If you were to ask tech leaders to describe what distinguishes an exceptionally successful enterprise from the average company, they’d probably use words like focused, driven, forward-thinking, and ambitious. These descriptions are no doubt accurate, but to me, they could describe almost any tech startup. And if they describe almost any tech startup, then they don’t truly describe the tech startups that go on to become billion-dollar enterprises.
By Ryan Westwood, Forbes, November 2, 2018
I became fascinated by this issue during a recent conversation with my colleague, Jason Holmes, president and COO of the cloud-based sales enablement platform Showpad. Jason was formerly the COO of Marketo, which Vista Partners recently sold to Adobe for $4.75 billion, realizing a profit of roughly $3 billion in less than three years. In looking at the data, we realized that just 57 startups out of more than 19,000 achieved valuations of $1 billion or more in 2017; in other words, a new startup has only a 0.00006% chance of becoming a billion-dollar enterprise. That said, Jason and I agreed that these so-called “unicorns” of the business world are not achieving outsized success by pure chance. Truly successful companies share common characteristics.
This article focuses on the key aspects of tech startups that Jason believes truly position them for outsized success--a perspective that he gained from his experience at Marketo. Let’s explore the five telltale signs that a tech startup is on track to becoming a billion-dollar enterprise:
Flawlessly executing on a focused vision and strategy: Every tech startup has a vision and a business strategy, but not every company will be fully successful executing on its vision and strategy. The ability to execute starts at the top. The founders and CEO must be more than just relentlessly focused, passionate, and determined. They must build a dream team of exceptionally dedicated employees; indeed, even one hiring mistake could derail a startup’s success trajectory. The founders and CEO also must build a board of directors with just the right mix of personalities, skills, and expertise. As Jason Holmes reminded me, it’s OK for your board to be composed of your investors and founders in the early stages, but it’s the CEO’s job to recruit more independent board members over time—people who can provide invaluable oversight in key areas like auditing and compliance.
Introducing a compelling product to an undersaturated market: Many tech startups enter the market with good ideas at a strategic time, but they don’t necessarily offer truly compelling, distinguishable products. They also may be entering markets that are already saturated with competitors. To rise above the crowd, you need to offer a unique, compelling value proposition to your customers. You need to offer products that fulfills an unmet need of your customers, and that measurably and elegantly improves some aspect of your customers’ lives, work, and daily routine. You also need to time your entry to the marketplace so you’re not competing against a crowd of competitors. An undersaturated market is where you’ll have a chance to stand out, refine your product and your marketing, and eventually eliminate your competitors—either by acquiring them or putting them out of business.Creating a product that is endlessly and effortlessly scalable: Many tech companies struggle because of a pervasive catch-22: They need to increase sales by investing in more R&D and marketing, but they can’t make these investments until they increase sales. Especially in the tech sector, the key to escaping this catch-22 is create a company that scales endlessly and effortlessly, with minimal infusion of additional capital. In other words, you want to build products that don’t require continuously more money to improve, maintain, and market. Even as you set lofty growth targets, your cost-per-acquisition ratio and your marginal-cost-of-supply ratio should remain as low as possible.Crafting a carefully tailored marketing plan: A marketing plan is at the core of every business’s growth strategy, but many businesses will never achieve the marketing goals they set. In many cases, there’s a disconnect between the goals of the marketing plan and the amount of traction that a product can realistically get in a given market segment. The first step is to develop a value proposition for your product that is both effortlessly simple and simply irresistible. The second step is to figure out how to penetrate a tiny market segment, and then launch aggressively into that market so you can quickly dominate it. The companies that don’t hit their sales targets are often the ones that have chosen the wrong market segment or that didn’t sufficiently narrow their target market segment.Moving in perfect harmony with your investors: When venture capitalists and private equity firms make a decision to invest in a business, it marks the beginning of a hopefully very productive, mutually beneficial relationship. Many startups, however, struggle to cultivate and strengthen this relationship because they don’t truly understand the mindset of their investors. Consequently, they don’t make key decisions that are necessarily harmonious with the sensibilities of their investor, and may not be fully aware of what their investors want. For example, every investor has a lifecycle: If they’ve been around for 10 years, they’re more likely to be impatient for an exit. Similarly, different types of investors have different priorities when assessing company performance. For example, a private equity firm is more likely to evaluate performance using EBITDA (earnings before interest, tax, depreciation and amortization), while a venture capitalist is more likely to focus on growth rate.
The likelihood of a tech startup becoming a billion-dollar company is almost certainly going to be infinitesimally small. But that doesn’t mean we can’t all benefit from an in-depth understanding of what distinguishes a billion-dollar enterprise from its less extraordinary counterparts. The telltale signs that a tech startup is poised to blow away its competition include an ability to flawlessly execute on a focused vision and strategy, an ability to introduce a compelling product to an undersaturated market, and an ability to create a product that is endlessly and effortlessly scalable. Other telltale signs include a deftness in crafting a carefully tailored marketing plan and an ability to move in perfect harmony with investors.