Failing to Execute
Lessons on Growth

One investor I know repeats the same refrain to every startup he works with: focus wins. The advice is as sound today as when he first gave it to me, along with a check, ten years ago. That’s because without focus, it’s impossible to lead, allocate resources, or define what winning means. Without focus, a company can’t grow. Are your resources spread too thin? What do you do if you’ve lost focus? When should you hit the accelerator? How do the most successful companies execute at scale?

Lack of Execution

Listen to investors talk about a company that’s not going the way they thought it would, and you hear one of two things. They either say the market isn’t there, or they talk about execution failure. Statements such as, “Those guys couldn’t execute their way out of a paper bag,” “It’s an A opportunity but a B team,” and “We need to get someone in there who knows how to scale,” are all too common.

If you’ve got a great market but you’re failing to execute, admit you’re wrong. It’s not that great entrepreneurs don’t make mistakes—they make tons of them. But they adjust quickly to correct them.

Sometimes execution failure occurs because people don’t get along. There’s no chemistry, people get on each other’s nerves, they find they don’t have enough common ground to make it work, or they can’t agree on who’s going to do what. They step on each other’s toes. There is no easy solution to this kind of execution failure—the answer frequently is that someone stays and someone goes. But communicating about who’s doing what—through both one-on-one meetings and weekly team meetings, not just casually—can help a lot. Success comes from tackling the big issues head on, not letting them linger.

Startups Are Fluid Organizations

Entrepreneur A interviewed more than a dozen candidates over the course of five months before deciding to hire one as his VP of sales. His board members, a number of them former operating executives, met with most of the candidates, some spending as much or more time with the candidates as Entrepreneur A himself. Yet the newly hired sales executive left the company after just three quarters.

The board and CEO conducted a post-mortem to try to understand what had happened. Three possible reasons were put forth:

• The company hadn’t achieved product-market fit. Although there was some early traction with customers, even the most talented sales executive couldn’t sell customers a product they didn’t need.
• Although the VP of sales had been successful in previous jobs, he had been selling products that were very different than the one the company was building.
• Either the VP of sales didn’t know how to build the kind of sales organization required to sell this product, or the right approach to selling the product hadn’t yet been found.

One board member suggested organizational issues—that Entrepreneur A hadn’t managed the VP of sales effectively and had, as a result, set up the VP of sales up to fail. As it happened, the VP of sales had run sales at one of the board member’s other portfolio companies previously and had grown sales from $7 million to more than $50 million.

What really caused the VP of sales to fail will never be known for sure. Perhaps he was a decent sales executive but had lucked into a great opportunity at the previous company—a product that virtually sold itself. He put the right process and people in place, but the product filled such a critical market need that he didn’t need to do all that much selling. Others argued that the VP of sales had implemented an innovative selling model at his previous company that caused the product to be successful.

Regardless of which factor caused the failure, what is certain is that it cost the company a lot of time and at least one additional round of funding. The VP of sales was in place for three quarters, and the search leading up to the hire took two quarters, counting the time the company spent deciding to start the search.

What’s also clear is that no one—neither Entrepreneur A nor his board members—wanted to admit that something was very wrong. They preferred to let the illusion of “a little more time” deceive them, rather than face reality.

When it comes to human resources, startups must be incredibly fluid organizations. Although there may be some short-term public embarrassment when a high-profile executive leaves, the cost of keeping the wrong person in place or not figuring out the root cause of a company issue is far greater.

Startups by their very nature must be nimble and move quickly. It’s one of the key advantages they have over their slow-moving, well-established, big-gorilla brethren.

As startups go through different phases, they need different people, and people with different skillsets and amounts of experience. Startups doing market discovery must optimize for trying a lot of things, failing quickly, and repeating until they find product-market fit. Startups that are scaling optimize for growth, and they frequently benefit from experience on the team in order to do that. That means the best startups are fluid organizations.

A startup should hire people who can address its immediate needs and its needs on a two-year time horizon. Some of those people will grow with the company and stay. Others will leave either because the startup doesn’t progress the way they expect it to or because they find themselves unable to progress with it. In either case, startups that have static organizations fail. Those with fluid organizations succeed.

Under-Resourced or Over-Resourced?

It has been argued that a startup can never have too much cash. But surprising as it may seem, startups can fail both from over-resourcing and under-resourcing.

