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The two keys to scaling a startup

By Robert H. Hacker

RobertHackerEntrepreneurs who dream of starting a new business typically dream of creating the next Google, Crocs or Starbucks. To reach that scale, one needs to examine successful, large entrepreneurial companies. In doing so, one identifies two key factors that explain their scale:

  1. 1. The business concept or Quality of Idea.
  2. 2. The business model or Quality of Execution.

Execution, how the idea is implemented, determines the pace of revenue and company growth.  To better understand successful execution in a startup one should focus on “business model”, which is a systematic approach to commercializing a product. There are many good writers on business model, such as Steve Blank at Stanford, Eric Ries of Lean Startup and Alexander Osterwalder, author of the “Business Model Canvas.” However, the slope of the revenue growth curve, reflecting the quality of execution, does not explain how big the company will be. Execution only determines how quickly the company will realize its potential and perhaps how capital efficient it will be. We will come back at another time to Quality of Execution and business model.

The key to building a really large company is the Quality of Idea or business concept because this is the factor that determines the market potential and therefore the ultimate potential size of the company.

Having worked hands-on with many entrepreneurs and their companies, I have found that many fail to give sufficient depth of thought to the original idea. Interestingly, serial entrepreneurs tend to put much more energy and thinking into the Quality of Idea for their second or third business than first timers. The question that the entrepreneur looking to build a large, scalable business should be asking at this point is “how do I improve the quality of the initial idea or business concept” of my company?

The most effective process that I recommend is “design thinking”. Design thinking has proven so effective a process that its use has expanded beyond product and service design to include almost any complex problem. For example, the U.S. Army adopted design thinking as the way to successfully approach the issue of insurgents in Iraq and Afghanistan. Design thinking has been popularized in part by the Stanford University Design School, and the school's website is an excellent resource to understand the process and the concepts.

To better understand the customer, design thinking begins with three key steps:

  1. 1. An environmental analysis to fully explore the needs of the customer
  2. 2. Formulation of a tentative problem statement
  3. 3. Proposal of a hypothetical solution to the problem

Part of the power of design thinking is the initial focus on the potential customer or user. The goal of the environmental analysis is to understand the customer such that you empathize with their situation. Without such an emotional realization one cannot generate the emotional reaction required from any customer to complete a sale. With this depth of understanding, the formulation of the problem tends to be a larger, more thoughtful concept. With the problem defined more broadly, the range of the hypothetical solutions naturally expands to consider many more alternatives, wherein lies the “quality”.

A recent example may illustrate my point. Suppose that you were tasked to develop an educational tablet for children. A superficial survey of parents would immediately lead one to the conclusion that parents want “electronic babysitters” and an entertainment device for children would be produced. A more thoughtful understanding of parents might show that they want to supplement what their children learn in school and they have difficulty choosing new software from the thousands of titles available. Parental control of website access and fear of exorbitant download bills might also surface. This type of analysis leads to a deeper  understanding of the emotional issues of the parent and a more profound understanding of their problem. Properly framing the problem in an emotional context increases the likelihood of customer acceptance of the proposed solution and thereby increases market potential. (This example merely illustrates the first three major steps in design thinking. Reaching a market ready solution also involves collaboration, iteration, prototyping and many other concepts and techniques.)

To build a really large new company, one needs a high quality, well thought out idea and design thinking is one proven technique to produce such ideas. To increase the likelihood of realizing the market potential of the idea, execution is key and business model development is an effective process to formulate the execution strategy.

Robert H. Hacker is the Managing Partner of GH Capital Partners, a Miami-based consultancy specializing in growth strategies, acquisitions and turnarounds for entrepreneurs since 2005. Also, he is an Adjunct Professor of Entrepreneurship and Social Entrepreneurship at Florida International University and previously taught at the MIT Sloan School of Management. He is the author of "Billion Dollar Company: An entrepreneur’s guide to business models for high growth companies" and has blogged for six years at Sophisticated Finance

Want to read more about design thinking? Find some suggestions in this Sophisticated Finance post.