How To Avoid Post-Seed Operational Debt

All growth comes with pain and companies are no exception.

The key is to find the stage-appropriate balance between testing and knowing, agility, speed and process and diligence in each key area of your operations. This is often more art than science, but a healthy tension is fundamental for success.

I have spent my entire career navigating significant growth pains and laying stage-appropriate frameworks and foundations. While I was at DHX Media, we propelled from formation to IPO in just over two years, followed by fours years of a growth-by-acquisition strategy (raising capital to undertake accretive acquisitions). I have experienced the effects of an organization that was late to lay a proper foundation during rapid growth during my time at Blackberry. Recently, I have been helping early stage startups navigate the transition from seed to series A.

Steve Blank’s recent blog post Organizational Debt is like Technical debt — but worse pushed me to write this post with the intention to round out his advice with my operational experience and to bring his overarching advice down to stage-appropriate levels for those navigating the post-seed stage. This is a key transition period because you need to start shedding the idea of being a startup and start laying the groundwork for being a company. I will break this topic into two separate posts, with this one focusing on an internal operations view and another that covers how your company story and investor expectations change during this transition.

In Blank’s post, he provided a lot of great advice for those in the build stage where the focus is on scaling the employee base. Black goes into detail on what you need to ensure is in place as a foundation before onboarding all of those people. I can attest to the importance of this and would add how important it is to evaluate the promote-versus-hire decision properly in a period of high growth.

In almost all cases, you should take the time to hire or promote the right person when you need it, particularly if they are leading other people. Here’s the exception: If your growth is too fast for this approach or the risk of alienating your team is too high at a critical time and you need to choose from within, it’s crucial to take the time later and evaluate if it’s working. If it’s not, you need to fix it. It’s not easy and it’s expensive. But leaving someone in a role that shouldn’t be there becomes exponentially more costly the longer they are there.

I’m generally a big fan of Blackberry, but this is not something they did well. There were reams of senior managers who were leading teams that had no business managing people or running these groups. They happened to be in the right place at a crazy time with slow subsequent correction. This greatly impacted the meaningful work Blackberry did later with their recruitment and onboarding processes. They were hiring top-tier people who were put through rigorous hiring processes to then report to someone that wasn’t held to the same standards. It lead to significant top-talent turnover; an expensive lesson that wasn’t learned.

Operational debt can be avoided with disciplined and diligent thought processes, decision-making criteria, testing, execution and monitoring.

Diligence, process, frameworks and structure are not bad words and they are not kryptonite to a growing company. But here’s a caveat. You absolutely need to place them properly on a continuum and be realistic with the scope in which you apply them. In the earlier days, think diligent thought processes, communication and frameworks. Then move into simple rules, processes & procedures and end up in formal documentation and monitoring.

Diligent and disciplined thought processes

If we use evaluating opportunities as an example to showcase a diligent thought process, use these questions to guide you:

Why is this a good opportunity for your company?

1. Market size — # & $
2. Competitive landscape — who else is there, what are they doing, who are they serving and why are you better?
3. Does this market have the same composition as your current one, i.e. demographics, concentration, buying power, path-to-market, etc.
4. What are the market trends that matter to your adoption in this area?
5. Are your partners and customers pulling you to this new opportunity? Do they have the same pain as your current ones? If not, what is theirs? What is their current solution? Do they resemble and act the same as your current partners and customers? Will they interact with your product/service differently? Are there any localization or other customization requirements?
6. Is where/what you are looking at in alignment with your vision and the market dynamics you have proven to be successful in?
7. What is the growth potential? How else can you expand once in this market/vertical?

What will it take to be successful?

1. Who are the key players and how do you get to them? Do you need to be associated with certain partners? Do you need to get certain star adopters first?
2. What is required to make it desirable to users and/or customers?
3. Does your value proposition and the way you deliver it resonate in this market/vertical? If not, what is it? Does it fit or is it a distraction?
4. Are there any impediments or incremental costs to this market/vertical that you don’t experience where you operate now? What are they and how material are they?
5. Do you need to change any elements of your current processes or structures to facilitate this new opportunity? (e.g. business development, sales, product, infrastructure, partnerships, customer service, marketing, accounting, billing, human resources, etc.)
6. What environmental risks do you need to mitigate? (e.g. legal, IP, regulatory, taxation, etc.)

How do you match up to these requirements? How are you going to be successful?

1. What are you going to do to penetrate and dominate this market/vertical?
2. Is now the right time?
3. Do you have the right team and skill set to take this on? If not, how can you fill the gaps? What is the timing and cost associated with this?
4. Do you have any current connections and how will you get in front of the right people?
5. What is your progress-to-date? Are you just starting your research? Have you undertaken customer, user and partner discovery? Have you formed any relationships or partnerships? Have you attracted any early customers and/or users?
6. How will you mitigate the environmental risks and impact of any changes on organizational processes?
7. (And last, but not least)…Is it worth it?

This is the type of thought process you should undertake to make the decision. Internally, it feeds into your decision making process and evaluation. Operationally, it helps to form the foundation for many of your tactical plans and targets including go-to-market, marketing, sales, product, infrastructure, partnerships, IP, back-office and legal. It also builds the basis for your external company story and the information and evidence you need to get your investors and board of directors on side with the opportunity.

In terms of level of scope and detail, I recommend walking through these questions at a higher level if you are unsure if there is a fit first. You don’t want to waste your time or your teams’ time on something that can easily be ruled out.

If you or a select group of people can’t rule it out, then dig deeper.

Decision making criteria

Determining how you prioritize your opportunities relative to your limited resources (time, money and human) is an art, particularly at the earlier stages. Later stage companies they have more financial and human resources, benchmarks, historical data and eventually internal rate of return guidelines they can utilize to aid in their decision making and prioritization efforts.

At the post-seed stage, you should have early indications of where you should be focusing your efforts and resources including traction, growth rate, user and/or customer pull. If you have taken institutional investment, your investors have an expected path for you to follow. There is no easy answer and you could try to break it down into it a complex decision making matrix, but it essentially comes down to answering one question — is this the best use of your resources right now for the path you are on and on timeline you have for achieving your goals?

Testing & Monitoring

You want some of the outputs of your thought process and research to be as specific as possible as this will set the basis for your milestones and targets. Then once the team is fully engaged, you’ll want to really examine the key leading drivers of success across all areas and the metrics that will indicate early signs of success or failure and will help to filter out the noise. This should be done with sufficient detail so you can identify the source of the issue, not merely a symptom and know what levers you need to pull to fix it. You’ll continue to refine this over time, but it’s absolutely necessary for you to be diligent and keep your eye on the metrics that matter. And when you find they’re off? Question them deeply.

Even with amazing metrics, don’t lose sight of direct contact with your customers, users and partners. They are why your company exists.

Get your team together to review and evaluate feedback and metrics regularly and determine if there are required adjustments or additional tests required.

Execution

Testing is meant to lead to action. Don’t overanalyze, don’t keep pondering.

Inaction is worse than the wrong action.

Forge ahead and maintain a balance between diligent execution and reflecting on what’s working and what’s not working.