Partner at Sova VC, a London-based venture capital firm building an international portfolio of high-potential early-stage companies.
At times, the past year has probably felt like a hands-on accelerated MBA and business school boot camp for entrepreneurs. Resilience became one of the management buzzwords as companies everywhere were forced to react to the radically changed environment brought on by the Covid-19 pandemic.
But there’s another aspect to resilience beyond a dogged ability to keep going in the face of physical and logistical challenges, such as lockdowns, mass office closures and a move to remote working. Resilience has a second definition: It’s an elastic quality, the ability to spring back into shape. For a business, it’s about being able to absorb shocks to its operating model, and in so doing, minimize risk to its continued growth.
From conversations our firm has had with entrepreneurs, it’s clear some are finding it a challenge to achieve and sustain growth. And when we look past the individual stories, we see the same theme over and over: Their business is missing the crucial ingredient of resilience. Some are either too tied to a specific city, state or country; others are only focusing on a narrow target market, missing out on opportunities for revenue streams from other customer segments. A crisis in one market or a shift in customer buying patterns could easily become a threat to the company’s existence.
So, what can founders do to make their startups and early-stage businesses more resilient? Here are some operational steps they can take to diversify the business, de-risk the path to growth and make it sustainable for an uncertain future.
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Spread the risk.
Spreading the geographical risk means that businesses can sustain lower levels of business in one region while another can take up the slack. It’s a form of natural hedging and is a more efficient way to run the business. Even in two large cities that are relatively close, such as London and Paris, there are different consumer habits and business hours, so the business needs to diversify its approach in each one.
Use the “MVP for sales” approach.
This leads to the next step: how to choose which geographies to target? For the startup watching its funds (or a venture capital firm’s) carefully, this doesn’t have to be an expensive approach that drains valuable cash on planes, sales offices and expense accounts. Tech entrepreneurs will be familiar with the concept of the “minimum viable product.” This way of building a product, testing assumptions and assessing profitability is just as valid for identifying markets. This is a light touch, iterative approach where a business launches initial ads in a city, state or country, gauges the reaction from potential customers, then fulfills initial orders to test that market. In my experience, each market launch can cost as little as 10,000 pounds ($13,770) at the start, so the risk is minimal. Use a wide marketing mix to manage the budget more effectively and choose the best options to drive growth.
This will lead to one of two possible paths: If there’s a strong level of interest, you launch more widely and put more resources into that market. If a particular marketing channel is working more effectively than another, lean into that. If the signs are that a market or segment isn’t responding, you make a fast decision to stop and move forward in another location. The choice in either case comes from validated assumptions that haven’t put the business under unnecessary strain.
Decide with data.
Speaking of decision-making, the “MVP for sales” approach is about replacing gut feeling with hard data. Collecting every possible piece of relevant information about a marketplace or customer segment makes the decision to invest further — or not — a quantifiable one. When developing the right marketing mix for a campaign, use data to inform all choices and adjust the mix by region or customer segment based on the information you’re gathering from the early market activity. Capture and document everything. And one metric beats all others: return on investment.
Sell from the bottom to the top.
One barrier to a sustainable and resilient business is a long sales cycle, as many business-to-business software as a service (SaaS) companies selling into large enterprises have found. Multiple stakeholders to pitch and a slow decision-making process lasting 12-18 months can consume lots of the seller’s resources with no guarantee of success.
Yet we often see complex solutions in this arena that sell in less than four months. So, what’s the secret? Aim lower. It doesn’t necessarily follow that a sale to HQ automatically means the company will roll out the product down through the entire chain.
So instead, divide and rule: Target discrete divisions or daughter companies and sell from the bottom to the top. Spend more time identifying the areas of the business that will use your product, and target those users. It’s simpler than trying to sell to CEOs. And it actually works.
Nurture teams, not superstars.
I’ve seen many entrepreneurs and founders with the same blind spot: They believe they can “buy” someone with 20 years’ experience and think their problems are solved. But there’s still a high risk that this star performer won’t work out; they might not fit in with the company culture. It amounts to an expensive gamble, and that kind of bet on one individual is the opposite of resilience.
The superstar recruit also amounts to a vote of no confidence in the existing team, which damages loyalty. Instead of hiring externally, companies should look to promote existing team members, give them more responsibility and grow their skills. If a staffer has spent, say, three years as a marketing specialist, for example, it’s important that they can see a pathway to becoming CMO. When the team has been together since the early days and feels an emotional stake in the business’s success, it makes for a more sustainable business.
It might be impossible to plan for external forces like Covid-19. But in an increasingly uncertain world, entrepreneurs who diversify their risk increase their resilience — and that’s the best hedge against most challenges they are likely to face.