Some believe the definition of a startup is a temporary organisation with the sole aim of finding a repeatable and scalable revenue stream that can grow at an astronomical speed of 5–10% every week. (This is impossible for the vast majority of industries.) Most people think a startup is simply a small business getting started. The difference between these definitions is of prime importance. The language we have available to us doesn’t sufficiently differentiate beyween these two types of entrepreneurs. The result is entrepreneurs using strategy and tactics intended for an arena different from the one they find themselves in.
A venture capitalist I met recently referred to their portfolio as “growth experiments.” They chose this term over calling them businesses or startups as governments, large corporations and the general public might otherwise get confused. The advice given to growth experiments compared with advice given to small businesses is not the same. If coffee shops raise multi-million-dollar rounds of investment with investors expecting 20X returns, everyone will be disappointed. If growth experiments play it safe, they will likely miss the opportunity they need to gain traction. Does the age of exploration offer any lessons for today?
FISHERMEN — SMALL BUSINESSES
Spending several years working on fishing boats, someone can afford to buy their own boat. They choose the boat they can afford with help from friends and family. With a capacity to store five hundred fish per day, financial calculations are easy to project for the first three years. A business plan therefore not only adds value in this case, it is easy to generate. Most small businesses are no different.
They need a small amount of money to get started. They have capital expenditures that limit growth and they appeal to a small local market that is difficult to expand beyond. They tend to be risk-averse as mistakes might result in losing the boat. “Move fast and break things” is the worst advice you can tell a small business, but makes complete sense for explorers who we will discuss next. Innovation is hardly relevant as they catch fish and sell them similar to how it has been done for centuries. While they may use the latest technology and innovations in fishing, they don’t invent that technology themselves.
They may create a global fishing empire and are not restricted in size in the long term. They are however not set up to experience rapid growth in the first seven years. Many people are supporters of this movement such as best selling author and entrepreneur Jason Fried who makes a strong argument on why ‘you should create a business, not a startup.’ Growth Experiments are not everyone nor are they suitable to every type of project and that is a good thing.
EXPLORERS — GROWTH EXPERIMENTS
An explorer desires to sail into the unknown. They believe they might find the Spice Islands or prove the world is round or discover a shorter route of trade.
But explorers can’t alone afford to buy three large boats and fund a crew with supplies to survive weeks at sea. More capital is needed than their extended family and friends can afford to provide them. Explorers begin their adventure by raising money from angel investors.
Asking what the return on investment at this stage will only yield a vague response of “fortunes will be made.” Unlike fishing, an explorer gains no value from projecting financial data during their maiden voyage. A business plan is impossible to generate as it is irrelevant. It is equivalent to planning the value of the American trade routes before America was even discovered. When governments and corporations refuse to deal with explorers without a plan, they should expect lies to be told to them. Explorers use prototypes and track their progress using a single page such as the business model canvas.
“A smooth sea never made a skilled sailor.”
Most explorers unfortunately return with nothing if they return at all. Failure is respected in the world of explorers and growth experiments are treated as experience of how to navigate the rough seas. Lessons learned in managing a crew will be useful in the future for further voyages and for younger explorers to learn from. Everybody in the port’s ecosystem including investors know that it is in their interest to advance the know how and experience of their home port so as they continually have the best equipped ships sailing on the high seas. Explorers are therefore backed in a portfolio strategy that allows nine ships to fail for every one that succeeds. A venture capital firm is no different from a dock housing the finest vessels on the sea, the most daring and skilled sailors who together search into the unknown fighting storms and mutiny.
Upon arriving in America, European explorers changed what their project was about. Their pitch deck presented in Portugal was a faster route to the Spice Islands, but they pivoted upon finding gold. They announced their success in discovering a repeatable and scaleable model to extract an endless amount of gold from the Americas. Some investors probably said that they were pitched a faster route to the spice islands and refused the changes proposed by the explorer. Others backed the team of explorers and were happy to share success in whatever they discovered. Growth Experiments code their first product after several iterations no different to an explorer trying to find land with several voyages. Successful experiments result in businesses, successful voyages result in trade routes. Trade routes found by explorers are a faster route to wealth than fishing and businesses found by growth experiments are a faster route to wealth than small businesses. Establishing a trade route is monetising a voyage.
TRADE ROUTES— SCALEUPS
Further investment is sought as trade routes are costly to establish. A business plan can now be made listing the size of the boats, the capacity of gold stored per voyage and the cost of each voyage. Numbers can be crunched to plan returns.
Venture capitalists scale the trade route. The first round of investment is called Series A ($1m-$5m) which might be equivalent of setting up one trade route, then a much larger second round called a Series B ($5m-$50m) establishes trade routes across the continent and a Series C to fend off any competition and become dominant on the seas.
News of the ‘new world’ and the success of bringing gold home spreads like wildfire. Other countries decide to launch their own trade routes to extract their share of American gold. The paths of the explorers are copied. In the startup world, these copycat trade-routes are called ‘clones’, ‘second mover advantage’ or ‘slipstream strategy’. The most prominent is Rocket Internet who seek out anyone who has announced success. Explorers aren’t needed to establish trade routes, clones only need to trace explorer’s footsteps. At Rocket Internet, teams are not led by designers and developers that normally lead the exploring, they are led by ex-consultants and ex-bankers who copy trade routes more quickly.
At an event recently on ‘Why Europe Doesn’t Have Billion Dollar Startups,’ I spoke alongside two panelists who had successfully sold companies for $40m. During the Q&A, they refused to acknowledge any of the strategies mentioned by the younger audience that was inspired by Silicon Valley. They were extremely successful fishermen and there is nothing wrong with that. But they were giving advice on exploring that they knew nothing about. When I mentioned this important difference between growth experiments and small businesses, they looked at me as if I was speaking nonsense. Thus, this is a more detailed explanation. While I love reading the tales of the great explorers, I haven’t yet figured out if I should be an explorer or a fisherman. Time will tell.