The Chrysalis Effect
Successful
startups reach a point when they must shed their early habits and take on just
the right amount of managerial maturity.
In
2013, Jawbone, a leading maker of wearable activity-monitoring devices,
acquired a startup called BodyMedia, reportedly for more than US$100 million.
The leaders of the two companies shared a grand ambition: They dreamed of
scaling up rapidly to become a multibillion-dollar wearables company, selling
devices that collected not just health and fitness data but any data related to
driving safety, travel, and the gamut of human experience, physical and
emotional.
They knew that this was a long-term goal;
devices of that scope would need hundreds of millions of dollars more in
investment. But they were convinced that the newly combined company would
outpace its competitors, including some of the largest companies in high tech.
“As one of the first consolidations of
experience, technologies, and IP, the merger with Jawbone was a statement,”
recalls John (“Ivo”) Stivoric, who had been a BodyMedia cofounder and chief
technology officer and then became VP of Jawbone’s research and development.
“It was a show of force in the face of giants like Apple, Google, Microsoft,
Samsung, even Amazon.”
And indeed, the newly merged enterprise
expanded quickly. Yet as the company grew larger, its momentum slowed. “In the
early days,” recalls Stivoric, “our team developed a track record for
disruptive innovation — repeatedly. People would say we couldn’t do something technologically,
and we would go ahead and do it, as well as proving our solutions clinically.
But over time, we got less and less nimble in taking risks.”
This pattern is prevalent among startups. As
they grow, they shelve their breakthrough innovations and move toward
incremental releases such as feature updates. This problem is generally
attributed to lags in market demand for new products. It takes time for the
relatively small number of early adopters to expand into a broad base of
customers.
But market demand is not always the main
problem. Startups face internal challenges that hold them back even more. Once
a company expands beyond a few hundred people, the informal, entrepreneurial
management style of the early days no longer works. Fledgling companies need to
grow large but keep the fluidity and productivity of a startup, and it’s not
obvious how to do so; first-time founders typically have little experience
running bigger companies. Add to that the vagaries of competition and the
challenges associated with recruiting and retaining good people, and it is no
surprise that so few companies grow past the start-up phase.
You could call this the “chrysalis effect.”
Several years after it’s founded, an organization experiences something like
the metamorphosis of a larva into a full-grown butterfly. Even for the insect
world, this is a brutal transition; the caterpillar molts its skin four or five
times and then, as a pupa, literally digests itself. Its old body becomes
broth. Formerly dormant cells called imaginal discs, released by new hormones,
replicate rapidly, forming eyes, wings, and color patterns. Only one in 400
caterpillar eggs survives to take flight.
The chrysalis metaphor is apt because the
process of maturation for startups also involves severe winnowing. In 2015,
startups died at a rate of one per week, according to the venture capital
database CB Insights, and when it comes to scale-ups, the chances of survival
are even lower. The survivors become famous: Google, Amazon, Facebook, Netflix,
and Apple are among them. To get through this transition successfully, leaders
have to radically change their organization and the way they manage, while
still growing. During this necessary transition, many companies are taken over.
But if the upstart leaders have anticipated the transition — for example, by
creating new roles for the founders, attracting people who have experience with
similar transitions, designing collaborative conversations, and borrowing
established practices in their own deliberate way — they can restructure and
soar.
Chronicles of the Chrysalis
When I first began asking technology leaders
about the chrysalis effect, it didn’t yet have that name. But I knew startup
leaders who talked about it informally, often with pain and in hushed tones.
“Scaling up,” as many called it, was often more challenging than they had
expected, and most declined to be interviewed on record about it. However, some
of their advisors and funders were willing to talk, and a few are beginning to
codify the practices of transition.
One place the transition is becoming codified
is Stanford University. Silicon Valley investor Reid Hoffman (cofounder of
LinkedIn and Greylock Partners) and his colleague Allen Blue — LinkedIn’s
cofounder and vice president of product management, and member of the U.S.
Department of Commerce Data Advisory Council — taught a class on “blitzscaling”
at Stanford in 2015 (which they then published on YouTube). They billed the
course as focused on rapid growth, but much of it covered the management
disciplines needed for a company to expand beyond its early days.
“First-mover advantage doesn’t go to the
first company that launches,” said Hoffman, introducing the first session. “It
goes to the first company that scales.” He described a typical startup’s
transition from a “tribe” — with a handful of employees, and a market
capitalization typically below $10 million — to a “village,” with thousands of
employees and a market cap in the billions. “You move past [the tribe stage],”
he said, “not because you want to, but because you need to.”
Another
expert chronicling the transition is Steve Blank, who founded the software
company e.piphany (now part of Infor). In his book The Startup Owner’s
Manual: The Step-by-Step Guide for Building a Great Company (with Bob
Dorf; K&S Ranch, 2014), he labels this transition as a move from
post-customer development to customer creation (typically after a series C
funding round): “A radically different stage during which the company suddenly
shifts from ‘searching for a business model’ to ‘executing one.’ [It now has]
revenue targets and timetables to hit, product and plans to deliver, and more
granular and precise accountability to investors and board members.”
