The lean entrepreneurship movement has captivated Silicon Valley and entrepreneurs across the country. It's provided an agile framework to develop the right product solution for a given target market, and is now used by almost every fledgling company to do just that.
The next challenge is growth - to achieve the financial returns and, more importantly, the impact they dreamed of when starting off on their adventure. Why do some companies realize the VC's goal of a 10x return on investment, while others flounder? What differentiates the companies that become part of the fabric of our lives and remain responsive, no matter how big they get from those that quickly fade? To find out, Ammirati looks at 20 different companies in pairs, who have achieved product-market fit at about the same point in history with the same general target customer-one of which has gone on to achieve real scale, while the other languished. As his research reveals, just a handful of choices-among them, who to partner with, how to finance growth, and how to use data-make all the difference in the world. With such intriguing examples as LinkedIn vs. Spoke, Facebook vs. Friendster, and McDonald's vs. White Castle, Ammirati shows the secret of "the science of growth" and how to cultivate it in any organization.
|Publisher:||St. Martin's Press|
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About the Author
SEAN AMMIRATI is a Partner at Birchmere Ventures, an early-stage venture capital firm based in Pittsburgh, PA, and Palo Alto, CA, and is an Adjunct Professor of Entrepreneurship at Carnegie Mellon University. Most recently, he was the COO of ReadWriteWeb, one of the most influential sites about the future of technology and innovation. Sean was previously co-founder and CEO of mSpoke, a big data SaaS company.
Read an Excerpt
The Science of Growth
How Facebook Beat Friendster â" and How Nine Other Startups Left the Rest in the Dust
By Sean Ammirati
St. Martin's PressCopyright © 2016 Sean Ammirati
All rights reserved.
"Genius is one percent inspiration and ninety-nine percent perspiration."
— Thomas Edison
If someone awoke after a fifty-year slumber, they'd find the new world to be a magical place. The phones in our pockets can call anyone in the world, yet we rarely speak into them. Instead, they are fully functioning computers with "apps" that can make a car or meal show up magically without our having to utter a word. If the modern-day Rip Van Winkle were to open the paper (likely on a tablet), they could read about multiple companies trying to build self-driving cars. Of course, prior generations could point to advances in their lifetimes that were similarly transformative, including the mass adoption of automobiles, televisions, radios, telephones, and even electricity.
It's because of passionate entrepreneurs that each of these improvements exists. Entrepreneurs see things that are broken in our everyday lives, and create the world they think we ought to live in by commercializing innovation.
I think the future is very bright, because more and more people are contemplating entrepreneurship as a career. From 1990 until today, the number of entrepreneurship programs on college campuses has increased from 180 to over 2,000. The quality of these programs and the entrepreneurs they educate is a key point of differentiation for universities.
And these emerging entrepreneurs have more and more high- quality material available to them, both in the classroom and on their nightstands. Thanks to thought leaders like Eric Reis and Steve Blank, the lean startup movement has captivated Silicon Valley and entrepreneurs across the country.
If you aren't familiar with the lean startup movement, it's a philosophy that basically takes the scientific method and applies it to the process of building a company. You devise a set of experiments, as efficiently as possible, to validate or invalidate key hypotheses about your business. The term "lean" comes from some of the techniques this process leverages from lean manufacturing.
I'm a big unapologetic fan of the lean startup movement, so much so that I teach the Lean Entrepreneurship graduate course at Carnegie Mellon University. I also work as a venture capitalist, helping companies early in their life cycle use many of these techniques to better understand their customers and build the right products for them.
One day, however, at the end of one of my lean entrepreneurship courses, a masters student in robotics and I were chatting on the way out of class. This student is brilliant, but to be honest, had also been a challenge throughout the course. He regularly asked questions that he knew would take the lecture in a completely different direction than I had planned, and it often caused me to have to play catch-up. If you think back to your time in school, you can probably recall at least one student like him.
