The First 2 Stages of Startup Success, and Why Clinging to Them Leads to Trouble

In this week's Rule Breaker Investing podcast, Motley Fool co-founder David Gardner is happy to have in studio an author he has admired for years: Les McKeown, whose first book was Predictable Success. After being involved with dozens of start-ups, McKeown developed a clear picture of what worked and what didn't. More to the point, he started noticing that there were certain patterns emerging in these businesses' life cycles, and the more he looked into it, the more he realized the stages are universal, repeating across nearly every organization that lasts long enough to hit them.

In this segment, he talks about the first two stages of that arc: "early struggle" and "fun." Both of them (yes, even struggle) have their appealing points, and the corporate cultures they tend to generate have a freewheeling energy some founders don't want to give up -- even when they really need to.

A full transcript follows the video.

This video was recorded on March 21, 2018.

David Gardner: What is the first stage of an enterprise?

Les McKeown: Well, it's probably the most intuitable. We call it "early struggle." It's essentially what would be called a start-up phase these days, but I call it early struggle. One of the key reasons I do that is that one of the disservices that many of us here, or commentators in the business, seem to have done over the last number of years is to glorify the start-up mentality as if it's something that is wonderful and to be maintained at all times. I think that's a sin before God to do that.

There's only one valid strategy for a start-up and that's to stop being one, because if you don't, eventually you'll die. You either stop being a start-up and become a valid business or ultimately the money's going to run out and you'll die. I call it early struggle to emphasize the need to get out of it.

Early struggle is essentially just that. It's the struggle to find a profitable, sustainable market. It's as simple as that. You've got to find a profitable, sustainable market...

Gardner: Something that will pay you, anybody you've hired, and have maybe something left over.

McKeown: Well, it has to have something left over. And there are so many pitfalls that will get in your way in early struggle, it's probably the most existential stage in the development of any organization. It's pretty binary. The drop-off with the mortality rate is about 80% of all new ventures fail in the first three years, as you're aware.

And there are two key reasons for that. One is the absence of what we call a visionary, which we'll talk about a little later. Someone who really owns the vision for the business. But the second reason is the one that is most frequent, which is just the lack of a ruthless focus on a profitable, sustainable market. Particularly if you're in tech and you get overfunded, you can go out and buy a bunch of conference chairs and get a beautiful new logo and things are going really well, but you're not one inch closer to that profitable, sustainable market.

So early struggle is all about finding that profitable, sustainable market. That's the only thing that matters. If you don't find it, like I said, 80% of businesses will fail. If you find it you emerge, and it is a sense of emergence. Coming out of early struggle rarely feels like an event. It's more something you recognize in the rearview mirror has happened. You're into the second of the growth stages, so we're midway up the left side of the arch. And that's the stage which I give the most technical term to. We call that fun.

Gardner: And before we get to that, I want to ask you briefly. I hear you on the glorification of start-ups and that mentality. I'm wondering if you watch the show Silicon Valley. If you've seen that on HBO.

McKeown: I do. I adore that show. I really do.

Gardner: Because in a way it actually contributes to the glorification in some ways...

McKeown: It does!

Gardner: ... but it's lampooning it and having a great bit of fun.

McKeown: I'm having good fun with it. But that constant need to pivot, and pivot, and pivot, and pivot is all about not actually wanting to get out of early struggle. In fact, we could get into this stage and never get out of it.

There are people who need viscerally to be in early struggle. It's the place they need to be. And they'll actually self-harm their business in order to stay there and you don't want to be associated with those people.

Gardner: I hear you. So, we are stepping up the arch. We've just laid a block. We've laid the foundation stone. It's called early struggle. We're going to stack a block on top of it as we construct an arch together, and the second block you've just labeled fun.

Now, I remember from the book that fun is fun because you figured out how to actually make money in a sustainable way and what a tremendous release that must be.

McKeown: It's fun because it's not early struggle anymore. Early struggle is a little like waking up every morning and finding a sharp edge and banging your head against it. It's just tough. You've got to find payroll, you've got to meet expenses, and you don't know where the money's coming from. So, now we've found this profitable, sustainable market. We're in fun. And if early struggle was all about finding it, fun is all about mining it.

We've got this market. It doesn't matter what it is. Maybe it's for lime green Post-it Notes. Maybe it's for flavored coffee. But we find a market and typically we move into fun and we've got tiny little market share. It's like nothing. It's close to zero. So, there's tons of low-hanging fruit, and we love it. We've found this market.

It's the most evangelical stage of the organization's growth. Everybody's highly aligned. There's very few job titles. There's the boss and everybody else, and we just get on with it. It's a wonderful time. We are saying yes to anything. We take on any job. No client gets turned [away]. We agree to ridiculous deadlines and yet, somehow, we haul it over the line at the last minute.

I like to say to folks that fun is when we're having beer busts every Friday night for two reasons. One is there's no HR department, yet, to tell us not to, but the second one is that we're reaching the weekend with a feeling of righteous exhaustion. We are beat, but boy does it feel good. How did we do that? How did we say yes to that stuff and deliver on it?

And so, it feels really good.

And the inherent issue that's going to crop up and cause us a problem, pretty soon, is the way that we're doing it. The way we're doing it is absolutely right for that stage in fun. In fact, it's the only way to deliver in fun. And it's something I call "flockball." Now, if you've ever watched 6-year-olds play soccer, you'll know what flockball is.

Gardner: Right.

McKeown: All 22 players are in the middle of the field with the ball somewhere underneath. There's a dust cloud, and wherever the ball goes they go, and this includes the goalkeepers from both teams.

That's the way we deliver in fun. We just flockball to success. We just put massive effort behind whatever needs to be done. We pivot to whatever the biggest issue is that we've got to deliver on today, and then we do the next one, and then we do the next one. Do the next indicated thing. And that's fantastic. So, we grow. We say yes to everything and we overinvest in making our clients happy. Our clients love what we do. We grow, and we get bigger, and we grow, and we get bigger.

And what's happening, every single day, is without us typically knowing it, the business is just becoming a little more complex. A little more complex. A little more complex. More product lines. Some service lines. Additional people. Maybe a new location. We decide to go into another geographical region. Just hiring people.

And at some point, flockballing doesn't work anymore. At some point we actually begin to drop the ball. And at that stage we're moving into the third stage of growth, which we call "whitewater" because...

Gardner: Whitewater.

McKeown: ... because that's how it feels. You emerge from fun, which is just like "we can do no wrong" and the boat begins to rock. And if you've ever been canoeing, and you hit whitewater, it's scary. And that's what whitewater is like. It's like you are going down this river, commenting on how beautiful this all is, and then suddenly this damn boat is rocking backward and forward and you think you're about to get pitched over into the water and down. And what's whitewater.