Grow
Slow and Smart -- or Grow Quick and Get Out
With so much investment capital floating around, startups will
be tempted to avoid the heavy work that it takes to build a company over the
long haul.
BY HOWARD TULLMAN, GENERAL MANAGING PARTNER,
G2T3V AND CHICAGO HIGH TECH INVESTORS@TULLMAN
One of the toughest decisions that an entrepreneur needs to make
as his or her company starts to expand and gain some serious traction is (a)
whether to focus on growing the business the smart and somewhat conservative
way for the long run, which sometimes means saying "No" to important
customers, large new contracts, and other exciting opportunities; or (b) say
"Yes" to virtually all comers, expand the team and the business as
fast as humanly possible, and pray every night that things don't completely
fall apart while everyone's running full speed ahead and trying to cover all
the bases and put out all the fires. You might call that fast-growth strategy the
latest version of the "fake it 'til you make it" philosophy.
I'm sure that arguing about what's best for the firm is a common
conversation in every enterprise, but it's especially challenging when you're
building a software company's capacity, which is considerably different from
adding a new line to a manufacturing business or more delivery trucks. As a
general proposition, throwing more software engineers at a given project is as
likely to slow things down and screw them up as it is to speed things to a
prompt and successful plateau and a minute's respite before the battle begins
anew. This is only one of the main reasons that Software as a Service (SaaS)
businesses are as complex and risky for
the prospective customers as they are for the companies themselves. Because no
one's ever 100% sure that they're in control while they're changing the tires
as the car races around the track.
Even more importantly, in many tech firms, the most senior
leaders, including the CEO, very often are NOT tech savvy enough to make
effective counter arguments when their CTOs and others lecture them on the
perils of going too fast or too slow. Or about the risks inherent in trying to
simultaneously meet too many conflicting and competing demands, with limited
available resources. The internal tensions between the senior management and
salespeople on the one hand (speed and sales) and the engineers and computer
scientists on the other (safety and stability) are a constant source of
friction in almost every startup and early-stage growth company. Even the
legendary tycoon Howard Hughes worried about these same issues more than half a
century ago. He said: "One of our anxieties is de-focusing the relatively
small number of engineers we have. Within our own core development, I am
reluctant to fund projects that are way afield of where we are."
This debate couldn't be any more front and center than it is
today with Elon Musk promising that Tesla's cars will achieve degrees of
autonomy (Level 5, as in total) by year end that virtually no one else in the
world thinks are remotely possible, including undoubtedly a ton of Tesla team
members who probably need to keep their mouths shut to
keep their jobs. As studio boss
Samuel Goldwyn used to say: "I want everybody to tell me the truth, even
if it costs them their job."
The SaaS conversation is usually a pretty straightforward if
somewhat strident discussion. The more mature and experienced techies are
focused on building a rock-solid code core that keeps growing and getting more
efficient over time because ultimately this will be the entire firm's
foundation and the engine on which all of its offerings will rely. They know
that the more standardized and universal the core can be, the easier it will be
to maintain and to deliver a common set of products and services to an
ever-expanding population of customers. In fact, I wrote a long time ago that
the best test of a software firm's maturity is whether the CEO can stop selling custom and bespoke solutions to new customers. Getting to this point takes time and money, but these
aren't the most patient of times for many reasons.
Likewise, the sales team and the managers responsible for the
firm's topline growth are constantly being presented with lucrative and
attractive opportunities to sign new and large customers for the firm's
software, BUT -- almost without fail -- every one of these big guys has a list
a mile long of features, functions, customizations and other requirements which
they just can't live without, and which need to be immediately incorporated
into the solution. Also, amazingly enough, they're even willing to pay for it.
Seems like a win-win for sure -- great customer, great dollars, and amazing
bragging rights. Unfortunately, it's a totally one-off and bespoke version of
the current product, which will need to be built by the tech team almost by
hand.
And, because it's a somewhat novel code base-- even if it
basically rides on the core systems -- the customized version will require
additional and extensive testing and other reviews that will absorb
considerable resources. Even worse, in some cases, these new versions may
negatively impact other earlier customers and adversely degrade the speed and
operation of the existing offerings.
It doesn't help that your team, your customers, your board and
your investors are all likely to have radically different views about the best
way forward. Ultimately, the decision is going to be yours. And, as
obvious as the choice seems in some ways,
there's no simple or single answer to this problem and, to make things even
more difficult, the "right" decision can differ from time to time and
depend not only on your internal dynamics, capabilities, resources and goals
but also on a number of external variables, which also are constantly in flux.
A simple example of one very material internal consideration
is the mental state of the key players on your team. As the prospect that we'll
see an end to the pandemic grows a little brighter each month, it seems that
almost everyone is taking the opportunity and making the time to take a serious look at just how they want to go forward in their own lives and
in their careers.
Some people can't wait to get back to work; some will never be
back; some feel that they dodged a bunch of bullets and are looking for the
nearest exit; and some now believe that building a business is a lot harder and
takes a lot longer than they ever imagined and they aren't sure that they still
have the passion or the patience to wait for a day that may never come.
Still others are seeing new paths, priorities and alternatives for their own
careers that have taken on far greater importance in the past two years.
While everyone in your company may have started out with a
shared vision and a common desire, things and circumstances change, families
and financial obligations grow, and for some simply tired and stressed-out
folks, enough eventually feels like enough. In some ways, these kinds of
changes can make those same people far more susceptible to externalities as
well.
An example of a material external consideration
is the state of play of M&A. If you're already thinking about bailing out
and looking for an excuse and a soft landing, the emergence of a very frothy
and active market for mergers, acquisitions and roll-ups in your particular
industry starts to look very interesting. And it's also likely that-- and
here's where things can get very hairy for the CEO-- the prospect of a near
term exit can change key team members' overall perspectives on what the
business needs to do to best position itself going forward.
All of a sudden, the long-haul view looks a lot less appealing
and the chance to grab some large, one-off deals and goose the near-term
revenues to dress up the business as an attractive acquisition target makes a
lot more sense to important members of the team -- even if they know in their
hearts that they're risking the whole business in the process. When your people
see their peers in other companies making a bundle, and crappy businesses are
cashing out for big bucks, it gets harder all the time to keep their heads in
the game and their noses to the grindstone. Even turkeys can fly in a tornado
of SPACs, spinouts and "story" stocks.
Building smart and stable software is never quick or easy. But
that's not even the most challenging part of the business. Whether they know it
or not at the outset, innovators and entrepreneurs sign up for a lifetime of
iteration-- fleeting moments of joy and exciting times of inspiration and
invention -- which are always followed by months of thankless revisions,
repairs and constant maintenance. The nasty secret is that you're always
leveling up -- or trying to keep up with the customers' demands and the
competition's advances -- because in software development, there's never any
real finish line. Only you can decide when enough is enough.