Latest from Sifted – Why startups do need strategy — despite what you’ve heard

Why startups do need strategy — despite what you’ve heard
2023-07-19
There’s no doubt that execution is important for a young company — but ignoring strategy is a recipe for disaster. Balderton partner Rob Moffat explains why

Why startups do need strategy — despite what you’ve heard

It’s a commonly held belief that startups don’t need strategy. I’ve lost count of how many times I’ve seen phrases on social media such as “everyone has a plan until they get punched in the face” or “execution eats strategy for breakfast”.

It is true that in the early days of a startup, the most important success factor is execution speed. Speed of learning about your target customer and adapting the product to reach product-market fit should be above all else.

However, you can’t “not do strategy”; your strategy is whatever you chose to do (a good summary is here). Every day you make decisions on prioritisation and trade-offs. Underpinning this is your strategy, whether you’ve thought about it that way or not. It just might not be a very clear strategy.

Even Google has struggled with strategy

Even some of the most successful companies have struggled with this. Google started with a clear strategy: “Organise the world’s information and make it universally accessible and useful.” Maps was intrinsic to organising the world’s information. Android was intrinsic to making it universally accessible. Google made one more successful push into dominating online advertising, with two highly successful acquisitions: Doubleclick and YouTube. 

Over time the strategy became much less clear. The company expanded in too many directions at once, without really committing to them. Failed projects and acquisitions in areas like social media and cloud gaming meant that Google lost out in sectors it should have won. For example, allowing Amazon to dominate cloud computing and letting OpenAI establish a lead in GenAI — and so perhaps the future of search.

What about earlier stage companies? As an investor and board member, some of the signals of an unclear strategy that I’ve seen over the years at startups and scaleups include:

  • OKRs written a few weeks into the quarter, not taken seriously and often missed
  • Shipping code that doesn’t get used
  • Engineering getting frustrated with product getting frustrated with marketing getting frustrated with sales. No one thinks the other team is supporting them correctly
  • Pitch decks that you would struggle to summarise in simple language
  • Too much time spent discussing “five-year vision” and none on the plan for the year ahead
  • Opportunistic M&A discussions based on inbound interest
  • Expanding in too many directions at once; sales team doesn’t understand what they are trying to sell and to whom
  • Build first, work out audience later
  • Not expanding beyond the core and running out of market
  • Running tests that don’t have clear success/fail criteria and therefore don’t lead to any change

Strategy for an early-stage startup

In essence, a startup’s strategy is deciding which markets to go after, specifying how your product will win in these markets, and allocating your resources accordingly. I’ve created a framework for how an early-stage founder can build a basic strategy — and welcome opinions on how to improve this.

Set your initial strategy

Force yourself to write down a single clear goal which is stretching but achievable in five years. You should already have a good idea of this, but challenge yourself to make it as clear as possible what your product will do and what the benefit will be to the customer. 

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Then focus on the next 12 months

Identify your ICP (ideal customer profile). Which is the segment of the market that is most frustrated today and willing to move to an alternative? Why will your product be better for them? What is your advantage in developing this? Use as narrow a definition of the market as possible. A great piece of advice for scaling startups, I think from Y Combinator cofounder Paul Graham, is to start by winning super-niche markets. What product can you build over the next four quarters to meet these needs? How will you know if you have true product-market fit? 

Work out the addressable market size of the initial segment you have identified

I recommend taking a bottom-up approach based on the potential number of clients and your pricing. If your current market is big enough to accommodate two or more years of growth, stay focused on it for the rest of the year. If not, work out which adjacent areas you are going to expand into.

Decide where to expand (and where not to)

Start by writing down the options: New countries, new customer segments and new products for existing customers. 

Then prioritise across these options. A typical framework to use is a matrix of the different expansion options and evaluation against the following criteria:

  • Market size
  • Competition and why we win
  • Product investment required
  • Time to get to market
  • Sales investment required

Try to whittle down the options to a short list before going deep on them. Longer lists are impossible to compare effectively. Force yourself to quantify every criteria: market size in value, headcount required and so additional costs. Best guesses are fine. Once you’ve reviewed all the options, select one or two areas (no more) to go after in the next 12 months.

Next, think about dependencies. Do we need to do A to unlock B?  Does C help us defend our core? Think about the major risks to the plan. Avoid generic SWOT tables. What do you worry about in bed at night? Think about the resource required. Do you have enough cash to do it? If not, will you be in a position to fundraise? Then put all of this to one side and think about the logic: what needs to be true for this to work.

Discuss with your leadership team, disagree, iterate and decide. Commit

Write down your strategy and quarterly OKRs.  Makes these OKRs SMART (specific, measureable, actionable, realistic and time-bound). What are the leading metrics which will demonstrate whether your expansion is being successful?

Review

Hold the course for enough time to make progress. A year perhaps. Many companies pivot too frequently. The exception would be if there is a major technology or regulatory change in your market which requires you to re-evaluate.

At the end of the year take a critical look at your strategy and whether it succeeded. Mark yourself against your OKRs. Try to quantify percentage achievement versus target, rather than a simple red/amber/green. Discuss it openly with your board and other trusted advisors. Use this to help inform next year’s strategy. 

https://sifted.eu/articles/startups-need-strategy

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