Startups spend the money they have. Teams that have too much cash early on don’t force themselves to make the tough tradeoffs. They hedge their bets, fail to focus, and throw in features that aren’t core to product success. They overhire and tend to spend too aggressively on acquisition, assuming they already have product-market fit or that they can solve problems through more aggressive sales and marketing, rather than a better product.

Startups that are under-resourced face the near-constant threat of going out of business or having to raise more money. Having bootstrapped multiple companies, I’ve experienced first-hand the agonizing decisions that have to be made when resources are scarce.

I remember several times when I wasn’t sure we would make payroll—either because we were still negotiating a customer contract or because our funding had yet to close. Employees were depending on us to pay them so they could pay their bills—it was a heavy feeling of responsibility.

That lack of resources forced us to focus and make decisions quickly. Discussions about priorities became a lot easier. When it came to product features, we asked ourselves the following questions. If the answer was yes, we made including the feature a priority:

• Will this feature cause a customer to buy the product?
• Will not having this feature prevent a customer from giving us money?
• Will this feature help us acquire more users/customers?

We became brutally focused on product capabilities that would generate customers and revenue.

We found ourselves spending a lot more time thinking about user acquisition and how to create a great on-boarding experience. We agonized over the details of reducing friction between our product and our customers. We didn’t want anything to stand in the way of someone using our product. And we devoted much more time to getting the word out, promoting our product, and figuring out new and innovative ways to market and sell. Ultimately, that focus on customer acquisition and revenue defined our company culture and approach.

Two incredibly successful entrepreneurs I know take this approach to an extreme. They’re known for selling what they don’t have. Given the choice between spending a dollar acquiring more users or a dollar on product, they spend on acquisition.

On the surface, they appear to be in grave violation of the mantra “under-promise and over-deliver.” Products they’re involved with take longer to build and have fewer features than promised. Yet when they do arrive, the products address very real market needs. What they lack in precision, they make up for in accuracy. These entrepreneurs know they can improve quality and add features as time goes on.

Because these entrepreneurs invest ruthlessly in customer over product, people question whether they’re building companies for the long term. Their product teams often have to be overhauled with new heads of product and engineering. Yet they’re masters at the product-market fit discovery phase so critical to startup success. Once they achieve product-market fit, they re-engineer their organizations and products.

Failing to Manage Cash

What’s the main reason startups fail? It’s axiomatic: They’re undercapitalized. Or their burn rate is way too high. Or their financial recordkeeping is shoddy. Whatever the underlying reason, they go to write a check and find the bank account empty.

When it comes to spending, there is no single path to success. Some entrepreneurs swear by the “run at the wall, and the wall will move” strategy. This can and does work—but it tends to work best for venture-funded startups with multimillion-dollar checkbooks behind them. Conversely, any bootstrapped entrepreneur worth their salt has looked over the precipice of the zero-balance bank account and stared it down. It’s easy to let yourself believe that investors are your only source of capital. They aren’t. Customers can fund you, too. But the real question you must ask yourself is, “Why am I running out of capital?” The answer is where you started: product-market fit.

One of the biggest reasons companies run out of money is that they spend far too much before they’re ready to scale. Until a company finds product-market fit, it’s fine to run some low-cost user-acquisition experiments, but there is little point in spending huge amounts of money on acquisition.

Venture-backed entrepreneurs often assume that if they can’t figure out their business with the current round of funding, they can get their current investors or new investors to invest more capital. They’re exactly right until they’re wrong.

Entrepreneur B had an unparalleled ability to raise money—investors loved his vision. Even when it costs tens of millions of dollars more than anticipated to fund his vision, he was able to raise the money. Investors overlooked the warnings signs that he was spending far too much while the economics of his market were changing. The prices of competitive products were coming down faster than he had anticipated, and it was taking him far longer than expected to get his product to market.

For a long time, investors disregarded this core issue, but eventually, after raising series D, E, and F rounds of funding, he met some investors who pushed hard on the crux of his business: would he be able to ship his product, and would it be at a price point that was competitive in the market?

Even though the existing investors wondered too, they held off on asking—because Entrepreneur B was such a great fundraiser. The conversations were short: “The guy just raised $50 million. How can we fire him?” But fire him they did, when he could no longer raise money.

