Weekly Briefing Note for Founders

26th June 2023

This week on the startup to scaleup journey:

  • The '7 powers' of startup growth
  • A question VCs never ask (out loud)

The '7 powers' of startup growth

As the funding market has tightened over recent months, so the bar for Series A funding has risen. Now, it's far from certain that even with several $M's in revenues and tangible evidence of product/market fit (PMF), this will be enough to convince VCs. Customer spending constraints, both at the consumer and corporate level, are impacting early-stage growth. As a result, VCs are digging further into the core assumptions around PMF (to see if they still hold) and the growth strategy (to see if it will survive a dramatically changed macro-environment). In the enterprise, for example, where spending decisions have become more centralised, PMF is bifurcating into product 'user' fit & product 'buyer' fit. As a result, PLG strategies have stalled as multiple stakeholders must now buy into the value proposition. But even with PMF secured, it's the growth strategy that is receiving the closest examination in due diligence: How the company is cementing a differentiated market position that will enable it to achieve its longer-term vision. Examples of operational excellence are now just table stakes and sales to early adopters alone may not be enough to signal that there is a credible plan to unlock the early majority. How can founders develop, implement and communicate a growth strategy that will resonate with investors in this tougher climate?

In our experience, there is no better place to look for inspiration than Hamilton Helmer's thesis, "7 Powers". This celebrated text provides a comprehensive framework for understanding and analysing the sources of power that drive business success. In particular, it offers valuable insights and strategies for founders who have achieved product/market fit and are seeking to scale up their operations and find sustainable competitive advantage. Helmer identifies seven distinct sources of power that can contribute to a company's success: scale economies, network economies, counter-positioning, process power, branding power, cornered resource, and switching costs. He provides tools and frameworks to assess the strength and relevance of each power and how they interact. Helmer then offers practical advice on making strategic decisions based on an understanding of the power sources. This includes guidance on pricing strategies, product differentiation, market positioning, resource allocation, and expansion planning. Over the years, the language and lessons of "7 Powers" have been broadly adopted by mainstream VC. Experienced founders not only adopt the well-tested principles but lace their pitch decks with Helmer's terminology to create 'investor connection'.

Serial entrepreneur, Guy Podjarny, is the Founder of Snyk, the leading Developer Security platform, recently valued at over $7B. He is a public speaker, O’Reilly author, and an active early-stage angel investor with over 100 investments. Podjarny recently disclosed that he is an avid user of the "7 Powers" framework both as an operator tool and an investment due diligence aid. His own experience is that counter-positioning (e.g. disrupting the status quo in an industry) and cornered resources (e.g. specialist knowledge born of unique insight) often provide the early foundations that can be built upon post-PMF. These, together with other powers, then help build defensibility as well as driving the growth strategy. Podjarny believes that each startup must create its own blend of powers depending on the industry, market dynamics, and unique characteristics of the startup. For startups that have got 'stuck' in a low-growth cycle post-PMF, a power exercise (to determine the optimum mix) can help them select their own investment priorities. This systematic analysis eventually becomes part of the culture and adds to the process power. The methodology also provides a consistent way of explaining the growth strategy that can be understood by investors.

A question VCs never ask (out loud)

Deciding if a business can scale is one of the most significant questions an investor asks at Series A. They will evaluate commercial progress, examine the growth strategy, dig into the go to market plan and test the business model. This much we all expect. But there is a second unspoken question that the investor is asking themselves. This is just as vital, but personal: Can the founder scale? The street smart entrepreneur who can raise a pre-seed round with a good narrative, pull in the early hires, create a sense of momentum and an esprit de corps, is often very negatively correlated with the sort of personality that wants to institutionalise business processes, undertake quarterly legal, financial and HR reviews, and monitor QBR reporting. One of the very first concerns for investors - as soon as early scaling begins - is employee productivity. In small teams of say 10 or less, there is little conventional management going on. Everyone is in regular direct contact, knows each other well, and the team members are effectively managing each other by influence. But when you scale to 30 people, to 90 people or above, you no longer have those personal connections and have to move to formal management techniques. That's when things can start to break down.

Charlie Songhurst is the former head of strategy at Microsoft and now a prolific tech investor. Few have had the opportunity to study the effects of scale on business fortune as he has done. He sees the biggest risk to the startup to scaleup journey as a collapse in the productivity per person - including that of the founder. In a recent interview, he refers to a term in microeconomics called managerial diseconomies of scale. "I think in some ways the angle of the decline of productivity per person is the difference between the great startups and the failures. And maybe if you're a great startup, as you go from 10 people to 100 people output per person drops 15%. And if you're a bad startup, it actually drops over 90% with the result that often 100-person startups produce less than they did when they had 10 people, because the managerial collapse has been so extreme." This collapse is often attributable to a simple lack of experience at managing operational scale as well as having to frequently deal with the uglier side of business that someone forgot to put in the job spec. Once you get to a certain size there is a regular flow of employee strife, lawsuits from ex-employees, patent infringement suits, debt collecting from customers and all the other boring but highly distracting stuff that is vital to survival - but kills productivity. Experienced founders foresee this and are highly proactive as a result.

When he meets a founder, Songhurst says: "I close my eyes and imagine this person on a public company conference call. Remembering my days at Microsoft, as in the Microsoft earnings call. And I'm thinking, can I imagine them sitting as a sort of CEO, next to their CFO, talking with the Wall Street equity analysts and the buy side on the phone and just being credible enough, deep enough, and mature enough to pull that off?" Founders that are pitching for their Series A may not be at that stage quite yet, but they have to make the right impression. Even without the prior experience of managing a 100+ employee team, they can allay investor fears by demonstrating high levels of self-awareness. A great way to do this is to set out the hiring plan, identifying the key executive roles and the experience they will bring (the gaps they will fill), and when they will be needed. For example, an IP-rich tech business regularly undertaking joint customer development would hire a General Counsel at the earliest moment, whereas a consumer services startup would likely defer this hire until the business was far more established. By Series A there should already be evidence that the founder has the ability to hire outstanding talent as well as being able to 'say goodbye' to those that haven't turned out to be a fit. This is a critical inflection point for personal scaling - it shows the founder is willing to be disagreeable to make the company what they want.

Happy reading!

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