Ali Mese from Growth Supply published this article on Crew a couple of weeks ago. It might be the best post on sales funnels I have ever read. His point is simple. Why worry about the detail of your metrics when you could be creating more value for customers? And he cites plenty of great companies that share this philosophy.
Perhaps though he would not expect confirmation from the boss of Dior. In Lunch with the FT this week Sidney Toledano expressed his view of reliance on numbers:
“Some people try to find out what’s wrong through the numbers. But if you stay in the office, nothing will change.” and “…its better to have no explanation for success than a lot of explanations for failure."
This stands in nice contrast to the deluge of metrics matter material hitting startups. Some readers may know that I am not a big fan of this approach. But instead of digging further into why I think its wrong, let me ask a different question.
Why on earth do startups want to measure and manage everything they possibly can?
For a start, I seem to remember that being an entrepreneur is about freedom. Fire your boss. Get out while you can. Do more of what you love. And so on. Where is the fun in becoming a slave to numbers and data instead of wages?
And if you think that’s fine for founders but you need a system to control the rest of your business? Well I suggest you go back and reread Animal Farm.
So next time you feel the need to grab hold of another set of metrics. And manage the hell out of some abstract concept. Think about these three things.
Both management and leadership are about human behaviour. The task is to get people to do what you would like them to do. Or to inspire them to fulfil their potential. This applies to customers, investors and teams.
The best way to influence human behaviour is through incentives of all kinds. Measurement creates incentives. So metrics can be an effective agent of change. But they are not the only way. And they can have unintended consequences.
There is a famous example from India in the days of the Raj. Colonial officials were worried about the growing number of poisonous snakes, mainly cobras. They offered a reward for each dead cobra brought to officials. Locals soon started breeding snakes and then killing them for the reward. Before long there were more snakes than ever.
Your challenge is to change things. That is the point of a startup. So the right place to start is how you create a system of incentives that encourage the change you would like to see. Choose each with care and learn from the effects that result. Place any metrics you choose to use squarely in this context. Try to keep the reptile count down.
Startups make an impact when they understand real world problems and build solutions that make a difference. This does not happen in a bijou loft converted into a cool co-working space. You need to leave the startup bubble and go listen to customers.
After change, the next order task is to learn. Data can be an excellent way of learning about customers and markets. But just because you have data doesn’t mean you should use it. One of the greatest errors in management is relying on numbers just because they are there.
What about the things you can’t measure? Sometimes the stuff which can’t be reduced to numbers is the only stuff that matters. Don’t use your metrics as a crutch and miss the big picture.
It is rubbish to say that you can’t manage what you can’t measure. Good leaders do it all the time. They sense problems in the team. They interpret customer feedback. They listen to advice and weigh the options.
Don’t allow metrics to be a substitute for management or leadership skill.
Metrics eat time. There is the delay between measuring and reporting. Shorter than it used to be but longer than you think. Then there is the time taken to analyse. discuss and decide. Often productive but the more you do it the fuller your diary looks.
And there is a philosophical paradox. No matter how much someone tells you that their pet metric will predict the future, it is still based on the past. The growth. The change you would like to happen. The success of your business. All this lies in the future. The past speaks in a foreign tongue. How good are you at translating into the language of today?
Startups need speed. Almost the only advantage you have over incumbents is agility. The ability to respond faster and better to emerging market needs. Numbers can help. Or clog up your business thoughts and actions. Use the good stuff and don’t let too much data get in the way.
There is a place for numbers. Metrics can provide a valuable indicator of performance. And an early warning flag for problems. But the goal of business is to create wealth. Not to generate good numbers. Focus on the things that matter.
Use your numbers to help you. Aim for a balance. Good management and great leadership requires thinking and action that is both analogue and digital.
Silicon Valley has become an icon (or a cliche depending on your taste) for innovation, entrepreneurism and technology. Cities and Governments all round the world seek to imitate its success.
Scotland has long since harboured similar ambitions. Is imitation the sincerest route to success? Or should we learn the lessons and then map out our own route? What are the unique opportunities available in this Northern outpost?
Of course we should start by thinking about what works elsewhere in the world. For example, the Bay Area is not the only cluster for exciting new business activity in the US. Innovation That Matters is just one recent report. It looks at cities that stretch from sea to shining sea. It concludes that Boston is best prepared for the digital economy. Not San Francisco or Palo Alto or New York.
