Exponential Organizations: Why new organizations are ten times better, faster, and cheaper than yours (and what to do about it)

by Salim Ismail

CHAPTER SIX Starting an ExO

This is perhaps the best time in the history of business to build a new enterprise. The confluence of breakthrough technologies, acceptance (and even celebration) of entrepreneurship, different crowdsourcing options, crowdfunding opportunities and legacy markets ripe for disruption—all create a compelling (and unprecedented) scenario for new company creation. Furthermore, traditional risk areas have been mitigated like never before. Continuing our earlier comet/dinosaur analogy: the comet has struck, the dinosaurs are teetering and the conditions are ripe for a new category of small, nimble organisms to thrive. A new Cambrian Explosion, if you will.

When assessing a startup for funding, investors typically categorize three major risk areas: Technology risk: Will it work? Market risk: Will people buy the product? Execution risk: Is the team able to function and pivot as needed? The challenge facing every startup lies in discovering how to de-risk each of these areas and, in the process, find a business model in the chosen problem space. Nothing is more important.

Technology Risk In 1995, it cost about $15 million to build a software startup based in Silicon Valley. That money mostly went to build server stacks, purchase software and hire staff to configure and manage all that technology, as well as to write new code. By 2005, the cost had dropped to about $4 million. Servers were cheaper, and software, now often open sourced, was easier to develop and configure. Most hard costs were focused on marketing and sales.

Today, with now-established capabilities such as cloud computing and social media, that same effort costs less than $100,000. The technology risk that was once enormous (particularly software) has been reduced over the last twenty years by 150x. Most of the remaining risk concerns mere scalability issues. A case in point: the rise of standardized web services allows complex software functionality to be integrated into a startup at the press of a button. Examples include Google’s Prediction API for predictive analytics and AlchemyAPI for deep learning software for pattern recognition.

Liam Casey, the CEO of PCH, has aggressively turned his company into a platform on which anyone can launch a hardware startup, to the extent that individual wants to create the equivalent of an App Store for hardware startups.

According to entrepreneur Chris Dixon, the most important change for entrepreneurs versus a decade ago is the ratio of reach to capital. Today, the reach of a startup is 100x larger, while the capital needed is one tenth that of a decade ago—a thousandfold improvement in just ten years. The result is that technology risk, particularly for largely information-based or information-enabled businesses, has all but evaporated. (Needless to say, if you want to build a supertanker, you still need some capital.)

Market Risk As to whether or not anyone will buy the product, we turn once again to Steve Blank, who famously said, “No business plan survives first contact with a customer.” Historically, one had to first commission classic market research, fully build the product or service, hire an expensive sales force, and then spend time and money marketing the idea—all before ever really knowing the answer to that question.

While we recommend reading the entire article, Lee’s key findings as they pertain to ExOs are as follows: It takes more than seven years, on average, before a “liquidity event.” Inexperienced twenty-something founders are outliers. Companies with well-educated thirty-something co-founders who have history together tend to be most successful. The idea of a “big pivot” to a different product after startup is an outlier. Most Unicorns stick to their original vision (i.e., their founding MTP).

Most have gotten to their current heights by following some combination of the steps below.

Step 1: Select an MTP (Massive Transformative Purpose). This is the most elemental and foundational aspect of a startup. Feeding on Simon Sinek’s “Why?” question, it is critical that you are excited and utterly passionate about the problem space you plan to attack. So, begin by asking the question: What is the biggest problem I’d like to see solved? Identify that problem space and then come up with an MTP for it. Even

As Travis Kalanick, CEO of Uber, said at the 2013 LeWeb conference in Paris, “You have to be self-aware and look for that startup idea and purpose that is a perfect fit with you—with you as a person, not as a business[person].”

Howard Thurman, the American author and philosopher, summarizes the same idea as follows: “Don’t just ask what the world needs. Ask what makes you come alive and go do it. What the world needs is people who have come alive.” Drew Houston, founder of Dropbox, agrees: “The most successful people are obsessed with solving an important problem, something that matters to them. They remind me of a dog chasing a tennis ball. To increase your own chances of happiness and success, you must find your tennis ball—the thing that pulls you.”

