Leading a Startup in Stage 2: Operational Validation

By the end of stage one of enterprise maturity, you have refined your original idea, prototyped your product or service, and found real customers for that initial offering. You’ve accomplished the principal task of the first stage -- customer validation.

In stage two your principal task is operational validation -- getting up and running as a rudimentary business. To achieve that objective, you will need to figure out how to 1) deliver your product or service, 2) satisfy existing customers while finding new customers, and 3) administrate the enterprise through bookkeeping, payroll, and the like.

Your focus now shifts from the product to processes. But the team that completed stage one may not possess the skills required to build and run those three sets of processes. Stage one requires ingenuity and resilience to get the project done. Stage two requires skill and expertise in setting up to do things repetitively. So in all likelihood you will need to recruit additional people whose strong suit is “getting it right” rather than “getting it done.”

This project-to-process transition presents both business challenges and leadership challenges. The business challenges include these:

Increased staff, requiring more support and resources, means cash is consumed much more rapidly. Cash management becomes critical, and cash flow becomes the overriding control mechanism for what goes forward and what gets delayed. Either you, or someone you trust to control cash, must make the ultimate decisions about what the enterprise can and cannot afford, approving every commitment before it is made. Further, the planning horizon now extends to the time it takes to get an order, fulfill it, and get paid for it. Longer planning horizons are not worth it.
Product setbacks can be costly. Your product can work well but still disappoint the original customers’ expectations, potentially forcing you to reconsider the entire premise of the enterprise. These mismatches between intended and perceived product performance are ideally caught in stage one, but sometimes they cannot be detected without more extended actual use. Making changes to products once they have been designed and delivered to customers is extremely complicated and expensive. So is changing the processes that produce or deliver the product. The good news is that such setbacks sometimes yield major insights into alternatives that will work better than the original product concept, and they can generate significantly more value for you and your customers.
The leader must make many risky “go/no go” decisions about significant investments. That includes the investments required to design and implement even basic product delivery and selling processes.

The business challenges that characterize stage two give rise to a new set of leadership challenges. The tough choices that you must now make are often of the damned-if-you-do/damned-if-you-don’t kind. And whatever decision you make is bound to upset someone or some group that is important to the survival of the enterprise. To lead adroitly through these dilemmas and their repercussions, you must be able to:

Remain selfish and selfless. As we saw in stage one, you selfishly want your product or service to change people’s lives. But to do so you must selflessly listen to potential customers and be prepared to change your idea. The same paradox crops up in the stage two transition from projects to processes. You must translate your “selfish” vision into repetitive self-sustaining activities, but this transition cannot take place unless you can selflessly let others take charge of producing or selling your product or service.
Reconcile the motivations. Reconcile the motivations of the new “getting it right” type team members with those of the original “getting it done” types. Both stage one and stage two hires share the desire to be part of something new and influence the direction of the organization. But some of the original team members will be upset because they can no longer can tinker with the product or discuss new, exciting ideas with the customer. They may also feel you are giving into bureaucracy. You should therefore set expectations early about how they will continue to play influential roles in the expanding organization. For example, since they are experts in the design of the original product or service, you can have them fully participate in the creation of the new processes. But you also have to prepare them to turn over responsibility for ‘their baby’ to somebody skilled in managing processes.
Control the project and process. Simultaneously control both the project to create a process and the resulting process. Because creating new processes may involve much iteration and adjustment, you must make sure that they are both well designed and up and running in some form while still under construction. You must make clear that such tensions are inherent in transitions and that constant adjustment doesn’t mean that you lack confidence or don’t know what you’re doing.
Maintain confidence in the face of setbacks. Prepare your team, donors, and other stakeholders for potential setbacks -- costly product or process modifications, customer resistance, and cash crunches. Detail how your enterprise will recover from such problems and act confidently and decisively when they occur. On the other hand, if the potential distraction from worrying about a given risk could be worse than the resulting anxieties caused by an actual setback, you may not want to discuss it.
Create some hierarchy without causing alienation. Priority setting within a stage two enterprise must rapidly transition from the as-required huddle to regular status reviews. Inevitably, these reviews will be attended by the leader, the “keeper of the checkbook,” and each of the three project leaders (in product, sales and administration), plus any other relevant experts that can give insights on how best to keep the projects on schedule. People not in this inner circle, who no longer have regular contact with the leader, may feel a sense of alienation. This alienation can impede critical information from getting back to the team setting priorities, resulting in poor decisions. Further, in any project-to-process transition, coordination among numerous areas and activities must occur informally. All of this puts significant stress on the leader to communicate priorities and status -- as well as the excitement of the vision -- to everyone within the greater enterprise so that they understand their roles and communicate all-important information.
Be conscious of culture. John Lennon memorably sang that “life is what happens while we’re busy making other plans.” That applies to startup culture as well. Many entrepreneurs fail to realize that how responsibility is apportioned, how problems are received and addressed, how much risk is tolerated or encouraged, how early employees are supported or not in their skill enhancement -- all of these things and more will coalesce into the company’s culture. That culture will play a critical role in your success. Once a culture has been created it is extremely difficult to change. No one has more impact than the leader, through both word and deed, on how that culture develops.

The business and leadership challenges of stage two have defeated many an entrepreneur. Often they feel whipsawed by the conflicting demands of remaining flexible about the product or service while introducing more structure with processes. They remain stuck in stage one, or they move to foreclose the product offering prematurely. They make equivocal decisions and often fail to lead effectively through the implications of even good business decisions.

How do you know when you have successfully negotiated this treacherous ground and achieved operational validation? When: 1) your company can reliably deliver a product or service, 2) the product or service provides the expected value to the customer, and 3) there exists a reasonable demand that warrants scaling up to the point where the product or service can be produced, delivered, and sold effectively. But now even more work lies ahead in stage three.