For Micheál J. Kelly, dean of the Lazaridis
Institute, a management research center at Wilfrid Laurier University in
Toronto, the transition requires knowledge that few startup leaders have.
“We’ve learned that entrepreneurs are very comfortable when they have 20
employees in their company,” he says, “but as soon as they need to build
structure around it, they have no idea what to do.”
Thus, any company that truly wants to shape
its future as a technological innovator must be ready to scale when the time
comes. Or as Hoffman said in his class about the early days of
entrepreneurship: “You [should be] thinking, what happens when it’s 1,000
people; 2,000 people; 3,000 people? Because the mistake people frequently make
in organizational stuff is they say, OK, let’s wait until it’s all broken and
then try to fix it. That’s much harder.” He added that the need to scale up was
a factor in his 2008 decision to replace himself as LinkedIn CEO with Jeffrey
Weiner. Weiner was recruited from Yahoo, where he had been executive vice
president of the network division and had led a team of 3,000 people.
Four Basic Principles
In the conversations I’ve had on this
subject, and in forums such as the blitzscaling course, four factors keep
coming up: setting up the founder in new roles that take advantage of his or
her creativity; recruiting for scale by seeking talented people who have
experience with the transition you’re about to enter; developing meaningful networks
within the company, so people can communicate even across large organizational
structures; and selectively adopting a few key mainstream management practices,
the kind that don’t swamp you in bureaucracy.
“The
principal challenge faced by a maturing startup is to remain the same but be
different,” says entrepreneur Hap Klopp.
These
practices all have a key principle in common: to remain the same but be
different,” as Hap Klopp puts it. Klopp, author of Almost: 12 Electric
Months Chasing a Silicon Valley Dream (with Brian Tarcy; Motivational
Press, 2015), has been a Silicon Valley entrepreneur since the mid-1980s, after
cofounding outdoor retailer The North Face. “The same things that are embedded
in the DNA of a company — its sense of urgency, singleness of purpose, passion,
devotion, and energy — need to be retained while simultaneously expanding the
team and expanding the horizon,” he says.
Repositioning
the founder:
In
1998, an engineer named S. Scott Crump and his wife, Lisa, were tinkering in their
Minnesota garage to create a toy frog for their 2-year-old daughter. He
discovered he could set up a hot glue gun to be programmed to shape 3D objects
by affixing the device to a robotic XYZ gantry system. This led him to invent
fused deposition modeling (FDM), the 3D printing process on which many digital
fabrication machines rely. The Crumps founded Stratasys, one of the first
companies in this field. Crump was chairman and CEO of Stratasys until December
2012, when it merged with Objet Geometries. At that point, he was replaced as
CEO and remained chairman. But he also took a role as the chief innovation
officer — symbolically and operationally retaining a connection between the
founder’s role and the strategic direction of the enterprise.
This pattern is common in mature technology
startups. At Google, for example, Larry Page took a new role in forming
Alphabet, Google’s innovation-driven parent company. It allowed Page to focus
his attention on fostering breakthrough innovation within the company.
Recruiting
for scale:
With
expansion comes rapid hiring, which can erode internal trust. To counter this
tendency, the companies that have navigated the chrysalis effect put a great
deal of time and effort into recruiting, even though they often face pressure
to add staff quickly. They seek people who fit their original culture, who
bring energy and a sense of accountability to their enterprises, and who know
how to push back against positions they disagree with, in a respectful,
constructive way. These companies also look for people with a broad
perspective.
“The
people who survive the transitions from startup to scale-up,” says Stivoric,
“are sponges for learning: interested in all aspects of the business. It
doesn’t matter whether they are senior management material or deep into
technical detail. You want them. They can flow with the phases and changes of
the business because they see where and how the pieces connect.”
Jawbone, for example, hired Jason Child as
chief financial officer. Child had 20 years of experience in leadership roles
at companies including Amazon. He had direct experience with the pitfalls of
poor management and the triumphs of good leadership.
Silicon
Valley’s famous tolerance for failure stems from this factor. “Some VCs say
it’s essential to hire experienced people because they’ve learned hard-earned
lessons from past mistakes,” says Amish Shah, founder and CEO of the recruiting
firm Millennium Search. “You want the double OPM: other people’s mistakes on
other people’s money.” However, the truly successful mature companies can also
attract success stories, and prosper accordingly. In July 2015, when the new
CFO of Google and Alphabet, former Morgan Stanley CFO Ruth Porat, arrived, the
company’s market capitalization jumped $60 billion — the biggest one-day gain
in market value for any company in history, according to the New York
Times. Investors knew the value of having someone in place who had run a
finance function effectively, especially for a commercial bank.
