Pacing and Performance: Be Quick but Don’t Be in a Hurry
As we enjoy March Madness, the college basketball tournament is a clinic in clock management. In games calibrated for offensive and defensive efficiency, every possession counts.
Every athlete knows that proper pacing is essential to win a race. Sprints and marathons are different races: a sprinter must go all out but a marathoner bides time over a 26 mile course. Similarly, cricket teams deploy different strategies for five-day test matches, one day invitationals, and Twenty20 matches played over a couple of hours. Football teams practice the “two-minute drill”, a no huddle offense to score quickly at the end of a game. Hockey teams have two minutes to score during power plays. Even baseball has adopted a pitch clock to hasten the languid pace of play.
Many leaders have transferred game experience from the playing field to the board room. Seven-time Tour de France winner Lance Armstrong reminds us in his memoir that Every Second Counts. Bill Bradley, a hall of fame basketball player turned U.S. Senator, noted in his autobiography Life on the Run that “Life lived intensely develops a momentum of its own.” John Wooden, the only person enshrined in the basketball hall of fame both as a player and coach, advised his players: “Be quick but don’t be in a hurry.” Wooden meticulously optimized 200 hours of team practice each season in five-minute increments to win a record ten NCAA men’s championships[i].
Proper cadence is critical for survival. Pacemakers are required when heart rates beat inconsistently (arrhythmia), too slow (bradycardia), or too fast (tachycardia). In epidemiology, the R-value, or reproductive rate, measures the speed with which a virus will spread. Species with high reproductive rates such as insects and bacteria thrive in unstable, unpredictable environments while larger species such as humans and elephants with lower reproductive rates are better suited for stable environments.
Startup Pacing: Competing Against Time
In Competing Against Time, Stalk and Hout presciently showed in 1990 that Fortune 500 companies deployed time-based strategies to gain competitive advantage. Pacing has accelerated in the past thirty years and time to market advantage is a leading currency for both startups and corporations.
Rapid prototyping is the mantra for lean startups that deliver products quickly and iterate based on customer feedback. Customers devour buttery products that are user friendly and provide obvious, immediate value. At the other end, long sales and implementation cycles are often a death knell for startups as they delay feedback loops and retard adaptability in rapidly changing markets.
Having observed thousands of companies over more than thirty years as a venture investor, heartbeats vary visibly across firms. I prefer onsite meetings as company heartbeats are often palpable. Yelp bristled with energy when I met CEO Mike Ghaffary at his office. The office buzzed as employees wearing Yelp t-shirts and sweatshirts dashed through the hallways. Their smiling faces, warm greetings and skip in their step suggested success before it was evident in their numbers.
The pace of Moovit and Lime in their early growth stages was breathtaking. Moovit, the #1 urban transport app serving over 1.7 billion users in 3500 cities, used a proprietary crowdsourcing method to launch two new cities every three days with an initial team of just 13 people. Moovit CEO Nir Erez had an immediate rapport with Lime founding CEO Brad Bao when I introduced them. Lime, the global leader in micromobility, also grew quickly expanding to over 100 cities with 100,000 shared bikes and scooters within eighteen months of launch in an operationally intensive business. Brad Bao set an amazing pace as he was seemingly in a different city every day yet typically responded to texts within fifteen minutes.
UCWeb showed promise as a leading mobile gateway in China when I invested. When UCWeb won the China market, I encouraged CEO Yu Yongfu to expand globally. UCWeb executed flawlessly and was active in over 100 countries with more than 1 billion users within a year.
Yelp, Moovit, Lime and UCWeb share an ethos reflected well by Facebook’s motto “Move Fast and Break Things,” and their vibrant cultures were palpable during office visits. My favorite company motto is “Be Exothermic,” which SVT Robotics professes and embodies as its office crackles with the energy emitted by CEO AK Schulz and team. SVT dominates exhibition halls as crowds congregate for their high energy presentations and synchronized robot orchestration displays.
Startup Pacing: Both a Sprint and a Marathon
But there is a catch here. Creating a lasting, iconic business is at times a marathon and at other times a sprint so leaders must modulate the throttle based on market and company conditions. The fastest company in my portfolio to reach $100 million in sales ran aground with operational issues and sadly failed. Three high energy CEOs were great during the startup phase but passed the leadership baton when their companies needed a steadier hand as the business scaled.
