The Ideal Path to Expansion Stage Growth

February 11, 2010

Just got back from having lunch with a CEO of a Provo-based software company. It was a fascinating discussion. We were neck deep in talking about his operation and how he built up the business organically through the start-up phase. It struck me that his company has all the key characteristics we look for as expansion stage software VCs.

Key Characteristics of Expansion Stage Software Companies

Build your business organically through the start-up phase

In our book, an ideal company coming out of the start-up phase is one that is set up with a differentiated solution that:

  • … addresses a critical customer pain point…
  • … in a very big market…
  • … and is sold through a profitable distribution model
  • … resulting in a company that can scale with capital efficiency

Getting to this ideal is very difficult, and takes years of tinkering with the product and the distribution model… and most importantly, it requires a very attentive ear to the customer.

So the less money a start-up has, the more the founders will be focused on what the customer is looking for (otherwise they won’t pay), and the more focused they will be on figuring out the lowest distribution cost possible, which invariably instills the right business discipline in the founders.

If you have to raise venture funding at the start-up phase, raise as little of it as possible, raise it little by little, and don’t raise it from a large VC fund. Remember, money corrupts.

Focus on a pain point that lots of people have

For a pain point to be truly painful, it has to be one that impedes a business or person from growing (either economically, physically or spiritually). Find the source of the pain and tune your solution to relieving it in a novel way. Many founders start off with a technology based widget, and go out to sell it as the next best thing since sliced bread. Only to find that customers are not looking for widgets, they are looking for solutions to address their pain. Sell your product as a pain killer, not as technology.

Make the customer your product manager

As a founding team, it is natural to want to be visionary, to want to come up with something that no one else has thought of. But right after that, start listening to your early customers and figure out how your visionary technology is actually going to turn into a solution to a problem that they have. Trust that success is not about the coolest technology. It is about the most novel way of solving a customer’s problem. So listen and tinker, listen and tinker, then listen and tinker… until you’ve solved the most acute pain felt by the largest number of people possible.

Build the lowest cost distribution model

Now that you have built the right solution that addresses the pain of lots of people, you need to figure out a way to reach them online and a way to sell them online or over the phone. Work really hard to find ways to reach your prospects organically (read up on content management marketing). Tune your website to scream out your prospects’ pain points and how you resolve them. Use online lead scoring to filter the best leads. Use a lead qualification team to qualify the leads for an inside sales team. Price and position your solution to be sold over the phone, and resist the temptation of building an expensive field sales team. Here’s my post on building profitable distribution models.

Focus on your customer on-boarding and renewal processes

I have seen so many companies get into the expansion stage with heavy focus on new customer acquisition only to wake up a year later with 50% or worse renewal rates. The customer engagement model does NOT end with a sale. That is when it begins. Make sure that you have a clear customer on-boarding process that starts before the sale is completely closed (determine who the users will be, get commitment to post-sale training, etc.). Have an on-boarding team that is held accountable for getting customers ramped up within the first 90-days. Once on-boarded, customers need to be handed off to account managers that specialize in building relationships with customers over time, making sure that they are using the product effectively and that they are happy enough to renew and buy more when the time comes.

Be obsessive about process

Recognize that a software business is an engineered system. It has inputs and outputs, and lots of mechanics in between. It is a living system that needs constant feeding, nurturing, maturing and waste removal. Focus your business growth strategies on engineering the right mix of people, process and systems. Measure and tinker, measure and tinker, then tinker some more.

Focus on the one or two most acute bottlenecks to growth at a time

Don’t try to do too much. Relieving a third or fourth bottleneck won’t buy you any more… and de-focuses you from removing your top one or two bottlenecks.

Be happy

If you are not enjoying building your business, figure out why and solve it. If you can’t find happiness, move on to something where you would. Life’s too short.

The Chief Executive Officer

Firas was previously a venture capitalist at Openview. He has returned to his operational roots and now works as The Chief Executive Officer of Everteam and is also the Founder of <a href="">nsquared advisory</a>. Previously, he helped launch a VC fund, start and grow a successful software company and also served time as an obscenely expensive consultant, where he helped multi-billion-dollar companies get their operations back on track.