Specialise for success
I am not going to argue with that conclusion. My interest is in the factors that drive future success. One in particular. The report highlights the need for specialisation. It will no longer be possible for any city or ecosystem to lead new technology across the board. A strong reputation in specific sectors or technologies is needed.
And the authors identify one sector at the forefront of this trend. Digital health comprised 60% of all startups in the 25 US cities studied. More significant health was also the focus of 60% of the fastest growing companies.
Embracing our diversity
Taken together this analysis offers some ideas for a different startup world like Scotland. We need to start by recognising and embracing our differences.
A new era of opportunity
Recent years have added to this mix. We have seen an amazing rise in talented people starting businesses of wonderful potential. But it would be foolish to deny that the depth and scale of our technology sector is tiny. In comparison to many US locations and even Europe, Africa or Asia.
And the new era of digital and mobile is a chance to overcome our traditional disadvantages. Distance and isolation are no longer a barrier. Scotland can be at the heart of global ideas and the the global economy. Positions we have not occupied since the Enlightenment in the 18th Century. And Second City of the Empire days of the late Victorian era.
Health is our greatest challenge and our best opportunity
Specialisation has to be the way forward for a small country. And health could be a great platform for Scotland. Life Sciences are a vigorous sector of our academic and business life. Our areas of wilderness and our range of wonderful fresh produce offer a rich choice of healthy lifestyles.
And yet… life expectancy in Scotland is 2 years below the UK average. Almost 3 years less than England. The City of Glasgow has the lowest life expectancy in the whole UK for both men and women. No satisfactory social or economic reasons have been advanced for this.
We have a genuine problem in Scotland. The skills and desire to tackle it are in place. Our Government and citizens are wholly committed to devoting resources to finding and implementing solutions. All we need is a platform for change.
Learning from the history of Silicon Valley
Here is my suggestion. We spend over £12 billion per annum on the NHS. Public and media debate centres on this as a cost. Willingly borne to be sure. But viewed as a drain on our finances. An ever rising burden which we fret about our ability to support in future.
Perhaps we can break this cycle by learning a lesson from the past. Remember the root of Silicon Valley’s success? It was Department of Defence spending in California during the post war decades. The US Navy was the customer that challenged smart people with big, difficult problems. And provided the market for the solutions.
We cannot and should not replicate that today. But we have an alternative - the NHS budget. Change the culture and the approach. Use that £12 billion as the catalyst for innovation. In digital technologies and life sciences of course. But also in service delivery, care standards, sustainable building, rural health and a thousand other areas.
Thinking about this idea reminds me why I got into the information and communication technologies in the first place. Tech has the power to change the world. By tackling the biggest challenges.
I think we could turn this principle full force on local and global health challenges. How can we transform the NHS from a cost centre into our greatest opportunity for change? I would love to hear your ideas.
If you have not already read Bill Gurley’s article on the dangers of the Unicorn financing bubble then you really should. He outlines current financial exposures. Created by the fashion for mega round private finance in the last couple of years. And sets out how each main group of stakeholders are at risk. With some excellent cautionary advice for founders and employees in startups.
As Bill points out, many well funded companies are still hungry for cash. Massive burn rates mean that even the largest funding rounds evaporate fast. Much of this cash goes on sales and marketing. Direct sales teams, commissions, distribution channels, advertising, content and all the rest. This creates an ongoing demand for finance. And also raises a couple of other questions.
Puncturing the investment assumption
Everything and everyone takes it for granted that the big money flowing into startup companies is investment. Companies raise investment. Angels, VCs and institutions make investments. Governments ease and enable investments. What happens when this (implicit) assumption is jettisoned?
All that cash was paid for shares. Then spent on building up market presence. Customers, brand and reputation in other words. Great if those stick when the dollars stop flowing. But for many customer loyalty may fade and the revenues will drift away. Because some companies need to keep spending just to stand still. Never mind grow.
Turn off the spending tap and there will be real separation between the good, the bad and the ugly. Companies built on good products will survive and thrive. Those that have built a track record of value and a loyal customer base.
Reputations created by spin, PR and heavy advertising spend will fare less well. Expect many more well known names to be tarnished.
And the losers will have nothing on the balance sheet. Nor any intangible assets of substance. Even a few lines of code will look like a solid asset by comparison. There will be some angry investors around when this emerges.
In more conservative investment ecosystems this could have a devastating long term impact. I already see a lot of investors who believe in patentable IP as the only solid basis for a technology business. A bunch of stories about "smoke and mirrors" startup growth will not help. The persuasion hurdle may be even harder to clear.
