High Growth Handbook: Scaling Startups From 10 to 10,000 People

by Elad Gil

If you do take the market, you tend to have the financial resources to be able to invest heavily in R&D. And you also develop M&A currency, so you can then go buy the second product if you have to. It gives you another option to get to the second product.

In fact, the general model for successful tech companies, contrary to myth and legend, is that they become distribution-centric rather than product-centric. They become a distribution channel, so they can get to the world. And then they put many new products through that distribution channel.

But anybody who’s actually worked in R&D knows it’s not really a question of money. It’s not really a question of percentage of spend. It’s who’s doing it.

There is a balance between focusing too much on either the short term or the long term. The key to me is having two documents. The first—at Stripe, we’re calling them charters—articulates the long-term view of why this team or this product or this company exists, what its overarching strategy is, and what success would look like over even a three-to-five-year period. And then the second is a shorter-term plan: “Okay, in the near term, then, what are we trying to get done?” That can look like a results-based management model or an OKR—objectives and key results—model. But it’s some way that a team can say, “This is where we’re going long term. And on a quarterly basis, this is where we’re focusing. We’re hoping to move X and Y metrics.” If you’re working on an early-stage product, even within a company that has a more mature product, that shorter-term plan looks different. You probably don’t know what X and Y metrics are yet. You’re still in the milestone mode. Any planning process needs to accommodate product life cycle, if you will. You want to establish buckets that the company understands to capture each of the product stages you have. At every stage, though, you want to find a balance between that long-term charter (“Why do we exist?”) and the short-term plan (“What are we going to do?”).

Now, in all startups, the game we’re playing is “default mortality.” I use the metaphor that a startup is like throwing yourself off a cliff and assembling an airplane on the way down. In other words, the default is that you’re dead. You have to gamble your assets very strongly in order to create something that has ongoing and persistent value. Everyone is aligned on that in the early stage. Everyone is like, “Yeah, that’s what we’re doing. We’ve all bought into the same game.”

The reason you’re hiring a new CEO is because there are new skill sets that are critically important. But if someone doesn’t have the founder’s mindset, they’ll be fundamentally, at best, in asset management. They’ll make sure that things keep running, keep going on a trajectory. But the ability to change the curve means taking a risk that a founder would take. That requires moral authority, but it also requires mental willingness—including risking hearing that, “You really screwed up, you’re doing this really badly.” You have to be willing to go through that in order to make it happen.

If you aim for zero-defect hiring, it’s a little bit like zero-defect decision-making: you’re probably too conservative. We teach, and I subscribe to the view, that you want to pull the trigger on an initiative or an executive hire when you’re about 70 percent confident that it’s the right decision. Below 50 percent is kind of reckless. But if you go for 100 percent, you’re waiting too long and you’re probably losing candidates. Your false positive rate may be low, but your false negative rate is going to be very bad, too. And a lot of people hiring don’t track their false negative rate of people they didn’t get that they should have gotten.

A lot of people talk about scale as it relates to the size of the company—that is, numbers of people. But I actually think there’s another dimension which really significantly affects scaling, and that’s the differentiation or complexity of the business. Reid Hoffman, for example, tends to focus on, “What happens when this company is like a village, versus a city”—you know, his whole analogy for the size of a company. I’ve seen companies that have a very basic model that they’re not changing a lot have an easier time scaling at first. The kinds of things that I’ve seen really complicate scaling are when a company, for example, enters a new vertical.

there are five top responsibilities of a CEO: being the steward of and final arbiter of the senior management; being the chief strategist; being the primary external face for the company, at least in the early days; almost certainly being the chief product officer, although that can change when you’re bigger; and then taking responsibility and accountability for culture. And culture is so fundamental to what the company is that it’s truly problematic to delegate.

But while people are attuned to how successful a cradle for technology Silicon Valley is, they pay less attention to, and are I think less aware of, how densely populated a graveyard it is.

Intel’s famous pricing strategy in the 1970s is a good example of a bold strategic move. At the time Intel understood there was a strong reduction in their own costs as they scaled unit sales. Dropping unit sales would lead to increased demand and volume, causing a virtuous cycle. Intel smartly decided to launch a new silicon product at cost below their COGs in order to scale market share faster. In response, their customers bought in volumes they had not projected until two years out, causing a massively lower cost structure for them and therefore profitability. In other words, their low pricing became self-fulfilling and sustainable through massive volumes years ahead of projections.

Think strategically and articulate that strategy. The VP product should be able to lay out a compelling product strategy that includes a strong understanding of (i) who your customers really are, (ii) what it means to win in your market, (iii) how to differentiate as a product and company, and (iv) how to build compelling and remarkable products for your customers.

Since focusing on product is what caused initial success, founders of breakout companies often think product development is their primary competency and asset. In reality, the distribution channel and customer base derived from their first product is now one of the biggest go-forward advantages and differentiators the company has.

Whereas if you started your career when the bubble collapsed or in the aftermath of the bubble, in 2000–2003, you understand what happens when there isn’t liquidity in the market. For example, a lot of our companies use debt as an oxygen to grow. It’s part of the business model of Opendoor, it’s part of the business model at Affirm, it’s part of the business model at Upstart, as examples. The price of that oxygen can change very radically and very quickly. Bill Me Later and Zappos famously had to sell, even though their businesses were performing quite well, because their access to debt was affected. Just as access to debt is affected by general macroeconomic changes, the ability to use money as a resource to grow can be completely changed overnight.

“Valuation is temporary. Control is forever.” Whoever has control can effectively end up controlling your valuation later. Never give up control. And control is given up in subtle ways:

As the markets become more liquid, the industry becomes more hit-driven. So the odds of your thing working out all the way get lower. The incentives of founders and investors are starting to diverge more and more. You can have a $100 million exit as a founder and you’re really happy, but your investors may not be, because their funds are getting larger and larger. The incentives are diverging more and more, so it makes more sense to do early founder liquidity.

We’re going after hugely winner-take-all markets. The new entrants keep coming up, the platforms keep shifting faster and faster, the half-life of the winners is shorter. It’s becoming a much more competitive atmosphere.

If I were to imagine the M&A road map at Facebook circa 2012, it speculatively may have looked something like this: Hiring M&A. Facebook needs to build out its mobile team, and is being pressured by Wall Street to increase its ad business. Therefore, we should buy teams of 3–10 people with strong backgrounds in (1) mobile engineering/product/design or (2) advertising products. Teams will be broken up and added to the areas of greatest hiring need. We should also buy machine learning or data science heavy teams as we can not hire enough of them. Product M&A. Buy Snaptu to enable mobile clients in LATAM/ASIAPAC, an email-scraping company to help with international growth efforts, and an IMfocused team to reposition for Messenger. Strategic M&A. Build relationships with founders of the top five social apps on mobile and the web. Set up quarterly 1:1s for Zuck to meet with the CEOs of WhatsApp, Instagram, Pinterest, Twitter, and Weibo. Determine when to pull the trigger and make a bid on each.

In general, it’s different for every company. But if a company has a large market to go after with your initial target persona, it should maximize scaling there before diversifying and diluting the organizational focus.