Spending Money on Company Growth

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One of the more fascinating things about entrepreneurship, and especially startup entrepreneurship, is how it is impacting societies far away from places like Silicon Valley or New York City. Someone once said that startups today are like rock bands in the 1960s and 1970s; a cultural phenomenon galvanizing the dreams and ambitions of an entire generation.

One of the ways one can see that entrepreneurship is a topic millions of people try to wrap their heads around, is the amount of conceptual frameworks being invented and shared to help understand and internalize it. There is Lean Startup, based loosely on the writings of Steve Blank, and there are the much-celebrated tweets of leading investors like Marc Andreessen.

If there is one “startup framework” that I found most useful in my own journey of understanding startup entrepreneurship, it’s probably the “Marmer phases” of a startup’s life, first shared by Max Marmer and my friend Bjorn Lasse Herrmann in their Startup Genome Report in 2011.

In their report, Max and Bjorn conceptualized the very useful idea that as a startup progresses through various phases (Discovery, Validation, Efficiency, Scale), it has to focus on entirely different, often opposite and contradicting activities and tactics. Successful company growth, therefore, is the result of a founder team’s ability to switch gears between being experimental (discovery) to lean (validation) to execution optimization (efficiency) to finally doubling down on what works (scaling). Very true to my own experience, both as a founder, and as an investor and advisor, one of the biggest strains of foundership is that very necessity to overhaul the entire operations based on results achieved and measured. And fighting the natural urge to become more conservative and complacent as benchmarks are met and assumptions are validated.

Having just wrapped up two weeks in Silicon Valley, I had to think again of the brilliance of the Marmer Stages after one of my meetings there.

Last week in Palo Alto, I asked a friend who used to be one of the top marketers in his native country in the Balkans, before moving to Silicon Valley to do marketing for leading gaming companies there, about what he thinks the biggest difference in business mindset is between Europe and US founders. His answer was simple: in America, people are used to spending money to make more money. Both in personal affairs and in business. In Europe however, making money is usually seen as a product of spending less, not more.

This thought made me reflect on many of the challenges I see with founders from emerging regions, when it comes to making a successful jump from Discovery and Validation, and Efficiency stages, to the Scale stage. Europeans, and Eastern Europeans especially, are extremely good in making things work with little resources. With lower costs of living and low alternative cost of early-stage company building time, it is easy to excel in everything cost efficient. When it comes to doubling down on the winning strategy, the saving part stops working. This is the moment the company needs to start spending resources on maintaining the results achieved and growing them exponentially.

Going from not paying your own salary and living in the corner of your office to finding a top sales gun and paying them a EUR/USD 100k plus salary is a good example of such a moment. As is paying flights, hotels, and event fees to meet investors or spending on services like lawyers or a marketing agency. This requires a big shift in tactics.

For most people without US business or work experience it’s hard to accept the risks of suddenly having to spend a lot today on the very things you would try to save the hardest on yesterday. For a society where millions go from food-stamp survival mode fresh-off-the-boat to a comfortable upper-middle class existence in a decade, it’s second nature.

And this is also true for funds: most professional investors I interact with in the Old World don’t have a strategy to pave a runway for spending on tier-one talent or market access. Rather, many investors are much more comfortable to provide the minimum needed for a full-time founder team to sustain itself while “figuring out growth”.

Paraphrasing this to the instantly recognizable plot of my generation’s cult movie Pulp Fiction, a European Vincent Vega and Jules Winnfield would probably hesitate to hire a Winston Wolf to tell them to clean their car. Winston Wolf is a quintessentially American character: charging good money for advice that makes problems go away faster than you can figure out on your own.

The reality is that high-growth expansion and fast scalability mean that companies need to spend on scarce resources that can deliver them hockey-stick growth once the business model is validated. Ideally, venture investors see traction and revenue validation plus the road map of hires and marketing spend as the basis for the right use of money for scaling. But it takes getting used to switching priorities quickly, and to stepping even further away out of a comfort zone that only gets bigger with every milestone achieved.

Posted By Max Gurvits, Director CEE/CIS/MENA at CBA.

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