The 4 wrenching leadership pivot gates that entrepreneurs face

By Bernard Lunn

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There are 4 gates that entrepreneurs have to pass through:

  • Gate 1: From Concept to Minimum Viable Product.
  • Gate 2: Prove the Concept = Product Market Fit.
  • Gate 3: Make it work as a business.
  • Gate 4: Expand and dominate.

It takes totally different leadership skills to go through each of these four gates. Few founders have all the four different skills needed, which is why so many ventures fail as they attempt to pass through these gates.  Even harder is the fact that the skills, techniques and attitudes that make you successful going through one gate are exactly the opposite of the skills, techniques and attitudes that make you successful going through the next gate.

Each Gate requires a wrenching leadership pivot.

This is like a ski race where you have to change from downhill to slalom to telemark to langlauf skis as you go through each gate. Yes, that is very, very hard!

This is not an issue if the  founder has self-knowledge and takes action accordingly (either by selling or bringing in management).

Gate 1: From Concept to Minimum Viable Product.

The debate about whether concept or execution is more important is silly, because you must have both. A bad concept that is brilliantly executed will be nothing more than a tough uphill slog with relatively little reward at the top. On the other hand, a brilliant concept with weak execution is nothing more than “woulda, coulda, shoulda”. Ideas are a dime a dozen, but conceptual clarity does matter; the concept behind Uber and AirBnB and Lending Club and Facebook was good.

Conceptual clarity must tick these 4 boxes:

One: Massive market. If you get traction in a massive market you will have exit opportunities, even if you don’t execute the full plan yourself.

Two: Massive disruption hitting that market. This is the kind of disruption that creates an existential threat to the major players in the market – think of Skype vs telephone companies or Google vs traditional advertising or AirBnB vs traditional hotels. If it is not disruption of that scale, the existing vendors will just add the features they need to stay competitive.

Three: You have a 10x proposition. You have to be 10x better or faster or cheaper than the incumbents. That seems like a high bar, but it needs to be this big to overcome the start-up risk that you are asking customers to take.

Four: Timing. Why now? Watch this great TED talk by Bill Gross of IdealLab on the “single biggest reason why startups succeed”. The punch-line – timing matters more than Idea, Business Model, Team or Funding. The timing may relate to something like how many people have access to the Internet, or bandwidth or economic necessity or a technological breakthrough (such as blockchain).

Here are the two things you do NOT need to have at this stage:

  • A strategy that seems viable to most people. Most great ventures look totally ridiculous to most sensible people in their founding days. Nobody cares about your venture and most people will think it is a lousy idea. You do need a couple of smart people to believe in the idea, whether they be co-founders, early employees, partners or investors. But get comfortable with the fact that most people will think you are crazy. Unless you actually are crazy, there will be plenty of times when you doubt yourself and when you think that most people may be right.
  • Any proof that any of the things on that checklist are true. Anybody who asks for proof at this stage does not know how this works and does not deserve to be your partner. Proof only comes later.

Many great entrepreneurs have conceptual clarity but are weak at articulating it, or are too busy executing to bother articulating it. At this stage nobody cares about your concept. Only after you have passed the next gate does anybody care (and even then it is very few, only at Gate 4 does everybody claim they knew it was great from the start).

The only exit opportunity at this Gate is an Acquire-Hire deal – aka “put it down to experience and put the best spin on it and get a paycheck and kiss your product dreams goodbye” exit.

A Minimum Viable Product  (MVP) is essential to show your concept. Without an MVP, the only people who will talk to you are people who will want to take your idea. The good news is that it is ridiculously cheap to build an MVP today.

What confuses some entrepreneurs is that first wrenching leadership pivot as you go through Gate # 2; this is when you have to focus not just on a small market but on a ridiculously tiny market.

Gate 2: Prove the Concept = Product Market Fit.

This is also what VCs call “traction”. This is the Product Market Fit chasm that all investors want to avoid.

The wrenching leadership pivot is from massive market dreams to tiny market reality.

Peter Thiel explains this very well in Zero to One when he describes PayPal going after the tiny (at the time) market of power sellers on eBay. That market had 3 critical characteristics:

1. Pain that you can fix now. Not some big conceptual story but “do this now and it will fix something critical right now”. In case of PayPal/eBay power sellers it was getting paid.

2. Small unimportant market – at the time. Nobody cared much about eBay let alone a subset called the power sellers. This is critical. It has to be a market that is not on the radar of the big incumbents, giving you space/time to get established.

3. It could become a big market in future. Although small and unimportant today, in the future that you envisage in your big picture Gate 1 concept, that market is critical.  In case of PayPal/eBay power sellers, Thiel and colleagues believed that in future we would all sell stuff online and so the power sellers were a critical early adopter market.

At launch, all the market will see and all the entrepreneur is thinking about is that tiny market of customers who are ready to make a commitment now, leaving out all the futuristic, big picture stuff which would only scare potential customers. These tiny niche customers will be ready to do that because they have a real problem to solve and that need is not being solved because they represent a tiny market that established companies are not interested in.

 

Entrepreneurs need to consciously transition from thinking about the future to executing on the present. This process of focusing 100% on the present day needs of a tiny market is a vital step that is 100% opposite to what you do to get through the previous Gate .

If you pass Gate 2, you  have two opportunities:

  • a big growth round to execute on the next stage.
  • A Trade Sale Exit.

Trade Sale acquirers know that the price will go up after a growth round; so entrepreneurs who make it to Gate 2 are in the catbird seat.

If you choose the big growth round, you will face the second leadership pivot needed to get through Gate 3.

Gate 3: Make it work as a business

During Gate 2, you can do things that don’t scale. You do whatever it takes to win those early customers. You need to worry about gross margin but Customer Acquisition Cost is less of an issue. Profit is not a concern at this stage. In Gate 2, you got Product Market Fit in a tiny market. You cannot build a business in that tiny market. It is just a stepping stone to a real market that that you go for in Gate 3.

Now, at Gate 3, all your unit economics need to be good. You need to make it work as a business (aka generate a bottomline profit). That is s another vital step that is 100% opposite to what you do to get through the previous Gate.

If you make it through Gate 3, you have a profitable, scalable business that you can grow with internal resources as long. You will be fending off acquisition offers all the time, both from financial buyers (private equity funds) as well as strategic buyers. You get to choose when and who you sell to. Or you may choose to go all the way to Gate 4.

Gate 4: Expand and Dominate.

The “expand and dominate” Gate 4 is about pivoting back to that original founding conceptual clarity, of realizing the big picture potential.All the long years of the earlier Gates are simply laying the groundwork to make this possible.

This is another wrenching pivot. The skills, techniques and attitudes that got you through Gate 3 are all about constraining ambitions for the future while concentrating on being profitable. If you have done a good job in the transition through Gate 3, you will be able to leave the quarter-by-quarter growth to a highly competent team. That frees the founder CEO to focus on expanding into adjacent markets and dominating the market.

Dominate may sound harsh to some ears, but that is what investors expect; that is what the high valuations given to fast growth tech companies are based on. Another way of saying this is what Peter Thiel describes as natural monopolies in Zero To One, the kind of monopolies created by network effects (think of Google, Facebook, Uber, AirBnB).

These are 4 pivot gates:

  • Gate 1: From Concept to Minimum Viable Product.
  • Gate 2: Prove the Concept = Product Market Fit.
  • Gate 3: Make it work as a business.
  • Gate 4: Expand and dominate.

If you are coming up to one of these gates, be very conscious of the wrenching leadership pivot that you will be encountering.

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