Walking out of class that night, he complimented me on the course and said how much he had learned from it, describing it as "the best course [he'd] taken in his entire time at CMU." I was relieved, but only momentarily, as he followed up with, "But it was a waste of time." I paused, thought to myself, "All feedback is a gift," and asked him to elaborate.
He explained that while it was great to learn about the processes and techniques that can turn an idea into a product that solves a real problem in a good market (a startup goal often called "product-market fit"), a much more relevant question (and one that would go on to form the basis for this book) was: What happens after you find product-market fit?
The more I thought about it, the more profound the question actually seemed. It's certainly true that plenty of companies have ultimately failed because they never built a product that solved a real problem, at least not for a large enough market to build a viable business.
But there were plenty of other companies that did build a product that solved a real problem for customers, yet never achieved the scale their founders envisioned. For every success story, like Facebook, there are thousands of stories of companies that started strong, then faded. In fact, the night that student and I chatted, Facebook had just released another strong set of earnings results, and was exploding in aftermarket activity. Yet, as most people older than 35 can remember, Facebook was predated by a number of competing social networks — including Friendster — that ultimately stalled out.
As my mind started racing, I wondered, Why do some companies stall out while others scale up? Are there best practices and techniques, similar to those I had taught in my Lean Entrepreneurship course, that could help at this stage of hypergrowth?
I also came to appreciate that for many of my grad students — because of visa issues, educational loans, or career ambitions — how to scale up a company was actually a much more relevant topic than how to start one. At this point in their lives, many of them were planning to join a venture-backed startup and contribute to scaling it up, not to found one.
I decided to step back and create a complementary course that would focus on exactly this topic of hypergrowth. I started by searching for a text like Eric Reis's Lean Startup and Steve Blank's Startup Owner's Manual to serve as the foundation of the new course. However, while I found tons of great resources on specific aspects, such as how to market or finance your startup, there was no holistic framework — complete with best practices and vocabulary — on what to do after you've found product-market fit.
As I started pulling material for the course, I became frustrated that the narrative didn't easily fit together. A hodgepodge of different material from different books — sometimes with conflicting recommendations — wouldn't get the job done. So in collaboration with my graduate students at Carnegie Mellon, I led an exploration looking at 20 different companies, split into pairs, that had achieved product-market fit at about the same point in their histories and had the same general target customer — but in each pair, one company had gone on to achieve real scale, while the other languished, never realizing its full potential. We augmented our research with an additional six companies that did not have a clear peer, but had achieved tremendous scale using the best practices identified in our earlier research.
The startups that achieved scale not only generated great wealth for their founders and early investors but, just as important, changed the world. The ones that did not, did not. What was the difference that meant so much?
You could easily assume that it was luck, but you'd be wrong. While each company's approach is of course unique, I've discovered that there is a science to growth. Across these case studies, a set of best practices has emerged, which I summarize in this book.
OVERVIEW OF RESEARCH
One of the most common questions I get when talking to people about this book and earlier research is: How does this relate to Good to Great and Built to Last by Jim Collins?
First of all, I should say I'm a huge fan of all of Jim Collins's work. His books were some of the most influential I read as a young entrepreneur and inspired me to build my own startups. I hope that this work will be similarly inspiring to future entrepreneurs.
Like Collins's work, this book takes a pair-wise comparison approach to the case studies. I believe this is effective because it avoids an oversight that many business texts make — specifically, looking only at success stories and ignoring the many failed companies that took a similar approach.
However, this book's focus is exclusively on startups early in their development. When the students and I started looking for these pairs of companies, we didn't have a hard-and-fast set of rules to drive selection. We were interested in what these companies were doing long before they went public. In fact, some of the successful companies were ultimately acquired; others are still privately held. Certainly, the companies that failed never achieved any public offering. Therefore, there was no standardized financial reporting information available for all the companies we looked at, and we could not come up with a single set of financial performance rules to determine which companies to include and which to exclude from our study.
