The Growth Stage Recipe – Ingredients Required to Build a Big Winner

As contributed to Fortune Term Sheet

For the few shining examples of enduringly successful high growth tech companies, there are far more that don’t make it.  Some of the most talented entrepreneurs fail to get their companies up and running, tripped up by technology or product issues.  Others grow their companies but plateau well below their aspirations.  Others still start successfully and may even get public, but are unable to achieve consistent growth and ultimately fail to create sustaining value.

Although rare, long-term successful companies create enormous value.  While many thousands of companies receive venture funding annually, rarely do more than 100 of these achieve an IPO in any one year.  And, an IPO is not an end game if you want to go long.  In fact, you can count the number of tech companies with over $1Bn in market value today on a few pairs of hands, and the list gets much shorter over $10Bn.  There are common traits among the winners, however, and aspiring entrepreneurs should always try to learn from existing models of success.

Four Keys To Going Long

There are many buttons to push when you’re running a company but in the spirit of Occam’s razor, identifying the simplest path can really help with focus.  The following list is far from exhaustive, but if you can nail these four, you’ll set your company up to be a long term winner.

Get Better as You Get Bigger

Most companies that achieve early success find that it gets harder, not easier, to continue prospering as they get larger.  Sometimes the initial, founder-led sales are difficult to replicate as less passionate salespeople are hired.  Other times, early demand turns out not to be indicative of a broader market need.  Whatever the culprit, growing gets harder and maintaining consistent pace feels a bit like running uphill in sand.

Some rare companies get better as they scale.  Sales teams get more efficient as more customers are added and the product matures.  Key metrics such as conversion rates, deal sizes, repeat purchases and support costs improve with growth.  The results are improving profit margins and higher return on capital over time.

Look at recently-public Workday.  The company has been steadily improving profitability with scale.  Sales & Marketing costs, R&D and G&A have all been declining as a percentage of revenue as the business has scaled.  Similarly, despite recent challenges, Apple’s return on equity has improved by 10% over the past five years.

Getting better with scale isn’t easy but if you want to build a long term winner, it’s essential to invest in your business.  This may slow growth for long periods – for example, you may need to slow hiring of sales people until you can build a mature enough product that will support efficient growth – but the long term result will be worth it.

Target an Enormous Market

There’s no shame in building a dominant player in a small market, but if you want to build a long term winner, your market has to be huge.  There are two ways to get there – disrupt an existing large market or build into a new one.

When Marc Benioff started and focused on CRM, this was already a huge market with a leader, Siebel Systems, generating $1.3 billion in the year before its acquisition by Oracle.  Launching as the first true SaaS application, Benioff disrupted the CRM market.  Today, at over a $3 billion run rate, Salesforce is much larger than Siebel at its peak, but Benioff didn’t have to create an enormous market – it was there and he was able to wrestle leadership from the incumbent via disruption.

Google, on the other hand, had built great search technology but hadn’t quite figured out how to monetize it in its early days.  Sure, Google didn’t invent search marketing, but the company re-invented this market, and single-handedly grew search marketing 20x in size over a 10 year period.

If your company is targeting an enormous market, your mission is to figure out how to win meaningful market share.  If your market isn’t huge, figure out how to grow it by introducing new products or attacking adjacent spaces.

Differentiate to Protect Against Competition

The more successful a company, the more likely it will engender serious competition. Unfortunately for undifferentiated high fliers, increased competition often causes trouble. Groupon grew very fast, but its competitive moat wasn’t deep and too many others have been able to offer similar savings to consumers.  The company has struggled to create value as a result.

Contrast Groupon’s experience with LinkedIn.  LinkedIn benefits from a meaningful core differentiator – its unique data set.  This data is enriched continually as business professionals keep their profiles and networks fresh.  Given the power of the network, there isn’t a viable alternative.  LinkedIn has been able to effectively monetize this data set, and without the threat of competition, appears positioned to grow profitably for the foreseeable future.

Build a Great Management Team

The best management teams excel at building the three attributes mentioned above – they structure businesses to get better as they scale, they expand the markets they go after and they create significant competitive barriers. In business, the only constant is change however.  The best teams recognize this and continually refresh the talent pool, grooming new leaders who are out in front of inevitable market shifts and who enable agility in the face of dynamic markets. The top teams also surround themselves with the best people, often times with boards that both challenge them and help them win.

There you have it.  While these four keys aren’t rocket science, they’re not simple to achieve.  The good news is that focusing on them early can help improve your chances of success!

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