A conversation with HBS senior lecturer Jeffrey Rayport on the biggest stumbling blocks to long-lasting success.
Managing rapid growth is a huge challenge for young businesses. Even start-ups with glowing reviews and skyrocketing sales can fail. That’s because new ventures and corporate initiatives alike must sustain profitability at scale, according to Harvard Business School senior lecturer He has researched some of the biggest stumbling blocks to long-lasting success and he explains how to successfully transition out of the start-up phase.
This scale-up phase of entrepreneurial ventures is a huge challenge, and today’s guest has researched the stumbling blocks to long-lasting success. He says you can overcome them by expanding your business model while at the same time systematically removing internal constraints on growth. And that means you’ve got an opportunity. It does not mean that you have much in the way of revenues, and most folks at that point have negative profitability. So, for us, the scaling stage begins with confirmed product market fit and moves up a very steep growth curve to the point where a venture can declare that it not only has product market fit, but also profit market fit. Often business models are borne out, not just on a unit economics, but become profitable by dent of scale.
JEFFREY RAYPORT: Exactly, exactly. That’s right. That’s some form of consolation as you go through the bankruptcy process, and I shouldn’t joke about that because we’re seeing a lot of that happening right now. We’re seeing a lot of significant meltdowns, most recently the FTX implosion, very much in the scaling phase of a business. And there are many ventures that by dent of their success and moving up that steep portion of the curve, cannot keep up with the demand that they’ve generated.
If it turns out that you can win 90% of the share in the market and you’re still a small venture, then actually you’ve got a ceiling on growth and scalability, which means you have nowhere to go. We see that happen quite a lot.
That’s changed in the last couple of years as they’ve pursued profitability, as many tech ventures are these days with the change in market sentiment. But what you say is absolutely right, which is the fact that you have a platform does not guarantee that you are achieving profit market fit. That has to be part of what happens during the extrapolation phase, not by accident, but by design.
Spotify focused first on the hundreds of millions of consumers, and SoundCloud got there late. And even though they managed to do a bunch of the deals they ultimately needed to do with the record labels to clear the copyright protections on that audio content, it was too late, in effect, to save the business from a dramatic recapitalization down round and effect turnaround that has been true of its story to this day.
Wayfair had a very interesting start back in the early days of Google, days when Yahoo was a big search portal and so forth, they noticed that there were these category sites, people who sold very specific products online, and the very first business that Wayfair established was called racksandstands.com. It was a site, I would call it a product.com site that sold only that category of product, or products plural. They went on to other amusingly named sites like allgrandfatherclocks.
Two problems with that at the time. One was that manufacturers are not in the business of serving or fulfilling one-to-one orders. They ship on pallet loads to warehouses that go out to retailers who break down the lots. So, one issue was these folks were not terribly skilled at one-to-one order fulfillment. They didn’t do it quickly, and they didn’t actually have much skill, capability or background in how to package up the product, let alone to put a Wayfair brand on the box.
CURT NICKISCH: What about your team and your people and your culture? What do you have to do there to make sure that you’re able to reach product market fit from a functioning organizational perspective? It’s something that Reed Hastings at Netflix is famous for. Many people know what their severance is on the day that they take their job. And as a result, essentially the culture is saying that this is not a family, it’s a team, that people are on a team because they have a useful role to play. When the role is no longer useful, then there needs to be a graceful, respectful way to get them into a different role or take them out of the team.
I think the other part of this takes us all the way back, if you will, to the beginning of the conversation and where this article came from.
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