Instead, the students and I used relatively famous companies as examples, because, when conducting completely secondary research, it is helpful to have a lot of information to pull from. It also enabled us (and the reader of this book) to have a better understanding of what the companies do, since most of them make products we interact with in our everyday lives.
We also focused primarily, but not exclusively, on software and Internet companies. This was helpful in several ways. First, there is a lot of information available about such companies, especially at the early stages of their growth when they are still privately held. Additionally, most executives today are realizing that even if their company is more of an industrial company, they can't ignore the reality that software is transforming their industry. Recently on the Charlie Rose show, Jeff Immelt, the CEO of General Electric, commented:
It's our belief that every industrial company, in the coming age, is also going to be a software and analytics company. The people that deny that digitization is going to impact every corner of the economy are going to get left behind.
However, we didn't limit ourselves to these types of companies, as we wanted to make sure the principles were broadly applicable to all types of transformative innovations. One particularly interesting case was the development of Fisker and Tesla in their race to commercialize electric cars. One company has gone on to be worth more than $25 billion, while the other filed for bankruptcy.
As any executive can tell you, the rate of change has accelerated dramatically over the last few decades, the time frame in which almost all of our chosen companies were established. However, for historical perspective, we've analyzed the case of McDonald's versus White Castle, two companies founded in the first half of the twentieth century. In fact, White Castle was started almost 20 years before McDonald's and invented the kitchen assembly line that McDonald's later popularized. McDonald's took advantage of many of the best practices later used by Internet companies like Facebook and Tumblr and today has over 34,000 locations, while White Castle has less than 500.
The full set of companies analyzed follows in the tables below:
MORE DETAILS ON THE COMPANIES CHOSEN
If you are already familiar with all of the companies chosen, you can skip this section. If not, you can jump to the companies with which you are not acquainted.
Tumblr and Posterous
Both Tumblr and Posterous provided a microblogging solution. The idea of a microblog is to provide a web platform on which individuals can publish short and frequent updates. As the name implies, the service is optimized for shorter updates relative to what you might typically think of from a traditional blog. This content typically includes photos, quotes, or very short (usually less than a few paragraphs) text updates. Tumblr was launched in February 2007 and about five years later was acquired by Yahoo for $1.1 billion. Today (as of July 1, 2015) Tumblr hosts over 240 million blogs. Posterous was started shortly after Tumblr and was its main competitor in the early years of development, but unfortunately it never achieved similar scale. The company was eventually shut down on March 12, 2012, after the majority of its team was acquired by Twitter in what has become known as an "acqui-hire" (in which the purpose of the transaction is not primarily to acquire the startup's technology or customer base, but its team).
Tesla and Fisker
Tesla Motors and Fisker Automotive both sought to create a premium electric car for mass production. Tesla would ultimately fulfill that vision — first with a sports car (Tesla Roadster), later with a premium sedan (Tesla Model S), and most recently with a premium SUV (Tesla Model X). In the first quarter of 2015, Tesla delivered over 10,000 Model S vehicles to owners around the world. Fisker on the other hand would end up producing only one vehicle (Karma), whose production was suspended shortly before the company declared bankruptcy.
Mint and Wesabe
Mint and Wesabe were two free web-based personal finance management services. They both sought to make it easier for individuals to manage personal finances by tracking bank, credit card, investment, and loan transactions and balances as well as making budgets and setting goals. Mint grew rapidly and was eventually purchased by Intuit, the maker of Quicken and TurboTax. Wesabe launched in December 2005, a full ten months before Mint. Despite this early lead, Wesabe failed to gain significant market share and ultimately was shut down after running out of money.
