Why every startup need to discover their Virtuous Cycle ?
Virtuous cycle is a recurring cycle of events, the result of each one being to increase the beneficial effect of the next. A virtuous cycle in the economy means that higher wages stimulate consumption, leading to higher prices and larger corporate profits.
In businesses/start-ups virtuous cycle becomes very important as it helps in scaling the demand and supply both which drives the business to grow manifold.
“If you are building a company, it is important that you architect your business by following the principles of a virtuous cycle. Or else, you may be unintentionally working yourself into a vicious cycle that will slowly but surely lead to your downfall.”
We have seen all of this happening. One important reason for most startups failing despite raising huge amounts of money is because they couldn’t figure out their virtuous cycle and ultimately it lead to their downfall.
Why it becomes important to find your own virtuous cycle ?
Definition of a start-up usually refers to a company or organisation designed to rapidly develop scalable business model. Time and scale are two most important things in this. To make sure that your start-up don’t fall on both, you should have a virtuous cycle through which you can achieve the scale in less time and create a thriving business.
This term got popular with Amazon and Jeff Bezos’ virtuous cycle philosophy which involves sacrificing short term gains to enhance the customer experience and maximising long term benefits.
For most of the start-ups, growth is the core of their strategy. Growth is generally to attract more and more users/customers to try out your product and make sure they not only sticks but also helps in creating a network effect which makes your product available to even larger audience resulting in a thriving and sustainable business.
The aim of the virtuous cycle is to just do this. Hence it becomes very important to find the metrics which can help in creating the virtuous cycle. Once it is discovered, you can put your focus on any part of that loop and it will give you beneficial effects overall.
Amazon and its virtuous cycle:
Jeff Bezos and team sketched their virtuous cycle drawing on Jim Collin’s concept of flywheel, or self-enforcing loop which they believed powered Amazon’s business. It was something like this:
Lower prices led to more customer visits. More customers increased the volume of the sales and attracted more commission-paying third party sellers to the site. That allowed Amazon to get more out of the fixed costs like fulfillment centres and the servers needed to run the website. This greater efficiency then enabled it to lower prices further.
Feed any part of this flywheel, they reasoned, and it should accelerate the loop. This helped them to understand what was core to their business and the result of this is what we see Amazon of today.
Uber’s Virtuous cycle :
If you are creating a decacorn business like Uber, it becomes very important to execute so many things right. Everyone knows Uber for their fast growth, high economic impact, user value and superior product experience. But to achieve this, they figured out what was working for them.
In 2014 David Sacks, tweeted the above diagram to explain why geographical density was the new network effect for Uber. No wonder, you can see it happening in any city Uber operates. Result is they are worth more than $65 bn.
Every startup has different set of metrics which work for them but ultimately the output is the same i.e. to create more and more value for the business. If you want to build a successful company in the long term, it becomes very important to figure out the virtuous cycle. Or else, you may be unintentionally working yourself into a vicious cycle that slowly but surely leads to your downfall. This is a philosophy that extends to anyone in any industry. It might be easy to win today, but it is more important to win in the long-term.