Market conditions and company performance alter optimal pacing. It is best to stay lean and iterate quickly before Product Market Fit. Expanding before Product Market Fit slows startups down. After Product Market Fit, the race is on to accelerate the Flywheel and seize market leadership.
Entrepreneurs must navigate this fine balance. Good leaders have a sense of urgency and need guardrails to focus their ambition. Great leaders need no guardrails as they are best positioned to modulate pacing based on company needs.
Startup Pacing: Six Determinants of Sustainable Growth
Assessing Product Market Fit is a judgment call for investors and management. Early customer adoption may not be a good indicator of broader market acceptance. Customer satisfaction may not be evident until contract renewal or expansion. Initial unit economics are an unreliable gauge for long-term profitability.
On what basis should CEOs modulate company growth? The following six factors offer guidance.
- Competitive Dynamics: Competitors can help build market awareness but may also dictate pacing. Stealth mode is an effective strategy for startups pursuing new markets. Staying under the radar gives startups the opportunity to iterate in search of Product Market Fit without attracting attention from potential competitors. As I described in Three Startup Strategies to Survive and Thrive the Gartner Hype Cycle, it is best to raise capital as market conditions allow but stay lean until Product Market Fit is achieved.
- Product Development Cycles: Technology risk is inversely related to market risk as deep tech has high entry barriers. But technology risk increases company risk before the product if proven. Rapid prototyping and product iteration accelerate customer responsiveness. Yet beware of customizations that undermine product standardization, which is essential to scale the business. SaaS businesses delivering over-the-air updates can accelerate product cycles – often with daily or weekly releases – without incurring technical debt.
- Sales & Implementation Cycles: Long sales and implementation cycles slow customer feedback, increase churn and total cost of ownership, expand capital requirements and reduce adaptability in rapidly changing markets. A business with quarterly sales and implementation cycles can iterate twice as fast as those with semiannual cycles. A velocity advantage of just a month or two can be a huge competitive advantage.
- Customer Churn & Net Dollar Retention: Customer retention is less costly than new customer acquisition. Customer churn slows growth and raises reputational concerns. Conversely, startups with a proven land and expand model ensure predictable growth before new customer acquisition. High growth businesses often have a Net Dollar Retention of 125% or more. We also encourage use of Net Promoter Scores as an early indicator of customer sentiment.
- Virality: Virality enables growth without incurring customer acquisition costs. Sales and marketing costs typically exceed new sales at the outset, yet the ratio of new sales to customer acquisition costs is a key measure of growth efficiency as a business grows. While ratios differ across market segments, a good indicator of Product Market Fit is this ratio exceeds 2:1.
- Unit Economics: Unit economics determine operating leverage and capital intensity. Sustainable growth rates measure how fast a company can growth while remaining cash flow positive. Ongoing funding is contingent on startups achieving outsized growth and promising unit economics. Investors typically index more highly on growth during bull markets and unit economics in downturns. CEOs have optionality when both growth and unit economics are favorable.
While startups should monitor many metrics, I recommend focusing on a few key indicators to calibrate pacing and measure business performance.
Proper pacing is essential for startup success. Higher velocity confers a competitive advantage and enables startups to outmaneuver incumbents in rapidly changing markets. May you stay in sync with your customers and one step ahead of your competitors.
Related Concepts
The Window of Opportunity – the timeframe during which a market winner is determined – is about Clock Management. Markets speed up when customers select a Dominant Design and startups achieve Product Market Fit. Winner Take Most Markets, especially those subject to Economies of Scale and Increasing Returns to Scale, increase rewards for winning markets and will accelerate efforts to achieve Critical Mass. Market dynamics influence First Mover Advantage versus adopting a Fast Follower strategy.
Financial factors also impact appropriate pacing. Sustainable Growth Rate determines the pace at which a company can grow without raising external funding. Capital availability will influence potential pacing, which depends on where a product is on the Gartner Hype Cycle. Capital Intensity determines funding requirements to scale a business. Raising equity to accelerate growth dilutes shareholders and impacts Return on Investment while raising debt increasing Leverage, which increases business risk and requires a higher Margin of Safety. Lean Startups can reduce Capital Intensity by Rapid Prototyping with a Minimum Viable Product and adjusting quickly based on customer feedback. These are one of many strategies to accelerate the Flywheel to reach Critical Mass and achieve Escape Velocity.
[i] John Wooden and Steve Jamison, Wooden on Leadership.