The investors brought in an operational CEO who was the opposite of the entrepreneur. He replaced nearly the entire management team, got costs under control (that is, cut them almost in half), and restructured the company’s debt. But the company had gone from being a rising star to a turnaround. Time will tell whether the turnaround is a success.

Bootstrapped entrepreneurs, conversely, have no one to rely on for capital but themselves, and potentially their angel investors, if they have them. I remember that when we bootstrapped our first company, we naturally went out of our way to save money. When we travelled, we looked for the best deals and stayed at the cheapest places we could find. We paid our bills on time, but we waited until they were due to send the money. We were frugal, and we negotiated hard.

I credit our upbringing for that—we all came from families where money was treated with respect. We were raised to make money and save money. As a result, it wasn’t hard to act similarly when we started our company. But we did face some significant challenges. Being bootstrapped meant we were constrained. Once we had paying customers, we couldn’t keep up with their demands because we were constantly making tradeoffs on what to build. But that also meant we were extremely focused.

If you’re venture-backed, it’s easy to get sucked into the false security of having what is, by any measure, a lot of money in the bank. The problem is that the more money they have, the more companies spend. Salaries go up, costs go up, and people become less frugal. Managed properly, these companies can potentially grow much faster, leading to greater successes—or bigger craters.

Debt

Debt can compound cash mismanagement. Some venture investors characterize debt for startups as “the banks loaning us our own money.” This is because debt for startups often isn’t backed up by receivables or revenue, but by the venture investors and the capital they’ve invested.

In my corporate finance class at the Stanford Graduate School of Business, a legendary finance professor once opened a door on the stage of the auditorium in which he was teaching.

“Do you hear that?” he asked us. All we heard was silence. We looked at him like he was crazy. He slammed the door shut. The room went from silent to deathly silent.

“That’s the sound of the debt monster.” Debt can provide great leverage on existing capital to accelerate a business. It can also devour a business as quickly as our professor slammed that door shut. For early-stage startups, debt can seem wonderful when things are going well. But when they aren’t, the company still has to make payments. Even as you’re producing revenue, a chunk of that revenue goes to pay off your debt every month. Even though you’re working hard, debt can drown you.

Entrepreneur C nearly drowned not because of debt but because of his lease. Long-term leases have proved very difficult to get out of. It’s possible to sublet space, but doing so typically requires approval of the landlord. And if you’re already subletting, you have multiple levels of approval to contend with. Entrepreneur C signed a long-term lease for a lot of space at the height of the Internet bubble.

When the bubble crashed, the loss of numerous customers was compounded by the large amount his company had to pay every month for its lease. No matter how hard the company tried, it was impossible to break even because the lease payments were so high. It took the company years to become profitable.

When you have a lot of cash, problems seem small, right up until there’s not a lot of cash—and then they seem really, really big. Failing to manage cash, whether it’s a lot or a little, is one sure way to make your company fail.

Cash Flows from Product-Market Fit

You can’t fake product-market fit. Sometimes you can use vast amounts of capital to cover up core business problems. But in the end, you must achieve a match between a great product, a big market, and the ability to reach that market efficiently. Ultimately, the truth will out, and you have to build something people want. Otherwise, you’ll run out of cash.

Many execution reasons can cause you to run out of cash—cash mismanagement, bad collections (customers who don’t pay), fraud, theft, ignoring problems, and not watching the numbers. Getting these elements of a startup right requires experience and skill, and you can often hire to manage them.

Product-market fit requires deep knowledge of your domain. That can be your own needs if you’re building a consumer product for yourself. Or it can be deep knowledge of a customer or market need if you’re building something for others. Either way, you can’t hire to find product-market fit—you must find it yourself.

Executing Early vs. Executing at Scale

During the product-market fit discovery process, you should expect to get a lot of things wrong, as long as you get the product-market fit discovery process right. If you don’t bring the discovery process to a successful conclusion, the rest of the items don’t matter.

Perfection is your enemy when you’re executing early. Get your product out fast, and ask for feedback. Get some money in the bank, even if it’s not on your ideal terms or the exact amount you wanted to raise. Be flexible about everything—but don’t compromise on finding product-market fit.

Finding product-market fit requires either being right out of the gate—possible but rare—or trying a lot of different things and failing at them quickly until you discover what works.