A potential SaaSastrophe
SaaS sales & marketing companies will suffer the greatest exposure. Tom Tunguz is the ultimate authority on SaaS data. He points out that Sales (=1st) and Marketing (5th) are 2 of the top 5 business functions for spending on SaaS products. In another piece he looks at the 1875 SaaS marketing companies started by 2015 (2014: 947).
I think we all know that every startup uses one or more of these products. They are the vehicle for all that advertising spend. The day to day tool for the sales and marketing teams. And further chunk chunk of investors cash is going to pay all those subscriptions.
This market is honestly crazy. Yes there are a handful of SaaS that I see everywhere. Hubspot and Intercom are prominent. In the enterprise space Salesforce has a strong position. And I know plenty of companies that generate real value using these products.
But I also see a new product every week. Ranging from the doubtful to the out and out flaky. On top of this I get sales e-mail from new startups most weeks. Offering services which grow more niche and less clearly defined by the month.
We have travelled from fragmentation to saturation to glut. Investment will soon be in short supply. Revenue will take a harder hit. There will be casualties. And desperate throws of the dice. It will not be pretty. In short, SaaS sales and marketing is a bubble waiting to be burst.
I will not shed many tears. The proliferation of sales and marketing “solutions” has infected the whole SaaS market. In all categories and verticals there is too much focus on sales. And not enough on delivering real value to customers. We need to rebalance.
A couple of simple precautions
If you are a startup (or indeed any company) using some of the products what should you do? I would not get too stressed about it. Keep two simple things in mind:
Contraction in the startup funding market is inevitable. The big dollar losses will be in unicorns that have raised or are raising gigantic private rounds. These are concentrated in the US and in the startup mega clusters. But everyone should beware the ripple effects.
After my previous post I had a great exchange with Brad Feld. To cut a long story short, he pointed out that I had left out a couple of crucial points. His book on Startup Communities stresses:
I can’t argue with either of these things. And taken together they remind me of another important challenge. The young founders and entrepreneurs in Scotland today are our best and brightest. The leaders for the next generation. I suspect the same is true for most startup ecosystems. How do we help them grow to realise their potential over a lifetime? The lifetime of a leader that is. Not just of a business or a technology.
I was lucky enough to enjoy a long and somewhat successful career in professional services. Start and up had not then been joined into the same word. Yet in my time (1984-2013) the industry and my firm experienced rapid growth and change.
Throughout learning and personal development were at the core. Central to what was expected and valued in the organisation. As a result I became a different a better person. Better at serving clients. More of a leader. Better balanced and more thoughtful.
Personal development objectives were part of every appraisal. More senior members of the team were always happy to make time to help with achieving these goals. As I progressed into leadership roles I found out why. The objectives of leaders also embraced growing talented people and teams. This applied at every level.
All sorts of behaviour flowed from this culture. Responsibility was given early to allow individuals to learn. But with a supportive mentor to ensure they succeeded. Promotions were denied on occasion. Because hitting the numbers was only part of the story. We also looked at how close each candidate was to realising their potential.
It could lead to unexpected moments of genius. I remember a media campaign we launched about a year before I left. At its core were a series of brilliant cartoons. They were produced by a teenager working in the post room in one of our offices. The marketing team found him. Because he had expressed a desire to develop his artistic talents in his annual review.
At length I realised that this culture arose from 3 mantras. They apply to leaders and leadership at all levels. Any time, any place, anywhere:
1. The only job of a leader is to grow more leaders
You do this by generating more work for others. So that you create space in the business for additional leaders.And by mentoring, coaching and supporting others to do more challenging work. Helping them achieve their leadership potential.
2. Grow leaders better than you could ever be
Be generous by bringing all your learning to the next generation. They will learn faster and achieve more as a result. Your goal is for your successors capability and talent to go beyond your own. And so take the business to new heights.
3. Look to future value not present gain
Make sure the business you leave behind has more potential than the one you inherited. Act for the long term growth of the business. Not just to maximise the value today. Or the exit value for current stakeholders. This is essential to build a great, sustainable business. It is also the foundation of fair dealing with employees, customers, investors and the wider world.
My ambition is to lead and mentor with these ideas in mind. We all owe it to the people who are taking the risk. The entrepreneurs of today and tomorrow. Those who will grow into the leaders of our communities for years to come.
This is the best investment in the future anyone can make. Succeed and you will find it is also the best fun you ever have.
Kenny Fraser is the Director of Sunstone Communication and a personal investor in startups.