Finding an MTP can be seen as a novel and perhaps more interesting way of asking yourself the following questions: What do I real...

Two more questions that can help speed the process of discovering your passion: What would I do if I could never fail? What would I do ...

It is not only about you as an entrepreneur, however. It is also about your employees. PayPal co-founder Peter Thiel poses the following question as an effective way to test if a startup has an MTP that will attract not only friends, but also employees beyond your personal network who share your motivation: “Why would the 20th employee join your startup without the perks, [such as] a co-founder title or stock [options]?” Accordingly, you should gauge your MTP against each of the acron...

“Work is love made visible.

The goal is not to live forever; the goal is to create something that will.”

Step 2: Join or Create Relevant MTP Communities The collaborative power of communities is critical to any ExO. Whatever your passion (let’s say you dream of curing cancer), there are communities out there filled with other pa...

Anderson said the advice to opt for the good of the community came from Matt Mullenweg, the CEO of WordPress, the world’s most widely used blogging platform. According to Mullenweg, “Whenever this moment comes up, always bet on the community, because that’s the difference between long-term thinking and short-term thinking.”

Step 3: Compose a Team While the founding team in any startup is important, given the rapid scaling of an ExO company with a very small footprint in terms of resources, the careful composition of its founding team is especially critical.

In his book The Advantage: Why Organizational Health Trumps Everything Else In Business, Patrick Lencioni argues that the single best way to determine the health of an organization is by “observing the leadership team during a meeting.” Leadership interaction proves to be an accurate barometer of team dynamics, clarity, decisiveness and cognitive biases. Furthermore, the key to putting together a successful ExO founding team is that everyone shares a passion for the MTP. Ben

noted the importance of shared passion in his recent book, The Hard Thing About Hard Things: Building a Business When There Are No Easy Answers: “If founders are in a startup for the wrong reasons (mon...

it’s worth revisiting one of the main points of Aileen Lee’s Unicorn study: companies composed of well-educated thirty-something co-founders with a shared work or school history have the highest success rate. Her research shows that the average age of a Unicorn founder is thirty-four, and the average number of co-foun...

The following roles are critical if founding ExO teams are to deliver diverse backgrounds, independent thought and complementary skills: Visionary/Dreamer: The primary role in the company’s story. The founder with the strongest vision for the company comes up with the MTP and holds the organization to it. User Experience Design: Role focuses on users’ needs and ensures that every contact with users is as intuitive, simple and clear as possible. Programming/Engineering: Role responsible for bringing together the various technologies required to build the product or service. Finance/Business: The business function assesses the viability and profitability of the organization, is the cornerstone of interactions with investors and manages the all-important burn rate.

The pace of growth of an ExO requires an extra emphasis on a fully synergistic core team. As Arianna Huffington says, “I would rather have somebody much less brilliant and who’s a team player, who’s straightforward, than somebody who is very brilliant and toxic to the organization.”

Step 4: Breakthrough Idea We don’t have to tell you that this next step is a big one. It is essential to leverage technology or information in some way to transform the status quo. And when we say transform, we really do mean it. ExOs are not about incremental improvement in a marketplace.

“Most entrepreneurs prefer failing conventionally rather than succeed...

Remember, the three key success factors for an ExO idea are: First, a minimum 10x improvement over the status quo. Second, leveraging information to radically cut the cost of marginal supply (i.e., the cost to expand the supply side of the business should be minimal). Third, the idea should pass the “toothbrush test” originated by Larry Page: Does the idea solve a real customer problem or use c...

We believe, however, that it’s better to start with a passion to solve a particular problem, rather than to start with an idea or a technology.

After all, everybody in a place like Silicon Valley has an idea for a new tech business. Instead, the key to success is relentless execution, hence the need for passion and the MTP. To demonstrate, consider the number of times the founders of the following companies pitched investors before finally succeeding: Company Number of Investor Pitches Skype 40 Cisco 76 Pandora 300 Google 350