The most important success factor in working with entrepreneurs: matching development stages

Whenever we have particular successes or particular failures with the startups in our portfolio I tend to try figuring out what was behind them. I think it’s important to think about patterns of behaviour that we should aim to repeat or avoid next time around if similar circumstances come to pass. Failure is an intrinsic part of working with startups but failures can be reduced or limited by paying attention to these points.

A quick reminder of what RIG does for those coming across us for the first time: we have a team of advisors who specialise in helping startups scale up to become sustainable businesses. Our model is similar to a VC’s model in that we have an element of fees and an element of ‘upside’ linked to the success of the startups with which we work. As a result, like a VC, we have limited space in our portfolio, and failure can mean working with the wrong companies over a long period without great success just as much as working with companies that crash out quickly and spectacularly. We also invest financially in startups which we really believe in.

Last week one of the companies in our portfolio had a great success – they won a significant contract with a major player in their target market, after a year of our combined hard work figuring out every aspect of market strategy, complex customer buying processes, the value proposition, the pricing, and the product development strategy. I tried to reflect on what has made this project successful to date and it struck me how important it was that we agreed about which development stage the startup was in.

At RIG we talk about three key development stages that all startups go through in their journey to becoming a sustainable business: finding a business model, building capability, and realising value. They broadly reflect other categorisations of phases that we’ve seen from other industry commentators such as Steve Blank’s Customer Discovery, Customer Validation, Customer Creation, and Company Building, and Ash Maurya’s Problem/Solution fit, Product/Market fit, and Achieving Scale. I think that the biggest determinant of a successful relationship and a successful collaboration with an entrepreneur as an investor or advisor is that you agree on the startup’s development stage.

Looking back at some of the startups I’ve worked with that have not done so well, the relationships I’ve had with the entrepreneurs have almost always been characterised by a difference in opinion about the development stage. I recall that one entrepreneur was convinced that his startup had a market-winning product that clearly solved a serious problem in his target market, but during the course of our collaboration we spoke to players in the market who didn’t understand how the product applied to them or how they would use it. Another entrepreneur felt unsure about fully committing his resources to a market strategy that had started to work, switched business model, and went back to discovery mode.

These differences are crucial because your development stage dictates everything about how you as the entrepreneur should invest your startup’s limited resources – in other words, it dictates your entire strategy.

Trying to optimise, outsource, and streamline your processes when you haven’t yet found a business model (i.e., you haven’t validated customer demand and therefore haven’t reached problem/solution fit) simply wastes a lot of money. In this stage you need your best resources at the front line learning from the customer and feeding back to your market strategy, proposition, and so on. Conversely, once you have real evidence of customer demand, spending time away from focussed execution will only slow your growth rate – sometimes to such an extent that you miss the market opportunity and never get past the startline.

I think that our recent success comes down as much as anything else to the fact that we all agreed that the startup was still trying to find its place in the world: working out where its product had the most value, who would pay a good price for it, and how to find those customers at acceptable cost. The entrepreneur didn’t try to go too quickly and didn’t get too disheartened by following a few paths with dead-ends. And now that they have a solid proof point of the right kind of customer demand they can shift into execution mode with renewed confidence.

I would be fascinated to hear the thoughts of investors who are asked to invest sometimes for discovery and sometimes for scaling. I would guess that if an entrepreneur asks for money with the promise of scale and then spends it on discovery, or vice-versa, then the relationship will almost inevitably deteriorate.

Please leave your thoughts in the comments section below.