The Mindset Required For Scaling Up
Part 2
In the last post in this series, we began to explore scaling. Remember that our context is the Master Funding Equation and we are assessing the five questions most investors will ask with respect to your business strategy. The last question is how you plan to scale the business.
Recall that there are options. Not every business (or its current team) is ideal for a massive scaling-up. Since investors know this, there is no shame in identifying a different approach to investor liquidity. Other options for creating investor liquidity include:
- Scale just enough to prove the concept by selling to early adopters, then sell quickly (early exit)
- Scale the company into early majority stage, proving sustainable traction, then sell the company (later exit with greater value)
- Don't scale at all. Focus on being a product development house that licenses technology to other companies (no exit but lots of license fees)
All that said, perhaps your business really is the type that can (even must) scale-up massively to become a major market player. If that's the case then you'll need to explain your current thinking to investors about how you'll accomplish that. In my last post, How Will You Scale Your Business (Or NOT), I intentionally left you with the notion that scaling-up can be brutally difficult. That's why so few companies successfully do it. Investors know this. They also know that rarely does the team that created a new company lead it to a major market presence, because the game of scaling-up is fundamentally different from the game of starting-up.
This video introduces the Scaling Up Mindset and this week's blog
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So the important point here is that you don't need to convince an investor that your current team is going to take the company to an IPO or late-stage acquisition. In fact, that would be a mistake. Your job is to articulate that:
- You believe now that the Company will need to scale-up in order to maximize investor ROI;
- You understand enough about how to accomplish a scaling-up such that your team can develop the business with a later scale-up in mind; and
- You understand it is a difficult, demanding process that will take years (generally), involve one or more pivots and most likely require new personnel in key roles.
If you want to express those three points in a powerful way, I suggest that you DO NOT RELY on pro-forma numbers, predictions about future market changes, competitive advantages you think you have, or customer acquisition strategies you believe will be successful. Have these answers but don't rely on them.
I did not say that you should ignore these things. I suggested that you not rely on those things to prove to an investor that you have a good grasp about how to scale-up the company.
Why not?
Three reasons:
- Remember, the investor probably believes that your current team (perhaps including you in your current role as CEO) won't be the team that will execute the scale-up sometime down the road anyway.
- Relying on future predictions about what competitors, customers or markets will do could make you come off as a charlatan since the investor knows from experience that such things are nearly impossible to predict more than a year or two out. Remember that investor trust is difficult to establish and easy to lose!
- Most other early stage companies pitching that investor are going to rely on those things. You want to stand out from the crowd, not be another sheep.
OK, then how should you communicate something unique about scaling-up that can actually build trust and make you stand out from the crowd?
Articulate the two mindsets required for scaling-up that I'm about to share with you. As I mentioned in my last post, we teach these mindsets at the Entrepreneur$ Bootcamp, grounded partly in the work of Verne Harnish, author of "Scaling Up."
Two mindsets that are almost uniformly present in companies that have successfully completed a massive scaling-up are:
- An internal mindset shared by the entire team, including investors
- An external mindset shared by customers.
These two mindsets combine to generate a Full Strategy Mindset that embodies purpose to all stakeholders. Before exploring this further, let's be clear about what a Full Strategy Mindset is NOT. It is not a mission statement. It is not a vision statement. Those are useful tools, but they're not what a Full Strategy Mindset embodies.
A Full Strategy Mindset is a permanent signpost, standing firmly and clearly in the minds of all stakeholders, internal and external, describing exactly how the company serves the lives of its intended customers in a unique way. It must be clear, inspiring, and easy to remember. The key word is "how." How does the Company do it?
Let me give you an example of the mission statement for a well-known brand that has scaled massively, along with my suggestion for what a Full Strategy Mindset for this company would embody.
IKEA
Their stated mission statement: "To create a better everyday life for the many people."
Full Strategy Mindset: Low cost yet durable and functional home furnishings with simple designs, some assembly required, where every item has a Scandinavian name, sold in self-service stores, solving the problem of furnishing for singles and young families with limited resources.
