The ‘Iron Triangle’ for Startup Decision Making
In project management there is a well worn model of constraints that is sometimes referred to as the project management Iron Triangle. In this model the factors of ‘time’, ‘cost’ and ‘scope’ (quality and features) are represented at the three corners of a triangle as opposing forces. Try to focus on or adjust one of these factors and you will necessarily impact the others.
I was introduced to the Iron Triangle while going through a budget review process for the building of Australia’s first 4G wireless network. It was put to me in a slightly colloquial way ‘time, cost or quality, you can have any two!’
That phrase has stuck with me.
While simplistic, the Iron Triangle has been a useful framework when assessing the performance of project management teams and making decisions in project management planning.
It also translates well to the world of early stage business. The cost component of your triangle rarely has room to move so you have to be very selective about the combination of features and quality you pursue in your product because you haven’t got much time to get results with the ‘sword of damocles’ hanging over your head in the form of impatient investors. After all, it is this dynamic that helped give rise to the minimum viable product.
More recently though, at both an Executive and Board level at a number of early stage businesses, I have started to observe a parallel set of constraints that act in strategic decision making. I have experienced the dynamic often enough now that I have adapted the Iron Triangle so I have a simple framework for assessing and communicating the challenge.
The corners of my new early stage Iron Triangle are growth, scalability and capital / profit. While they can be loosely anchored back to the original project management model (capital / profit = cost, growth = time, scalability = features and quality) these 3 constraints are more frequently referenced when assessing strategy for early stage businesses. You very rarely see all three flexing in unison and instead early stage businesses are best served by cycling through focus on one or two of these constraints at various stages in their development.
Growth → I typically refer to growth as being an acceleration in the rate of customer acquisition, so choosing a path of growth means changing the rate and not merely relying on the current growth trajectory. Growth costs resources (time and/or money) and importantly, growth shows up cracks in the scalability of your business and so needs to be balanced.
Scalability → This is probably the least understood component of building an early stage business / lean startup (some people find it easier to think of this as a focus on product). How often have you come across a stakeholder or observer who says they can get that product or website built for $25K, don’t we just need a couple of engineers for 3 months? It doesn’t work that way. In a global, digital market a bright light is shone on all businesses and that transparency brings a high hurdle for customer experience and hyper competition on pricing. The ONLY way to deliver value in this market over the long run is to invest in streamlining the systems and processes required to deliver a superior experience at the best price. This is not a discrete project but an ongoing process and should always be competing for focus in strategic decision making.
Capital / Profit → All companies make decisions about where they spend their money, even the Apples and Googles of the world. Most reading this will be thinking about startups or projects that have very little capital to achieve milestones, and for you these decisions are your life blood. For others you might be closing in on profitability or even deciding how much profit to invest. In all cases it costs money to decide to focus on growth or scalability and so money will always be a key constraint.
Here are three common scenarios to see how the Iron Triangle can work in practice; a brand new startup, a VC backed Series A stage company and a corporate venture.
New Startup → When you first get started with a new startup the constraint of capital is a foregone conclusion. You have to be lean and you have to do what you can with few resources. The Iron Triangle dictates that you need to choose one of the other areas to focus on, so which one will it be? Either can be effective. Most of the prevailing advice is to get out in front of customers and start selling before you have a product (or have a hacked product), which is akin to choosing growth. The other approach, usually from engineering founders or serial entrepreneurs, is to focus entirely on product on the back of a vision and only launch once a level of perfection has been reached, which is akin to choosing scalability. Where the wheels come unstuck is when you try to choose both growth and scalability from the outset with such limited resources, you don’t have the resources and you end up floating from one feature set to another, struggling to prioritise what should be built and disappointing on all fronts.
VC Backed → So what happens when you reach some all important milestones and you get your Series A away, filling the bank account. Suddenly capital no longer seems a constraint and you are free to pursue both growth and scalability, hiring as many engineers as you can find and ramping up the sales and marketing budget. Up until mid-way through 2016 it was a case of double down on both as VCs took a view that it was winner take all and capital would flow as long as you executed on your growth and scalability focus. However that stance shifted during last year and investors are now looking for a more measured approach to using capital that has subtly reintroduced capital as a constraint. This was inevitable and healthy, as I said above even the behemoths operate with constraint. Most VC backed startups will experience this shift through 2017 and it will force strategic decisions about where to focus as they are pushed towards reducing their burn or toward profitability.
Corporate Venture → Lastly, the scenario where I have found the model most useful is in corporate venturing. The classic trap for corporates is to combine their hunger for rapid growth (isn’t that why we’re venturing), assumptions about scalability (we need to launch a mature platform / experience that can scale if we’re getting behind this) with an expectation that they can achieve it all on a bootstrap startup budget. It never works and something always has to give, the question is just how long it takes to realise and whether corporate patience lasts that long.
No one likes to compromise, but it is necessary for success. The most important thing you can do is be very deliberate about the decisions that you make. I have found that thinking about an ‘Iron Triangle’, while simplistic, helps bring clarity to communication and decisions.
I even found myself the other day in a Board strategy meeting saying ‘growth, scalability or profit, which two do we want?’