In contrast, executing at scale means optimizing for growth. Instead of trying many different things, growth-stage companies attempt to replicate what’s working. Entrepreneurs who are great at the product-market fit discovery process may or may not be great at scaling up.

Some entrepreneurs fail at this transition because they stop focusing on delivering great products. Other entrepreneurs focus on product to the exclusion of all other company functions: they’re unable, in particular, to hire people to manage functions like finance, sales, and human resources.

One entrepreneur I know is amazingly detail-oriented. This level of detail extends to all areas of his life. Even though his personal net worth is in the tens of millions of dollars, he still does his own taxes. He excels at operational detail.

Conversely, speed isn’t his strong suit. When he first became an entrepreneur, he struggled with this conflict. After many years, however, he learned to hire to backfill his weaknesses. He spends his time focused primarily on technical and process aspects of his business that require intense rigor and attention to detail.

Many creative entrepreneurs find the process of scaling up tedious and boring. Or scaling up is so foreign that they stop trusting their instincts. One solution to this problem, articulated by serial entrepreneur Niel Robertson, is to look for hires from companies that are 12–36 months ahead of where you are. Don’t hire for the needs of your business today; instead, hire for where you need to be 24 months from now.

Also consider hiring from companies that are ten times bigger than yours. If you hire people from organizations much, much larger than yours—say, 100 times bigger or more—you run the risk they’ll be too “big company” for your startup. And if you hire people from companies that match where yours is today, you risk outgrowing them quickly. You want to gain the benefit of experience but not have that experience be more than two years out. The key is hiring at the middle of that experience curve.

Hiring Help to Scale

A famous venture capitalist once reportedly said, “I never fired a CEO too soon.” Although this may be the classic wisdom, another famous investor said, “[Running the company] is the founder’s job to lose.” In other words, investors shouldn’t back founders who they don’t think can lead their own companies, and founders shouldn’t start companies they don’t think they can lead. It’s the founder’s job to run the company until they prove they can’t do it.

How do you choose a great founding team? What works and what doesn’t? How do you know when you’re not scaling as fast as your company—and what do you do about it? Should you ever fire yourself?

It’s rare to find an entrepreneur who is both a great product visionary and a fantastic operator. By definition, product visionaries see how their product and the world should be; great operators are pragmatists who see the world primarily as it is. A few rare people are able to work at both ends of the visionary/operator spectrum simultaneously, or at least easily switch between them.

But many of the most successful tech companies have separate people in these roles. Mark Zuckerberg is the product visionary at Facebook; Sheryl Sandberg is the operator. Larry Page and Sergei Brin were the product visionaries at Google while Eric Schmidt, until recently, was the operator. Bill Gates had Steve Ballmer, and Steve Jobs had Tim Cook.

What worked so well with these partnerships was that the founders maintained their roles within the company—setting product direction—while the operators managed the operations. Yet sometimes this simply isn’t possible.

Entrepreneur D was a big fan of hiring a COO. Inexperienced at operations but a world-class product visionary and promoter, he raised tens of millions in venture capital and scaled his business quickly. But the details of finance, sales, and legal issues frustrated him. His board members suggested that he hire a COO, and he agreed. Yet he faced numerous challenges in making the hire.

Entrepreneur D mostly delegated the hiring process to his board members—not because they asked him to but because he didn’t want to deal with it. The board spent several months interviewing candidates, and the same thing happened on each potential hire: the candidate talked politely with the board members but wanted to talk with Entrepreneur D to understand what he was like to work with.

The entrepreneur, who kept himself extremely busy, didn’t make time to meet with the candidates. Weeks passed between the initial meeting with a board member and the follow-up meeting with Entrepreneur D—and then he would often cut the meeting short because he had other meetings to go to that he felt were equally, if not more, important. Candidates came away with the impression that Entrepreneur D wasn’t interested in hiring them. They were right—he wasn’t.

Entrepreneur D faced another challenge. His standards were high—a great thing. But he had a vision of what his ideal COO was like, and each time he met someone, he found several things wrong with the candidate. Although some of the people he interviewed went on to become successful COOs at other high-profile startups, none of them matched his requirements on all dimensions—none of them were perfect.