Automattic (WordPress) and Six Apart (Movable Type)
Automattic and Six Apart both provided a service for hosting blogs. A unique aspect of these companies is they both were built around software that their founders had created to manage blogs. In the case of Automattic, that blogging software was WordPress; for Six Apart it was Movable Type. The companies the two entrepreneurs founded simplified the process of running this blogging software on the Internet. It's difficult to separate the blogging software from the companies; we'll highlight stories of both throughout the book. WordPress was launched in August 2005 and is now used by over 60 million sites, including more than 23.3 percent of the top ten million websites (as of January 2015). WordPress competed directly with Six Apart and its Movable Type blogging service, which was launched in 2001, well before WordPress. However, eventually WordPress overtook Movable Type as the preferred blogging platform, and today almost no one uses Movable Type. Automattic is a thriving company valued at over $1 billion in its last financing round. Six Apart, on the other hand, was merged with VideoEgg to form a new company, SAY Media, and less than three months later that new company sold the Movable Type assets to a Japanese IT services company.
YouTube and Revver
YouTube and Revver were both early entrants in creating an online video-sharing platform. YouTube was founded by three former PayPal employees in 2005. The site made it incredibly simple to upload, share, and watch videos. In 2006 Google purchased YouTube for $1.65 billion. Revver entered the video-sharing market with a product similar to YouTube but with what they believed was a better solution: They attached advertising to all videos uploaded to their site and offered to share ad revenue with content creators. Unfortunately for the three founders of Revver, this differentiation didn't result in the same growth YouTube experienced. The company was acquired by LiveUniverse and eventually shut down.
Facebook and Friendster
Friendster was one of the original social networking sites. Founded by Jonathan Abrams and launched in 2002, Friendster grew rapidly, securing over three million users within the first few months of going live. However, ultimately Friendster was overtaken by MySpace in 2004 and then MySpace was similarly overtaken by Facebook. Unlike the two companies that preceded it, Facebook at this point appears to have created a service with significant staying power: The company today is valued at more than $270 billion. Facebook initially limited the website's membership to Harvard students, later expanding it to colleges in the Boston area, the Ivy League, and Stanford University before eventually opening it to all universities, high-school students, and finally to anyone who is at least 13 years old. With almost 1.5 billion users in 2015, Facebook remains the world's most popular social network.
LinkedIn and Spoke
LinkedIn is a business/professional-oriented social networking service launched on May 5, 2003. It was founded by Reid Hoffman, formerly of PayPal, and four co-founders. The site grew steadily in popularity. In 2015 it had over 365 million users in more than 200 countries. Spoke, a site launched at about the same time, was also designed to offer an online solution for professional networking as well as a business directory. Although Spoke is still in operation today, Internet audience measurement firm Quantcast estimates it is getting less than 200,000 visitors a month.
Hotmail and Juno
Although hard to remember today, at one point, most individuals got their personal email address through their Internet service provider, such as America Online. Hotmail sought to change this by providing free web-based email. Hotmail service was founded by Sabeer Bhatia and Jack Smith, and was one of the first webmail services on the Internet. It was launched on July 4, 1996, and by December 1997 had over 8.5 million subscribers — which was quite a large number back when most people were still using dial-up. Hotmail was acquired by Microsoft for $400 million on New Year's Eve 1997.
Excerpted from The Science of Growth by Sean Ammirati. Copyright © 2016 Sean Ammirati. Excerpted by permission of St. Martin's Press.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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Table of Contents
Foreword Richard Florida ix
1 Introduction 1
Section I Prerequisites For Scaling 25
2 Founder's Core Vision 27
3 Scalable Ideas 41
4 Solves a Real Problem 51
5 An Excellent First Interaction 61
Section II Catalysis For Accelerating Growth 75
6 Double Trigger Events 77
7 Drafting off Platforms 87
8 Optimizing Algorithms 97
9 Viral Growth: Measuring and Optimizing 113
Section III Elements For Sustained Long-Term Growth 125
10 Be Data Informed (Not Data Driven) 127
11 Financing Strategies 145
12 High-Performing Teams 155
13 A Culture of Discipline/Focus 167
14 Maximizing the Value of Network 179
15 Conclusion 187
Appendix: Company Overviews 195