A Systems Perspective for Startup Business Dependencies

A business is a system, the purpose of which is to get a customer by providing a good or service that can be delivered for less than it costs (otherwise the business will eventually cease to exist).

Systems have dependencies. Complex systems mask many hidden dependencies.

Adding to a complex system is not ideal because it causes unanticipated effects. It’s better to subtract from it. Removing things from big complicated business systems reveals what is (and isn’t) valuable. Thus, Paul Graham pointed out that small companies have a way of clarifying the market value of contributions by the team.

People generally don’t like this. For one, it removes the safety of the crowd. They could be discovered as lazy or incompetent. And second, it challenges their pet project or activity. Everyone likes leaders who say yes to their pet thing…until suddenly everyone’s thing gets cut for lack of resources.

Hidden dependencies create tradeoffs.

Trade-offs can work when they seem like a fair exchange of value and the expectation is established upfront. If I want a decent cost and reliable airline service then I’m willing to put up with Southwest’s unassigned seats and second-tier airports. I may not like it, but I accept it in the exchange.

And in return, Southwest simplifies the system with the same planes (interchangeable parts) and fast gate turns (boarding process) and less time weighing luggage (streamlined check-in).

Many people work in systems without seeing the dependencies. As a result, they do dumb things:

  • Some marketer did SEO-optimized blog posts at a company 5 years ago and it worked. So they attempt to do it again at their new company and it flops when the content is boring and google can’t be gamed as easily.
  • A product manager built a feature at their last company and assumes building it here should have a similar outcome. But it’s too sophisticated for the user base, who does not want it.
  • A few investors made a lot of money with an enterprise sales team 10 years ago, so they run the same play at the new startup they invested in with their exit dollars. Burn rate ramps and the company runs out of cash before it can get any product-market traction.

Why doesn’t it work this time? Because they’re in a business system that’s operating within a complex market system that’s constantly evolving.

At some point, entrepreneurs realize that strategy is less like checkers or chess and more like poker. It’s not just about their resources or processes or execution. Their customer is a member of a market that’s comprised of alternative solutions. When the customer wants to make progress on something, they look to hire a product to help them do the job.

When the product does the job, it serves a purpose. There are other things that also might serve the same purpose. Deciding between these alternatives is not something our minds like to do. So we use heuristics to help us compare, categorize, and choose. Thus we position the product against alternatives and rank according to factors like quality, reliability, and value. When we’re really confused or just don’t want to think, we use price to do the sorting for us.

Price is magical. Think about it — the value of the entire business system is ultimately represented in a single number that a customer agrees to pay. Sometimes this price is derived from the cost-basis for the unit exchanged. But that doesn’t explain why we pay so much for an iPhone, Tesla, or the Starbucks coffee I bought when I started writing this.

The two other pricing methods are based on a) competitor pricing and b) the value that is being generated for the customer. The dependencies of pricing this way are more complex… and far more lucrative.

Price drives revenue, which bakes the pie from which all of the expenses of the business will be sliced from. The larger the pie, the more there is to go around with building the product, or acquiring customers, or a nice office with ping pong tables (after working in a place once with ping-pong tables, I recommend you avoid them).

Thus, the product and marketing are both dependent on the price.

Startups miss this when they assume an outbound sales team after someone reads a book about it. But that book failed to warn that having an outbound SDR and inside AE rep will automatically create significant costs that require a $10–15k ACV. Maybe that’s fine. But wouldn’t it be preferable to first check the alternative prices at the table before doubling down on this hand?

I think the point is this: software leaders are quite capable of figuring out their purpose, positioning, pricing, promises with trade-offs, product, or promotional marketing. However, they often fail to identify the dependencies between these variables. As a result, individuals and teams perpetually add new initiatives, campaigns, product features, etc… which exacerbates the problem.

If you know someone who would like help unraveling all this, I have in-the-trenches experience with 2 companies that had great outcomes and 2 companies with mediocre results.

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Josh Colter

Josh Colter

I help companies understand customers and create go-to-market plans for category leadership.