DARE - Because Entrepreneurs Do

It’s so familiar that is has a name: the “hockey stick.” What is it? The typical growth curve that entrepreneurs project when they forecast how revenues will grow over time. The curve gently rises until it hits an inflection point, at which point growth rises sharply, exponentially.

The inflection point usually occurs when the venture achieves “critical mass,” a term taken from nuclear physics.  A reactor reaches critical mass when enough atoms are being split to create a self-sustaining chain reaction and a business reaches critical mass when enough customers are signing on that growth begins to build upon itself.

Philip Anderson

Our case this month profiles Suminter India Organics, founded by Sameer Mehra to assemble an end-to-end supply chain that allows the company and Indian farmers to capture more of the value created through organic farming. Mehra has joined Endeavor’s global network of high-impact entrepreneurs, a group of several hundred venture founders, who in aggregate have created several billion dollars in revenues from their companies. Mehra believes that Suminter has reached an inflection point in its growth and how well he makes that case to potential investors will determine the success of his next round of venture financing.

There are good reasons to believe that Suminter can scale exponentially over the next few years.Success stories like Mehra’s encourage entrepreneurs to believe in the hockey stick model—when a venture succeeds, exponential growth along a logistic curve (the “S-curve”) is typically what we observe. But when we step back and look at the aggregate experience as opposed to individual successes, we realize that the growth rate of ventures in aggregate follows a power law. A very small number of ventures experience true exponential growth. Many more start up the hockey stick, but then hit a wall. They plateau—growth levels off well before they expected. The familiar S-curve still applies, but the top of the S arrives far too soon. For every $100 million enterprise, there are dozens that got stuck along the way. They survive and create wealth, which is no mean achievement, but they never realize what their founders believe to be their true potential.

Why does growth plateau? It’s easier to explain the hockey stick that never happens, the growth path that turned out to be a mirage. It’s harder to explain the fate of businesses that experience extraordinary growth for a period of time until they hit a limit beyond which further expansion is much more slow. It’s easy for a professor to say “S-curve growth is normal,” and hundreds of mathematical models yield logistic growth curves. With a few simple assumptions, one can design a simulation that yields an S-shaped growth curve every time. But to say that logistic growth is a statistical regularity doesn’t explain when and why the curve flattens at the top.

Our experience at INSEAD counseling several thousand entrepreneurs suggests that venture founders are quite often precisely wrong when they explain to themselves and us why they hit a wall beyond which they could not grow. Their usual instinct is to look for flaws, for weaknesses that explain why growth stopped. Growing a business is difficult, so there is never any difficulty finding any number of shortcomings to blame. They pounce on one or two as the critical bottlenecks that choked off progress and enshrine as a lesson learned, “Don’t make that mistake again.”

It’s human nature for us to think that way. All of us have gotten through much of life by detecting faults and eliminating them. It’s a well-known path to excellence, particularly in school. But looking for imperfections and blaming them for our failure to grow as fast as we once did can blind us to the real reason why growth plateaus. In the majority of cases we examine, a startup’s weaknesses are not the key factors that retard its progress. Paradoxically, the problem is its strengths.

The leadership guru Marshall Goldsmith recently wrote a book whose title is a commonplace nostrum, “What got you here won’t get you there.” It’s a good book and it highlights why people have to grow and change as leaders, because what works in one situation won’t work in others. So-called “one trick ponies” are limited to environments that favor what they do well. They find a natural niche and are imprisoned within it. With entrepreneurial ventures, however, we can go even further. What got you here not get you there, but moreover, what got you this far is the main thing that interferes with getting to the next level.

As long as an entrepreneur and his firm have the courage to face their weaknesses, they can usually be corrected. Admitting to a flaw is the most emotionally painful part, because we are designed by nature to believe in what we are doing. Once a defect is recognized, however, we usually progress as soon as we start fixing it. We gain confidence in a new way of doing things and soon admit that we have hit on a better way forward.

In contrast, facing up to the dysfunctional consequences of your strengths is much trickier. First, it is difficult to accept that the very things that helped you overcome your initial travails in a startup are now getting in the way. There is so much evidence that your strengths are the critical success factors accounting for why you have survived and thrived that we tend to dismiss people who suggest these strengths are getting in the way. Because story after story validates what we’re good at, anyone who questions the lessons of experience initially seems crazy.

Second, and more importantly, fixing the consequences of a strength is very different from fixing a weakness. Usually, when you correct a defect you soon see progress, so it’s easy to believe you are doing the right thing. Unfortunately, when you start doing differently something that you have done well in the past, you usually see negative progress at first. An old method may have had its limitations, but you had learned how to reach a high level of performance with it. Once you start doing things a new way, you almost always at first experience worse results than before. You have to go downhill before you start going back up, and you must pass through a period where you perform today even worse than you did in the past, taking it on faith that you’ll eventually turn things around.

By analogy, let’s take a really bad batsman at cricket—me, for example. If an experienced cricketer gave me almost any advice, I’d immediately see better results. In contrast, what happens when a finely honed athlete, such as a Dhoni or a Sehwag, starts experimenting with his technique? He has reached such a refined level of performance that almost any change will initially bring him down from his peak. Paradoxically, the stronger you are, the more difficult it is to change the things that have underpinned your excellence.

Typically, an entrepreneur hits a wall not because of the things he or she does badly, but because of what he or she does well. A particular set of skills or capabilities gets you through the initial phase of a venture where everything seems uncertain and all hangs by a thread. You learn what you do well, when you win and that learning becomes crystallized as a bedrock belief. Once you reach the limits of winning a particular way, however, it’s difficult to find another way unless you are willing to accept a period of retreat.You have to go backward for a time when you change what has worked so well in the past.

I recently counseled a group of entrepreneurs who have done brilliantly for three years because they are outstanding at demonstrating software. Every client they have is someone who was wowed by a demo. Typically, they listen to a client describe a problem, then in exceptionally short order create a program that does exactly what the client wants. A sale results, with cheers all around and a sense of truly satisfying accomplishment. The challenge for them is that you can only get to a certain point with such a sense-and-respond model. At some point, if you want to grow, you have to replicate and that means producing programs that aren’t 100% what the client wants. The smiles are thinner, complaints are louder and it’s hard to tolerate that your former strength—creating extremely happy clients—is what got you to a certain level, but will take you no further.

If your business starts falling off, usually the environment has changed or you are doing something wrong. Look for defects and fix them. But when you hit a plateau—you are not regressing, but you can’t resume your former rate of growth—don’t look to your weaknesses. Look to your strengths. Is what got you here the very thing that is keeping you stuck? High-growth entrepreneurs seldom rely on a magic recipe or a perfect business model. What they have in common is the willingness to reinvent themselves and accept the temporary consequences of changing a winning formula.

The author is INSEAD Alumni Fund Professor of Entrepreneurship, Director, Rudolf and Valeria Maag International Center for Entrepreneurship and Director, 3i Venturelab.

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