“The most successful entrepreneurs have been
in [big] business before,” says startup veteran Annette Kramer, who advises
entrepreneurs and venture capitalists on strategy. “They’ve seen how poor
management severely curtailed growth in enterprises when they were employees.
Their first priority now is to develop the company with an eye on growth, right
from the beginning.”
Below the executive levels, staffing an
organization with the right people requires the same intensive attention. The
strategy employed by Regeneron, a biopharmaceutical company that tripled in
size in four years, shows the important role played by organizational culture.
Faced with the need to swiftly add many experienced scientists to staff large
research projects, Regeneron invested first in articulating what was special
about its high-engagement, high-integrity culture. “Once these cultural values
were clearly articulated, they were able to attract new employees who fit,”
says Benoit Hardy-Vallée, an executive advisor with IBM who wrote a case study
about the initiative.
Developing
meaningful networks:
Having
recruited the right people, bring them together regularly in ways that enable
them to learn together, particularly across internal boundaries. This can be
done in large-scale gatherings focused on the company’s goals. In 2015 at
Makerbot, for example, Jonathan Jaglom, then the general manager of the
Asia-Pacific and Japan business, was promoted to CEO and charged with
overcoming a slowdown and revitalizing the company’s growth. “One of the first
things I did,” he recalls, “was to set up a 50-person voluntary creative staff
council.” His team identified the top influencers in different departments, and
he asked them to meet regularly with him as a group, to collaboratively
redefine Makerbot’s culture.
Meaningful networks can also be built through
one-on-one conversations. When Jeff Weiner became CEO of LinkedIn, he arranged
in-depth meetings with each senior team leader to talk about the company’s
strategy, priorities, and measurable objectives. He asked them what they would
focus on, and instructed them to think about the company’s culture and values
in that context. He then synthesized this into a common set of priorities,
articulated on a single page so everyone could understand what they were
working toward.
“This is still the same mission that we work
with today…. It’s important to have this, because it is actually the touchstone
which becomes part of daily decision making among the people who are within the
company,” explained Hoffman in the blitzscaling course.
Selectively
adopting mainstream management practices:
“Any
product that becomes popular and spreads through the Internet can see revenues
jump from $1 million to more than $100 million,” says J.F. Gauthier, head of
business development at Compass (formerly Startup Genome), which provides a
management dashboard and benchmarks for tech startups and e-commerce. “But
that’s just the tip of the iceberg.” Now comes the time to bring in the
established management practices that allow you to move forward. These may
include new ways of training and evaluating people, designing business
processes, working across internal boundaries, keeping track of performance,
marketing and selling at scale, building relationships with customers,
incorporating data analytics into your products — and managing technology
teams.
In
conventional companies, these jobs were typically handled by staff in
functional departments: IT, human resources, and organizational design. That
tends to slow an organization down. In startups, as Reid Hoffman said in aHarvard
Business Review interview, the company moves more quickly, scaling
faster than its competitors, taking on more risk, and seeking, as he put it,
“freedom from normal rules” of management.
You can’t avoid controls entirely; for
example, you need them to ensure quality throughout your company. You therefore
have to selectively borrow those practices, metrics, and organizational designs
that fit well with your company — and that allow you to keep tapping the
insight and experience of the people you hire. For example, Alphabet defined
itself within Google through its organizational design. It has a division
called X (or Google X) where entrepreneurs like Stivoric — who left Jawbone to
join Alphabet two weeks after our interview — can develop new businesses
separately from the rest of Google, but with the support they need to grow. X
has set up recruiting and management processes, long-term funding, and
collaborative practices that will presumably help these new businesses overcome
the chrysalis effect.
The Unicorn and the Butterfly
Devouring your own old practices and
consciously creating new ones may be painful. But the alternative, for many
startups, is worse. In the blitzscaling video, Hoffman recalled how
entrepreneurs facing this transition think: “Now I’m going to really crank up
my burn rate. I’m going to hire a whole bunch of people. I’m going to really
make a go at this.” But if you’re wrong, he said, “It’s pretty painful. It may
be death. If it’s not death, it’s a massive retrenchment and loss of
opportunity.”
To Silicon Valley’s unicorns — the tech
startups that have gained a market capitalization of $1 billion or more — the
challenges of growth may not seem relevant. They have, in effect, won for
themselves the capital with which to scale. But the popularity of Hoffman’s
course shows that capital is not enough for reliable growth.
The world may celebrate the unicorns of
technology, but the economy needs butterflies: companies that can introduce and
manage innovative technology with the maturity to stay afloat. Navigating
through the chrysalis effect, growing wings, and developing the ability to fly
afterward may differentiate your own enterprise. The process represents a rite
of passage for today’s generation of startups, and it may be a necessary factor
for our future economic health.
by Juliette Powell
http://www.strategy-business.com/article/The-Chrysalis-Effect?gko=b1a92&utm_source=itw&utm_medium=20160714&utm_campaign=resp
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