Startups, It’s Time to Think Like Camels — Not Unicorns
The world has changed. In the wake of Covid-19, and the global recession it has caused, business leaders, innovators, entrepreneurs, and investors are all girding for a long period of extremely challenging conditions in the global market. How can startups and innovators of all stripes survive in such conditions? Many are not prepared.
The current situation is particularly difficult for Silicon Valley, where the predominant model is to raise unicorns – the colloquial reference to startups worth over a billion dollars. Traditionally, this is done through rapid growth. The problem now, however, is that this growth-at-all-costs methodology, which the Valley’s top players are exceptionally good at, only works in the strongest bull markets, in the most optimal conditions.
But consider what I call the “Frontier”: those business ecosystems outside the Bay Area bubble, where startups have less access to capital or trained startup human capital, and where, especially in many emerging markets, they are more susceptible to severe and unpredictable macroeconomic shocks. Instead of the unicorn, the camel is the more fitting mascot. Camels are able to survive for long periods without sustenance, withstand the scorching desert heat, and adapt to extreme variations in climate. They survive and thrive in some of Earth’s harshest regions.
These startup camels offer businesses in all industries and sectors valuable lessons on how to survive through crisis, and to sustain and grow in adverse conditions, even if the metaphor isn’t as flashy. They do this with three strategies: they execute balanced growth, they take a long-term outlook, and they weave diversification into the business model.
Balance instead of burn.
Camels have no interest in “blitzscaling” — rapidly building-up the enterprise and prioritizing speed over efficiency in pursuit of massive scale. They are as ambitious to grow as any Silicon Valley enterprise, yet they take a more balanced growth path. This balanced approach has three key elements.
Right-pricing from the start. For one, entrepreneurs in developing markets don’t offer free or subsidized products to perpetuate customer growth, resulting in a high “burn rate.” Instead, they charge their customers for the value of their product offerings from the get-go. Camels understand that price shouldn’t be considered a barrier to growth. Instead it is a feature of the product that reflects its market position and its quality.
Cost management through the life cycle. At the same time, camels manage costs through the life cycle of their companies to align with a longer-term growth curve. Matt Glotzbach, CEO of Quizlet, an online education and study aid company, understands this strategy in terms of his cost of acquisition and his key expense: people. “You want to have a business that can survive the ups and the downs,” he explains. “Resiliency for me has two factors: one is the unit economics of the business for user acquisition, and the second is how far do you invest in headcount ahead of the revenue curve to drive that growth? This is where we make calculated decisions and have expectations for the investments where, if we’re right, we grow significantly, and if we’re wrong we won’t suffer significantly.”
Changing the trajectory. Managing burn throughout the life cycle of a company prepares startups to weather tough conditions over a sustained period. The typical Silicon Valley startup has a cash trajectory with a deep “valley of death” — the graph line reflecting steep losses before profitability is achieved. The line for Frontier startups looks different. Of course camels don’t avoid growth or venture capital funding, but their scaling trajectory and associated burn rates will be less extreme. In some cases, as with Grubhub, they’ll grow in controlled spurts, choosing only to put their foot on the gas and invest (often by raising venture capital) when required by the opportunity at hand. After such a spurt, sustainability (and often profitability) is within reach again if necessary. The difference here is that camels maintain the option to adapt their growth trajectory and return to a sustainable business.
Camels are built for the long haul.
Founders at the Frontier understand that building a company is not a short-term endeavor. For many, breakthroughs don’t come immediately, but rather occur later in the company timeline. Survival is often the primary strategy. This allows time to build the business model, find a product that resonates with the market, and develop an operation that can scale. Competition will exist. But the race is about who will survive the longest, not about who goes to market first.
Quizlet just raised a $30 million Series C round, which valued the company at $1 billion in May of this year. The company did not take any funding until 2015, when it raised a Series A for just $12 million after 10 years in business. It took its time getting there, operating on a slow-but-steady philosophy toward growth. Glotzbach told me that Quizlet’s pace saved it from destruction. “I actually believe that had Quizlet raised a large amount of money earlier in its life cycle it may not have made it,” he said. “The risk of getting overextended with high expectations and the infusion of capital earlier on might not have been able to accelerate the business fast enough to meet those expectations. Like so many startups we would have over-promised and under-delivered.” Taking the long-term outlook is critical to manage the risk-return trade-off.
Breadth and depth for resilience.
Entrepreneurs operating at the Frontier face unique constraints which can often become strengths during times of adversity. Because entrepreneurs often are building startups in smaller markets by necessity — which markets are not sufficient on their own to grow and sustain the enterprise — they are forced to be born global, targeting many markets from the get-go. Frontier Car Group, a popular used-car platform, for example, launched originally in five markets, each serving as a regional hub. In some countries, the product caught on, but in others it did not, and the company learned valuable lessons along the way, shuttering those markets where it didn’t see a fit. But had the company put all of its resources into the wrong country to begin with, it might not be around today.
Similarly, because a rich tapestry of enabling infrastructure or ecosystem of adjacent products and services doesn’t exist in Frontier markets, entrepreneurs often need to go deep and build the full stack of supporting structures. This means that they have multiple business lines and products, and provide an ecosystem of services from day one. When one slows, the others pick up the slack. Take the case of Guiabolso, a “Personal Finance Manager” software platform that helps customers in Brazil understand their financial situation so they can manage it better (similar to Mint.com in the U.S.). Unlike their peers in more developed ecosystems, Guiabolso had to build their own bank interconnection layer where none existed, give insight into credit worthiness without a robust national credit scoring infrastructure, and kick-start its product marketplace to allow its customers to make the most of their newfound financial insights.
Of course, entrepreneurs cannot and should not take this broad and deep portfolio strategy too far. Building a startup is exceedingly difficult, and overstretching across multiple fronts is a recipe for mediocrity on all. Instead, successful camels only expend resources on activities that are self-reinforcing (where lessons from successes or failures support the business as a whole) and self-balancing (when one piece of the business naturally hedges another).
By prioritizing balanced growth, building for the long-term, as well as deepening and diversifying for resilience, camels can not only survive market shocks, but can also grow and thrive in good times and bad. In short, they turn adversity into an advantage. As we prepare for the tough challenges ahead, the answers won’t be found within Silicon Valley’s insular bubble, but by learning from camels at the Frontier, who have had the solution all along.
Original article appeared on the https://hbr.org/2020/10/startups-its-time-to-think-like-camels-not-unicorns, website. Harvard Business Publishing (HBP) was founded in 1994 as a not-for-profit, wholly-owned subsidiary of Harvard University, reporting into Harvard Business School. Their mission is to improve the practice of management in a changing world.