The final challenge Entrepreneur D faced was that of the few candidates whose failings he could look past, none wanted to work for him. The truth was that even though Entrepreneur D recognized he wasn’t properly managing the operational aspects of his business, he didn’t want to give up the control that bringing in a COO entailed; and he didn’t really want a partner in the business, even though that partner would be operationally focused while Entrepreneur D would continue to be the external face of the company and drive all product direction.

One board member only half-joked that Entrepreneur D liked the operations of the company being slightly sloppy and remaining as they were when the company was smaller, because even though the company wasn’t operating optimally, it allowed the entrepreneur to maintain complete control. In fact, because Entrepreneur D’s board members had no way of fully knowing what was going on inside the company, they had little choice but to go along for the ride—or fire Entrepreneur D.

After a year of conducting the COO search, that is exactly what they did. It wasn’t smooth, and the company lost its product visionary—and its way. Later, it came out that numerous business-development deals the company had entered into jeopardized the core of the company’s business. Only after two years and an additional round of funding did the company find its legs again and get back on track. Whether it will be a success is yet to be determined.

Entrepreneur E faced a different problem. He hired a COO quickly, but the COO turned out to be a terrible hire for the company. Although the COO acted knowledgeable and had a great resume, he wasn’t very good at his job. Put another way, he “talked the talk” but didn’t “walk the walk.”

The company could have avoided this problem by taking more time to meet with multiple candidates. Although the company desperately needed an experienced executive to help it scale, Entrepreneur E rushed into the hire and regretted the result. “If we don’t get someone in here quickly, it’ll cost us,” is a difficult statement to disagree with. But the counterargument holds more weight: getting the wrong person costs more.

As one investor I know is fond of saying, if a company that’s in a great market with a great product that’s selling is struggling, the answer is almost always “hire.” If you’re a product visionary, team up with a great operator. It’s rare that this happens at the founding stage of a company, because great operators need something on which to operate! They also tend to operate at scale—in the growth phase of a business—not in the product-market fit discovery phase. If you’re a great operator, find an incredible product visionary. And if you think you’re both, ask yourself how you can have the biggest, most highly leveraged impact on your business. Then hire an all-star management team to handle operational functions such as customer service, sales, finance, marketing, and legal.

Know Your Numbers

As the Cheshire Cat said in Alice in Wonderland, “If you don’t know where you’re going, any road will get you there.” If you don’t know your numbers, it’s very hard to predict when you’ll need more capital and which of your activities is having an impact on your business. How can you know where to invest if you can’t measure what’s working and what’s not?

One CEO I know always hesitates slightly before he talks about the “cash out” date of his company—that is, the date his operating plan indicates his company will run out of money, not the day he gets to cash out his stock for millions of dollars. He views any discussion of running out of money as a negative. He used to put this number at the very end of his board-meeting presentations. One day I suggested he put all the numbers up front. Just put it all out there—the good, the bad, and the ugly. He asked me, “Won’t my investors find that disturbing?”

“I doubt it,” I told him. After all, for angel and venture investors, most of their companies are always running out of money! The time a company has the most money is the millisecond after a new round of funding closes. After that, the company’s cash balance gets lower and lower right up until more funding closes or the company becomes profitable. During portfolio reviews, investors spend a lot of time on capital planning, cash positions, and the future cash needs of companies. That’s because understanding and managing the capital needs of their portfolio companies is a big part of an investor’s responsibilities.

Board members find it disturbing when CEOs miss their numbers when they’re supposedly in the scale-up stage of their business. But they find it really disturbing when CEOs don’t present critical information up front—or at all. Waiting makes people think you’re hiding something, reduces your credibility as a leader, and takes focus away from the most important challenges a business faces. Changes and unexpected events are to be expected at a startup.

Knowing your numbers is critical to operating your business:

• What is the slope of the growth of your business? That is, how fast is your business scaling?
• Which activities and features result in customers or users sticking around?
• Which areas of marketing activity and spending produce the most results?
• How much is a user worth to you?
• How much money are you burning every month?
• If you had more money, what would you spend it on? In other words, is what you’re doing to acquire users and customers repeatable, and just a question of capital and people constraints?

As it happens, these are the very same questions investors will ask you when you go to raise money.