See the difference?
The mission statement expresses a purpose, in theory. The Full Strategy Mindset embodies that purpose but goes on to detail exactly how the company accomplishes that purpose. Verne Harnish, has researched the strategic mindsets of more than 3,000 companies from around the world. For a full treatment on the results of this research a encourage you to read "Scaling Up" and visit the "Gazelles" page. Fortunately, Mr. Harnish has reduced this research into seven actionable practices that scaled-up companies embody. I'm going to briefly introduce them in this post, then delve deeper into them in my next post. They are:
Choose the words you want to own in your marketplace
Using my IKEA example from above, those words might include "low-cost," "durable," and "functional." The idea is to be, in the mind of all stakeholders, the provider of a product or service which embodies those words you want to own in the marketplace.
Offer a unique brand promise
What is unique about your brand? Articulate that in a set of promises (Harnish advises a set of three) in which one of them is most "top-of-mind" to stakeholders. Again, using the IKEA example, notice three promises embedded into that Full Strategy Mindset:
- Simple designs (anyone can put them together)
- Durability & Functionality (good quality, useful)
- Low Price (I can afford this)
I'll leave it up to you to think about your experience with IKEA to see which of those promises might be the "top-of-mind" promise, but you get the idea -- three promises, one that you lead with.
Make it hurt to break your promise
Your company system needs to include an external promise to customers that, if not kept, will result in an internal pain-point. Examples include money-back guarantees and other forms of customer satisfaction guarantees. The idea here is to create a culture of accountability towards keeping the brand promises at all costs.
Create a one-PHRASE strategy
This is your internal reminder to embody a team orientation around keeping the brand promises. You don't necessarily share this with customers. Rather, this is the internal "credo" that defines the actions you and your team take daily to support the brand promise. Harnish recommends a simple one-word phrase and uses the example of "Wheels Up" for Southwest Airlines. It is a statement designed to constantly remind everybody in the company of the spirit in which they do their work in support of the brand promise -- and, as Harnish says, this phrase should also underpin the strategic decisions made by senior management in support of keeping the brand promises. What should IKEA's one-word phrase be?
Support your one-PHRASE strategy with differentiating actions
This is a set of specific actions you take to ensure that you execute your business differently than the competition. This is the "how you do it differently" part of the Full Strategy Mindset. Again turning to the IKEA example, since a self-service approach to buying furniture is a major distinguishing factor in their business model, perhaps ensuring that every day at every store every product is clearly labeled and in the proper bin or shelf. You get the idea -- what actions does your team take every day, from top to bottom, to make sure your company delivers on what makes it unique in the eyes of customers.
It occurs to me that the real reason IKEA names every product is that makes it easy to keep track of the self-service shelves.
Establish your “X Factor”
The X factor is your secret strategy for beating the competition consistently, hopefully to the level of 10-times better than they do it. This is your competitive advantage defined and put in action internally (you don't share your secret recipe outside of the company) in a way that everybody on the team knows what it is. What do you think IKEA's X Factor might be?
Measure your profit per X
This is a key metric that defines the essence of your business model and is tied to long-range goals. Among all the seven factors this, in my opinion, is the one you want to share clearly with investors. It defines how you plan to measure the scale-up. We will delve into this factor in the next post.
KEY TAKEAWAY: If you're going to scale-up, you need to articulate to investors how you plan to go about it. Investors know that market forecasts, pro forma financials and competitive predictions are of little value because it takes years to scale up. Be ready with those forecasts, but tely on those things and you'll lose trust. You also will not stand out from the crowd of others seeking that investor's money. Instead, demonstrate that you understand the mindset(s) it takes to effectively scale up. To do that, master Verne Harnish's 7 Actionable Practices. Think them through. Learn to articulate them. Have your entire team embody them. This will let an investor know that you understand that consistent, clearly articulated MINDSET drives scaling, so you've put structures in place to support that.