Early in my adventure in startups, I nurtured a young tech company.
At the time, the company was run out of a garage. This same company would eventually become a million dollar revenue business with global operations. Yet, the rationale behind the existence of such an ‘abstract’ microeconomic model has never been questioned and the inflow of capital to the industry has continued ever since.
Although more than 20 years has passed since companies like Apple or Netscape set the standards for startup expansion, the questions of “When do startups become mature tech organizations?” and “What triggers the transition process?” remain largely open-ended.
So, I took my notebook and scribbled a couple notes, coming up with a hypothesis that I needed to test. After all, our company, which in two years grew from 10 to 1,600 employees, could no longer be classified as a startup. The growth happened so quickly, it was hard to determine at what point we stopped being a startup. Observing the different forces that direct the growth of the average startup, I came up with the following assumption:
There is no one clear cause behind the transition of startups to more structured tech businesses. The factors behind maturation vary and include legal, financial, operational, and product areas.
Since barely any mathematic models could determine the exact point a startup matures, I decided to reach out to entrepreneurs, who have already gone through the journey. I listed 50 executives from some of the world’s top startups, asking them about the path their organization took to become a mature tech company.
Having received 25 constructive answers from companies such as Facebook, ExactTarget and AirBnB, I was able to come up with some pretty impressive insights, despite a relatively low sample for my research.
First, I was glad to see that as many as 48 percent of the startup entrepreneurs saw their journey as a natural transition through external and internal forces. The cashing-in or growth of revenues was cited as one of the biggest indicators of maturation. Almost 20 percent of those sampled referred to changes in organizational structure as a major indicator.
Surprisingly, no one cited the traditional definition of IPO underwriters, which signify the end of a startup phase at the moment of exit. Although these raw numbers shed light on the multidimensional nature of growth and maturation, the most compelling findings came from the qualitative answers I received from some of the brightest heads in the industry.
It’s clear that organization structures change with the companies entering a mature stage of their lifetime. We can likely say that the switch in management is one of the main triggers behind the transition process.
Well, the first observation speaks for itself. Changes in organization structure will remain one of the main forces shaping growth of all firms regardless of industry.
“I’ve noticed a trend where companies first start with all engineers – and even most employees – singularly focused on one product. As the company matures, in our case, we had to move towards vertically integrated teams, from the backend to the frontend, including product owners, etc. That shift allowed each of our teams to stay small, own a piece of the business, and stay focused on providing a great experience for our customers.”
“I consider organizational structure to be an indicator of maturity. As we hire and promote people to focus on areas that were previously lumped together, that part of your business will grow.’’
“We brought in more senior management.”
Mature organizations do care about Revenue planning. We can assume that a company that can accurately forecast its revenues over the next fiscal period has exited its startup phase.
It’s striking how fast the switch from the ‘growth focus’ to ‘money-making focus’ can be among the startups. Usually the investors impose the new direction when the user base has reached a reasonable threshold and competition loses its grip on the market. Whatever the real trigger is, with no doubts, revenue planning indicates startup maturity.
“We have implemented formal measures of sales/distribution capacity tied to financial plan and revenue forecasts.’’
“We hit maturity when we could consistently predict revenue month over month.’’
“Having clear and accurate business and revenue forecasts more than one quarter in the future.’’
Regional differences do exist. Brazilians focus on people and company culture, while Asia cares about big clients. Some companies follow a reverse path of startup development.
It’s fascinating to see both differences across regions and stand-alone cases of companies, which tend to focus on business priorities typically for early-stage startups. Yet, each one of them deserves a round of applause for the implementation of systems previously known from big MNCs only.
“We implemented Enterprise Resource Planning’’
“The execution became faster’’
“We prioritized product development above other things’’
To sum up my findings, the transition to a mature tech organization can be attributed to many factors. Although they may vary regionally, they remain largely homogenous for the majority of successful tech companies. First, mature tech companies have full-fledged organizational structures with clearly defined roles. It often happens that aside from vertical teams, cross-team functions (such as “VP of Devil’s Advocate”) become important too.
Second, such businesses are able to accurately plan and predict the revenues over the next fiscal period. This comes together with the ability to effectively make money and close the biggest deals. Finally, the former startups do care more about the company culture and human resources. Advanced ERP systems, clear KPIs and project management were listed by tech entrepreneurs as the dominant forces behind maturity.
That’s the end of Part 1. Watch out for Part 2, where I will be talking about the time horizon of startup maturity and exceptions from the rule, i.e. extreme startup incubators.