The Goal: Repeatable, Profitable Acquisition

Knowing your numbers tells you whether you’ve built a repeatable, profitable acquisition mechanism. You know how much it costs to acquire and serve a user or customer, and how much that user is worth to you, during the lifetime they’re a user of your product. Everything in a scaled-up organization is in support of building a great product and then feeding and optimizing the machine that attracts, retains, and monetizes the users of that product.

If you try to create the machine before you have product-market fit, you waste a lot of time and capital. That’s why, according to the Startup Genome Project, the number-one cause of startup failure is premature scaling. Premature scaling means spending money too quickly, which causes startups to run out of money before they have a chance to iterate their way to product-market fit. It also means startups that suffer from premature scaling lose the nimble approach that is core to being a startup. They’ve overcommitted to an organization and approach before they know what organization and approach they really need.

Although business schools teach over and over the importance of treating sunk costs—money that is already spent—as irrelevant to future investment decisions, the reality is that sunk costs play a strong psychological role in both investor and entrepreneur decision making. By scaling prematurely, not only do you have a physical organization and associated high burn rate in place, but you also have a larger psychological hurdle to overcome if you want to change direction. Early-stage startups that haven’t yet found product-market fit are all about preserving optionality. Startups that have entered the growth phase are primarily about optimizing for scale while introducing relevant features and updates to keep the core product attractive and competitive.

The Myth of First-Mover Advantage

Investors are fond of talking about first-mover advantage, which is the apparent advantage gained by the first entrant in a new market. Some first-movers are able to capture the market and create monopoly or near-monopoly-like businesses.

Many of today’s market leaders, however, didn’t have first-mover advantage. Facebook wasn’t the first social network, the Apple iPod wasn’t the first portable digital music player, and Google didn’t create the first search engine.

Quite often, pioneers end up with arrows in their backs, while one of the later movers learns from the pioneers, executes better, and takes the market-leadership position.

Numerous entrepreneurs and CEOs have claimed that their companies were “a little too early” for the market. Investors just needed to be patient. Yet even having admitted that the market didn’t exist or that they hadn’t figured out a way to reach the market, they chose not to cut their burn rates to match their scaled-back revenues, switch go-to-market strategies, or change markets.

Many of them were too heavily invested in their existing plans, were convinced it was a matter of executing better than they had been, or put ego ahead of reality. As a result, they ran out of money and failed.

These companies didn’t cut back their burn rates, so they needed more capital. They couldn’t raise that capital not because they lacked vision or execution—many of them had both. Rather, they took too long to match vision to reality. Investors will suspend disbelief for some period of time. But ultimately, they’d rather put their money into companies that are growing than ones that aren’t.

How the Late Entrants Won

How did Facebook beat early market leaders MySpace and Friendster? How did Apple beat the existing digital music players? How did Google beat the other players in search, including Excite, which started long before, in 1993?

Unlike its competitors, Friendster and MySpace, which focused on helping people meet new people, Facebook focused on keeping people connected with those they already knew. People feel more comfortable connecting on a social network with those they already know than with people they don’t,¹ and that that was a much bigger need than meeting new people.

In terms of its go-to-market strategy, Facebook started with a niche—universities—and used that to make real identities and authenticity a core value, whereas profiles on MySpace and Friendster were much more likely to be exaggerated or made up. Although anyone can now join Facebook, Facebook originally gave the site exclusivity by limiting who could join. That drove demand for the site.

Facebook did nearly everything a startup is supposed to do right: it was nimble, reacted quickly, and got the product right. In contrast, its biggest competitor, MySpace, was mismanaged as part of the larger organization of News Corp. Describing its handling of MySpace, News Corp. CEO Rupert Murdoch said, “We … proceeded to mismanage it in every possible way.”³

Google won because the company focused on search to the exclusion of all else. By implementing a new approach to generating search results based on the relationships between web sites, Google delivered more relevant results than any other search engine.

Even Google’s closest competitor, Yahoo!, switched from serving its own search results to using Google’s. And as the number of web sites and pages Google indexed grew exponentially, it continued to deliver a better product experience, driving down the time required to deliver search results.

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Although other companies developed MP3 players before Apple, Apple was the first to get the end-to-end consumer experience right, from the design of the device to the software for loading music. And like Google and Facebook, Apple won by selling benefits—a better experience—not features.

