From Startup to Tech Company

Scaling Strategy by The Family

By Nicolas Colin (Co-Founder & Director) | The Family

This story is part of a The Family series exploring business strategy in the 21st century. Sign up for my weekly newsletter to make sure you’re up-to-date on how businesses thrive in the digital age.

To overcome the many erroneous ideas about startups, it’s important to understand the successive steps an Entrepreneur must take before their venture eventually becomes a tech company. This reflection has two separate goals: to show that technology matters only quite late in the life of a tech company; and to explain to Entrepreneurs what they should focus on during their earliest steps.

The first step is activation. In today’s competitive and saturated environment, a startup Entrepreneur must be creative and analytical, adopting and adapting strategic methods to improve activation — which, by the way, is exactly what the phrase “growth hacking” means.

The second step is retention, when a maximum number of users comes back after a great first experience. For a retail application, it means making people become repeat buyers. For a SaaS company, it means lowering churn. For a startup providing content, it means getting people to read, listen or watch that content regularly. Retention is critical because it enables a startup to collect data on a regular basis and ultimately understand its users. Read what Andrew Chen has to say on that here.

The third step is knowledge, which is available at that point thanks to the accumulated data about those who repeatedly use the product. Indeed, intimate knowledge of users’ likes and dislikes is what makes it possible to constantly improve that product. Early users help Entrepreneurs better solve the problem they’re tackling — or, as explained by Paul Graham, “the initial user serves as the form for your mold; keep tweaking till you fit their needs perfectly, and you’ll usually find you’ve made something other users want too.”

There’s a reason why knowledge plays a key role early in a startup’s life. Entrepreneurs start a business with the intent of solving a given problem. Because of this intent, they acquire a first group of users who have that problem. As these users behave like clients, they provide feedback and demand improvement, forcing the Entrepreneur to redefine the problem and the way to address it. Intimate knowledge of early users allows for complete personalization, with the startup settling for the product that best fits the needs of those demanding early users. The Entrepreneur ends up developing a product that addresses the problem as defined by the pickiest ‘clients’.

At that stage, the startup is about to pass a very important inflection point: product-market fit. From serving clients, it will soon learn to serve customers. Seth Godin best defined the key difference between clients and customers:

Customers hear you say, “here, I made this,” and they buy or they don’t buy. Clients say to you, “I need this,” and if you want to get paid, you make it. The customer, ironically, doesn’t get something custom. The key distinction is who goes first, who gets to decide when it’s done.

Past product-market fit, the version of the product that satisfies all the early users is standardized, packaged into an exceptional user experience, and offered to everyone else. If the most demanding can be retained with a standardized value proposal, then everyone else can, too — others are even “wowed” by a product initially developed for the pickiest, which they didn’t imagine they could afford. This is why, at that point, the product merges into an exceptional experience. Within that experience, there remains some room for marginal personalization, but standardization at the highest level of quality is absolutely critical on the path from startup to company: Uber, Google, Amazon all offer a (mostly) standardized experience, because it’s a condition for scaling up operations.

Scaling up is when technology takes the center stage. Technology enables efficiency, like when Amazon replaces warehouse workers with Kiva robots. Technology enables machine learning, with data being harnessed to constantly improve the user experience. And advanced technology, including that resulting from the company’s own research & development, helps scale an exceptional experience up to hundreds of millions of users.

And that’s finally when increasing returns kick in, with the powerful, technology-driven combination of economies of scale, network effects, data, and virality. Increasing returns help the company increase its activation rate exponentially, with a rapidly diminishing marginal cost. The former startup has finally become a tech company, ready to take all or most of their market.

The first two steps (activation and retention) are all about marketing: this is the stage when a startup’s most important skill is that of the growth hacker. The three following steps (knowledge, personalization, exceptional experience) mark the reign of design: only designers can exploit the intimate knowledge of early users to devise what the startup’s standardized value proposal should be. Achieving product-market fit can only happen with good designers. Finally, scaling up and sustaining a company’s increasing returns are about technology. Those last steps ultimately confront the startup with raw technological challenges. Only then does it finally become a tech company — whereas a startup can rely on cheap, commoditized technology.

If you’re a corporate executive, here are the three questions you should ask yourself:

• When exploring a new market, do you take the steps in the appropriate order? You should focus on the right steps at the right time: first, marketing; then, design; and finally, technology.
• Is everything in place for you to accumulate knowledge? Because if you don’t practice regular and systematic monitoring of your users’ activity, you don’t belong in the Entrepreneurial Age.
• What’s your view on standardization? Should it be the lowest common denominator? Or rather, like the most successful tech companies, should you standardize upward, by democratizing premium products?

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