Unicorns are the premier league of start-ups. Still small, but fast growing entities worth at least $1 billion. Led by a group of tech-savvy college drop outs they have come up with brilliant ideas and outsmarted incumbents. Gone are the days when established companies can rely on their scale and marketing power to stifle these upstarts.
This at least is the stereotype. The reality is more complex but true enough unicorns are (typically) more flexible and less bureaucratic. They achieve scale with the help of partners, outsource production, and build a brand without expensive TV ads. Large companies capture some of these benefits through their own venture capital funds and business incubators. But there are also lessons from successful start-ups that large companies can apply to their main business: disdain for bureaucracy, obsession with products and customers that comes from the very top, focus on the core spiced up with just a little bit diversification, and a combination of long-term orientation and tight budgets.
These lessons were drawn from an analysis I did of the 50 most valuable start-ups in the world and an interview with Chris Zook, the co-head of Bain & Companies Strategy Practice. In his new book he explains how a founder’s mentality ensures profitable growth, a notion of how to preserve the approach that also drives successful start-ups.
Fight bureaucracy – Keep things simple
“When I returned from Cleveland to London, I spent six months in deep culture shock because until I had been away for a couple of years, I hadn’t realized how deeply embedded the bureaucracy, the distrust, the second-guessing, had become. We want a more flexible organization that works on trust and openness and teamwork rather than on hierarchy.” This statement from Robert Horton, the CEO of BP from 1990 to 1992 summarizes one of the biggest issues large organizations face: bureaucracy.
Successful start-ups don’t have this problem. The pressure to get something off the ground focuses the mind of all those involved on the one task that really matters: a great product (or service) and happy customers. The small size also allows the founders to cut through potential internal hurdles and simply get things done. In tasks which they consider to be important they are personally involved. For example Alex Karp the CEO of Palantir, a company that mines massive data-sets for security services and corporate clients is personally involved in hiring new staff even though the company has more than 1,500 employees today.
Large companies can do three things to fight bureaucracy. First, they can identify a very small number of important metrics to make sure everyone focuses on what matters. When Dell was growing massively in the 1990s it had only four metrics it applied across each segment of business. One of them was the percentage of products shipped on time. Secondly, they can allow initiatives outside the usual structures. On Feb 17 2012 John Donahoe, the CEO of eBay, attended a meeting with young leaders. At the end of the meeting Jack Abraham proposed a promising innovation and John told him to figure out what he needs to make this happen. Jack decided to take five developers to Australia for two weeks. When he came back, he had a prototype ready while usually such an initiative would take a couple of years, produce hundreds of power-point slides, and eat up several million (read this story in more detail here). This ad-hoc type of project happens commonly in the start-up world but large companies need deliberate encouragement to make this happen. Finally, CEOs can battle bureaucracy by articulating their priorities clearly. Zook points to one of Bain’s clients who went to a meeting with half-dozen managers he hired to professionalize his company. Every functional expert seemed to have a separate program ready so the CEO saw only one way forward: he told them to stop and come back with two or three things that helped the company to achieve its main goals. In short, he cut down time-wasting initiatives before they got off the ground.
As Zook points out though, sometimes more radical steps are needed to turn an organization around and help everyone to concentrate on what matters. Taking a company private can be such a step, Zook said: “In 2014 Michael Dell took his company private. This enabled him to simplify meeting structures, cut the board down to three members, and increase the appetite for risk. After several years of disappointing results and excessive focus on costs, Dell is on the way up again. No longer are things held up in endless committees but all eyes are on innovation and customers.”
Fighting bureaucracy is not an easy feat in large organizations. It has to be done every day. Good signs to watch out for: forms and long meetings which do not end in clear decisions. Neither of these will get much air time in successful start-ups.
Personal obsession with customer needs
For founders business is very personal. Frank Wang Tao is obsessed with the sky since elementary school when he read a comic book about the adventures of a red helicopter. At 16 he got his first remote-controlled helicopter which he promptly crashed. He had to wait for months to get new parts. So when an opportunity came along to build his own helicopter flight control-system during a senior year project he embraced it. Following from this he started to build his own prototype and launched DJI out of his Hong Kong student hall in 2006. Last year DJI had grown to 3,300 employees, revenues of $1 billiong and is valued at $8 billion. It achieved what no other Chinese company had done before: world market leadership in its industry. And Wang takes his business as personal today, as he did in 2006. Whenever he feels DJI is under attack he is ready to lash out.
Wang is not the exception but the norm among those who run successful start-ups. Quite commonly they turn a personal obsession into a business. Take Cheng Wei who was frustrated by the difficulty to haul a taxi in Beijing and started Didi Dache, a Chinese ride sharing company similar to Uber. Or Parker Conrad who felt that companies are being ripped off by HR software providers. In Zenefits he offers the software for free and generates income as an online insurance brokerage which helps their customers to pick the right plan through their system.
For large companies it is hard to preserve that passion with the frontline. But as Zook points out, the very best achieve this: “At the Oberoi hotel group each staff member is empowered to directly create value for a customer by, for example, giving them a scarf when they are on the way to meet a sick friend. In Toyota every operator has the right to shut down the production line when there is a problem. These are just two examples of large customers who put the obsession with customers and the front line first.”