Apple coupled the sleek iPod device with an equally sleek marketing campaign. The iPod was easily recognizable, from the device to the white earplugs. Apple and the iPod became a statement, not just a functional device.

Become the Market Leader

What if you’re not the market leader? It’s the elephant in the board room, the difficult question no one really wants to ask: “We’re #2. How do we become #1?” If you don’t answer the question, #1 will answer it for you.

The advantages of market leadership are obvious. Investors (private and, later, public) want in and are willing to pay for the privilege. As a result, market leaders can raise more capital on better terms than any other player.

They have pricing power. Because they’re #1, customers and users want to go with them, so they can charge a premium. And their brands are the best known, so user and customer acquisition costs are lower.

Becoming the leader may seem like a daunting task, but there are some proven ways to succeed:

1. Decide to win: Deciding you want to be #1 is probably the most important part of becoming #1. If you’re comfortable at your company and things seem to be going okay, you’ll never become #1.
2. Build great product: As you’ve seen with the examples of late-market entrants, focusing on the right product and the right way to deliver that product to market can enable you to beat out the other players.
3. Move faster than the market: Many startups give up the agility that is a startup’s inherent advantage in favor of overly long-term planning and slow execution. They take too long to hire, agonize over strategy changes, and reduce their appetite for risk, nervous about how investors will respond to radical changes.

   Yet risk-taking, innovative approaches, and moving quickly are what make startups succeed. If you’ve settled into a comfortable existence at your startup, shake it up so you can move faster than the market.

4. Shatter the myth: In some cases, #1 by all measurable accounts (revenue, market position, number of users, or capital raised) is #1. But in less-developed markets, it’s often more marketing than reality. Don’t be “all steak no sizzle” and let yourself get outmaneuvered by companies that have great marketing but less-worthy products.

   Up your profile, get visible, and market like crazy. Every time #1 is mentioned, you want to be mentioned. Shatter the myth through marketing, PR, and customer acquisition. Implement a partner strategy to make yourself bigger than you are alone. Make your reality the market perception.

5. Make being #2 an asset—until you’re #1: This is the Avis “We Try Harder” strategy. Organizations with existing products simply can’t move as quickly. They have to consider their existing user, product, and cost investments when making changes. This is the quintessential startup strategy: be more nimble than #1.

   Some companies take a fast follower strategy as the #2 players in a market. They copy many of the product and go-to-market strategies of the #1 player, and then, if #1 stumbles, they leapfrog ahead.

6. Make it easy to switch: A trail first blazed by Excel/Notes and Word/Wordperfect, these products made it easy to switch by implementing the same keyboard shortcuts as existing products. With little to no behavior change, users were able to do everything they’d always been able to do and take advantage of a host of new features as well.

   More recently, this has happened in the form of e-mail and contact importers, which make it nearly friction-free for users to take their contacts with them. Features like importers and migration tools may seem unglamorous to build, but they’re pivotal in getting users to switch.

7. Be open when others are closed, and closed when others are open: This is the strategy Google took with Android (open) in the face of Apple (closed). Google, with Android, gave the other players in the market (that is, the other phone manufacturers and wireless carriers) a viable alternative to the Apple iPhone. This works exceptionally well in markets where the existing ecosystem feels threatened.
8. Roll up the market: With the right capitalization strategy, you can go on the offensive, acquire some subset of the #3 through #10 players (by market share), and become #1. Vacation-rentals site HomeAway (which went public in June, 2011) applied this approach very successfully—it rolled up a market of smaller players to become the big kahuna.

   Proper investor backing and valuation are critical to this strategy, along with an organization that can execute on it. When executed well, acquiring your next-largest competitor is a time-proven way to accelerate customer adoption, revenue, and growth. Just make sure your organization doesn’t die of indigestion.

9. Use white-space innovation: Some companies are so caught in their legacy businesses or existing approaches to the market that they find themselves unable to avoid a decline into oblivion. Most people think this only happens in big companies, but it happens to startups that have been around for a while as well.

   A product has been selling, but relatively slowly. The startup may be profitable, but it’s the law of small numbers—the company stays in business but has reached a local maximum, and rapid growth seems near impossible. The company exists in the shadow of much larger players that are dominating its market or an adjacent market.

