saw at WordPress was the culture around money. If you're a WordPress user, you might have noticed that it's hard to find the WordPress Store. Many WordPress programmers are used to doing work for free, Berkun writes, and making money isn't a huge emphasis there. The takeaway lesson is that scaling may mean you're no longer struggling to survive, but every employee should still understand his or her connection to the bottom line.
Perhaps the harshest scaling reality is not when you scale too early or have team troubles but when you discover that your product actually isn't scalable at all. The size of your market may not be big enough (experts recommend around $1 billion), or your costs may just be too high. Either way, it's your choice to continue running a business that won't achieve rocket ship growth—a perfectly respectable choice—or go back to the drawing board to pivot to an idea that is scalable.
Assuming you do survive until exit time, you have a whole new set of harsh realities to face. Even though you're almost at the end, you may be fighting an uphill battle, like TeRespondo did.
From 2003 to 2005,
Google and Yahoo! were embroiled in an acquisition process with TeRespondo, the AdWords of Latin America. I say “embroiled,” because it wasn't a friendly situation.
At one point, Google and Yahoo! were trying to poach TeRespondo's largest partner, UOL. So TeRespondo's CEO, Juan Diego Calle, did the only thing he could think of. “I remember chasing our partner—one guy in that company—around the West Coast from Mountain View all the way to Pasadena while he talked to our competitors, to Google and Yahoo!” recalls Calle. “I was chasing him from location to location—literally, I was after him from hotel to hotel—and making sure that at the end of the night after he was done having these conversations with my competitors, that I would end up having a drink with the guy at the bar.”
Throughout the process, Calle says, Google and Yahoo! both tried to poach TeRespondo's employees, too. He worried that they were just showing interest in order to figure out what he was doing and then copy it. “We were defending ourselves from these two monsters trying to enter our market,” he says. “It wasn't a friendly situation where you go present the company and everyone's happy and interested.”
It was a long year and a half. Some months there was no activity whatsoever, and TeRespondo was torn over where to focus its energies—on getting the deal done or on running the company. Because it was a cash-strapped startup, management couldn't just hire someone to handle the deal for them. But TeRespondo survived. It had survived the dot-com crash, and it survived this—finally getting acquired by Yahoo! in 2005.
Even if your exit process is smoother than TeRespondo's, you may not feel total jubilation once it's over—for the same reason some parents tear up when their kids go to college: your identity is so tied up with being a founder. Entrepreneur Jason Cohen, now the CEO of WP Engine, sold a startup called Smart Bear and shared his feelings in a post called “Startup Identity & the Sadness of a Successful Exit.” He writes, “Almost all startup founders experience a deep and prolonged sadness after selling their company, even when the sale is an outrageous success. Why?…A startup founder lacks this distinction between personal identity and work identity…A startup is the founder's personal identity.”