Focus on the core and move (just a little) beyond it
The ability to put customers and the front-line first is closely related to sticking with what companies do best. For large companies in particular there is always a temptation to start new things. But chances are that once you stray from your core, there are competitors who are better in serving these customers.
Successful start-ups define their activity radius quite narrowly. But it does not mean that meaningful diversification that complements the original core is out of question. Of the 50 most valuable start-ups 44% have not diversified at all, 66% have expanded beyond their original business idea at least to some extent. Tanium, a cyber-security firm founded by a father and son team for example stuck to its core. The serial entrepreneurs developed a simple and fast system that allows its customers to monitor whether hackers infiltrated the system. As spending on cyber security is growing at 30% annually compared to IT spending in general at 3%, there is no need to look for other opportunities.
Other start-ups see opportunities that actually enhance the attraction of their core business. Houzz, for example, started to allow customers to purchase furniture and other items they see on their website recently. The start-up is only a go-between, avoiding stock inventory by routing the traffic to the right retailer or manufacturer for a 15% commission. With one million listings this has the potential to turn into a billion dollar business and Houzz relies on word of mouth to attract visitors rather than spending on advertising. What’s crucial in any attempt to diversify is to consider both the ability to leverage existing resources and potential costs. Uber, for example, is entering the on-demand meal service business with Ubereats as it has it has a fast network of drivers already and a brand that is likely to attract restaurants to join. Snapchat, a website where you can share images that disappear after 1 to 10 seconds of viewing introduced Snapcash through a partnership with Square cash – connecting the user base of the former with the expertise of the latter.
Context also plays a role here. In some of the emerging markets higher levels of diversification can be sensible as consumers stick with brands they trust, knowing that there is limited consumer protection if things go wrong. Xiaomi, China’s most valuable start-up, not only sells cheap smartphones but also routers, set-top boxes, air purifiers, and rice cookers. The company sees smartphones as a way into people’s households, selling them other products, software, and services. A business model distinct from other hardware producers which see the phones as their main revenue stream.
Large companies can learn from start-ups that the range of activities has to be narrow and tightly fitted to the value proposition for its customers. Diversification is not ruled out per se, but the temptation to expand the scope too far is greater than keeping it too narrow when value maximization is the main goal. To reduce survival chances and long-term performance, slightly higher levels of diversification might be advisable, as my own research on long-living corporations suggests.
Long-term perspective but tight budget
That start-ups have tight budgets is expected. Brian Chesky, Joe Gebbia, and Nathan Blecharczyk created breakfast cereals leveraging the hype around Barack Obama and John McCain during the presidential campaign, calling them “Obama O’s” and “Cap’n McCains”. They sold 800 boxes for $40 each, netting $30,000 which they used to get AirBnB started.
The tight budget mind-set not only helps to keep costs down, but also helps to focus on those things that really matter. Particularly in a start-up world the temptation to sell out or make a few quick bucks through advertising is big. When Adi Tatarko and Alon Cohen started Houzz it was an after-work project. They allocated just $2000 a month to it but were determined to create a website that offered realistic ideas for homes. Once the traffic picked up, advertising would have made life easier. But they resisted. They only took outside funding once they found assurance from an investor that they won’t compromise on user experience (i.e. start with ads too early). To make all of this possible, the founders kept spending down. Even when Tatarko was pregnant with her third child in 2013 she flew economy class, leading by example. Keeping a tight budget ensured that users got an ad-free website.
But tight budgets are only part of the story here. They are combined with a long-term perspective many large organizations find hard to achieve. Free from the pressures of monthly reporting, the founders can set up projects which don’t guarantee immediate returns. Elon Musk’s SpaceX is an example. The company’s vision: reduce space transportation costs to a point where we can colonize Mars. While this sounds far out, it has set the company on an aggressive course of cost reduction and innovation to achieve this. In 2008 they launched the first privately funded liquid-propellant rocket reaching orbit. In 2010 the first privately funded spacecraft that was also recovered followed and in 2015 SpaceX achieved a vertical landing of its rocket. In particular the work on reusable rockets has the potential to cut costs for SpaceX, already the cheapest operator in the industry. The cost of Earth orbit was $56.5 million but once the reusable technology works, prices can drop to as little as 5 to 7 million.
For large companies it is not easy to implement this combination of tight budget and long-term perspective. But it is not impossible either. Sam Walton, the legendary founder of Wal-Mart, created a penny pinching culture that is still alive today. It translates into tough negotiations with suppliers but also sparse offices and tight travel budgets. And Virgin, the British conglomerate best known for its airline and Media business, developed a structure that gives managers of its subsidiaries a stake in the business they run. They act like owners rather than managers, combining cost consciousness with bold ideas.
So, should you turn large companies into Start-ups?
Probably not. Investing in start-ups is certainly a good idea but creating a portfolio of activities is probably a step too far for most companies. What they can take from successful start-ups is their disdain for bureaucracy and love of the front-line.
This article was written by Christian Stadler from Forbes and was legally licensed through the NewsCred publisher network.