A Traffic Light System for Startup Survival
Why do so many startups and scale-ups fail? Because they only set themselves up to succeed, not to survive.
When I first encountered Adam Thomas’s brilliant work around survival metrics, I finally understood what so many companies I’ve worked with over the last decade were missing: a specific picture of what survival looks like, and a plan for how to achieve it.
Indeed, most startups and scale-ups are very good at describing what success looks like. But success and survival are not the same thing, and often call for entirely different strategies.
For example, a startup working to find product market fit might define success as having 10,000 users by the end of the quarter. But what is the bare minimum needed for the company to survive the next quarter? Is it 1,000 users? 5,000? Is it a revenue figure that has nothing to do with user growth at all? Or something entirely different?
These questions prove particularly critical if (and often when) it becomes clear to the people actually building the product that “success” is unlikely or impossible. If the goal of 10,000 users is out of reach, should the product team continue working towards “as many users as possible”? Is there a specific number they should be optimizing for? Or should they be pivoting and focusing all their efforts on revenue-generating work to ensure that the company can live to grow another day?
To kickstart this very conversations with startup founders, I’ve been facilitating an exercise that uses a traffic light system to define the following scenarios around a company’s next big milestone (such as the next round of funding):
The red light scenario is the best possible scenario in which we would cease to exist. In other words, the most revenue, growth, and other high-level metrics that would still not be enough for us to survive.
The yellow light scenario is survival. We need to shift our strategy to make sure we live to fight another day, and test and validate new approaches.
The green light scenario is success. Our wildest dreams, realized. The next round of funding in the bank, or profitability achieved. We can continue investing in our current approach.
As the above example illustrates, reading from red to green does not always mean that our business-critical metrics all move in the same direction. To use a common example, a company that is successfully moving towards a green light scenario may choose to forego monthly revenue to accelerate growth. But if that same company is unlikely to achieve their growth goals, they might need to pivot towards a strategy that is primarily focused on short-term revenue.
The specific conditions of success and survival depend on the individual company, but my advice is generally for founders to complete this exercise with a small team of strategic advisors (such as investors and/or board members), then present the results to the product team to see how it aligns with the work they have planned. Oftentimes, this is the first time the product team — even if that team is just one or two people who work closely with the founder — will have seen any specific goals or targets attached to the company’s survival. And just as often, the product team will immediately recognize that they are headed straight towards the red light scenario, and that a strategic shift to the yellow light option is the only realistic way to stay alive.
There are many reasons why founders might hesitate to have this conversation. But a tough conversation about the realities of your business is always better than a doomed last-minute pivot — or, even worse, a tough conversation that ends with “I’d be happy to provide a reference to anybody on the team who needs one.”
If you’re interested in learning more or want me to run this exercise with your team, drop me a line at matt@mattlemay.com.
Thank you Saielle DaSilva for the thoughtful edits!