   Taking a white-space approach can free a company to go from laggard to leader. It requires a team that is empowered to build the best product, free from the legacy obligations of the existing business, and not held hostage by the existing organization.

10. Pour on the gas once you have product-market fit: When you have product-market fit, you know it—you can feel it. Things are on fire. Users are signing up in droves. Sales people aren’t just saying things like, “This product sells itself!” they really mean it. It’s time to scale up. Focus on organizational growth combined with ramping user growth, for consumer companies, or customer growth, for business companies—as fast as you possibly can.

When the Market Outruns You

Startup founders often find they’re too early to a market or that their product isn’t a fit for what the market wants. Sometimes, however, the market outruns you.

Later entrants can enter a market in which you were an early player, quickly understand the core features that users or customers want, and focus on those. They aren’t weighed down by the baggage of trying lots of different approaches—instead, they can see what works and perfect just that.

Entrepreneur X set the vision for his startup based on trying to address his own needs as an executive at a large company. An ahead-of-his-time thinker, when he developed his product, it addressed his needs but was so far ahead of what the market was ready for that adoption was very slow.

However, Entrepreneur X was an evangelist. He educated the industry on the need for his approach. Meanwhile, in an attempt to get customer adoption, Entrepreneur X’s team added more features and changed the company’s product focus. Entrepreneur X kept promoting his vision, but his product no longer matched that vision.

Competitor Y entered the market two years later. The company focused on the core functionality Entrepreneur X had promised and delivered a very compelling, easy-to-use product. Other entrepreneurs, seeing the success Competitor Y was having, entered the market as well.

Practically overnight, a market that had been moving slowly erupted with a frenzy of activity. The market became crowded with products and noisy with marketing messages. Company Y stayed focused, whereas Entrepreneur X’s company spent months pivoting back to its original plan. Of course, by the time his company did that, it was game over—Competitor Y had a huge lead in customers, revenue, and mindshare.

Coming from behind after another company has passed you is very difficult. You need the leader to stumble or become complacent, you need a must-have innovation that leapfrogs the leader, or both. There is incredible momentum in being the leader; that momentum is difficult to regain once you lose it.

It can be done, however. Apple regained its momentum, but it took the return of its founder, years, and a new product line to do it. IBM regained much of its momentum, but it took a new CEO—Lou Gerstner—a new strategy, and a shift in culture. GE got its mojo back, but it required a new CEO—Jack Welch—who implemented radical restructuring and the “Be #1 or #2” mandate.

Regaining market leadership, unlike getting it in the first place, is a turnaround situation. Turnarounds, by definition, are difficult. And although they might seem toughest for large organizations, they’re doubly hard for small ones. When big companies are on the verge of going out of business, a lot of people and institutions have a vested interest—customers, investors, shareholders, suppliers, employees, even the government. When small companies are on the verge of going out of business, a few people care deeply, but the vast majority do not. You must save yourself.

Your options are as follows:

• Bring in a new leader: Although it may seem unlikely that a new leader would want the job, there is a set of people who enjoy the unique challenges of a turnaround. Investors are often willing to provide more capital behind a new leader. Like organ transplants, new-leader transplants can face a host of complications, including rejection. An experienced investor once told me that bringing in a new CEO is a 50/50 proposition at best. But sometimes an injection of new leadership—regardless of the leader—is what a company needs to regain its footing.
• Sell the company: Of course it’s better to sell when you don’t need to than when you do. But this must be considered as an option.
• Focus, focus, focus! Companies that need to regain a market-leadership position have often lost their way and lost their focus. They have too many products, they lack a clear vision, and they struggle due to poor execution. The advice I was given by an investor ten years ago is as applicable to turnarounds as it is to new investments. Focus wins.

Summary

Great execution can’t deliver product-market fit, but a lack of great execution can kill a company that has found product-market fit.

When it comes to execution, one of the biggest challenges entrepreneurs face is organizational—hiring for growth.

Startups that have been around for a while and that haven’t hit the growth curve they desire are often hesitant to shake things up due to the emotional and psychological investment in sunk cost. To succeed, leaders of stagnant startups must fight the siren song of sunk cost, while leaders of high-growth companies must scale their organizations to support the growth.

Market leaders have proven time and again to deliver the most value for investors and entrepreneurs alike. Great product-market fit combined with unparalleled execution will move a company from market laggard to market leader.