October 26, 2012 by startupengineering .
In physics, time moves in one direction. The times of our lives are marked by cycles, but also beginnings and endings. Lots of people believe that god exists outside of time.
But for startups, there are five different clocks:
- Leaking time. Many professional investors look at this clock, and Phil Schlein at US Ventures put it well. Investors give startups time in the form of a runway. Startups usually need several new rounds of investment before they can actually take off and fly on their own. So, as money burns away and the startup moves down the runway, the goal is to add demonstrable value, so that the next set of investors will recognize it, and the entrepreneurs and seed investors can capture it. The startup’s life, and its value to early investors, is measured in milestones along the startup runway.
- Velocity. For Paul Graham, a startup is defined by its clock, which measures, not changes in company position but changes in market growth rates. If velocity in physics is change in space over time, velocity in startups is change in customer count over time. You may count customers, initially, in terms of active users, then later count the paying ones, and ultimately count the revenue. But however you count, for a startup to BE a startup, it must be operating at a high velocity (Graham suggests that 7% growth per week is healthy).
- Weaponized time. According to Max Levchin, time can be thought of as a weapon. Speaking at a startup class at Stanford, Levchin said: “…as a startup, you’re underfunded and undermanned. It’s a big disadvantage; not only are you probably getting into trouble, but you don’t even know what trouble that may be. Speed is your only weapon. All you have is speed.” This clock measures agility rather than Graham’s straight-line speed. A startup can out-innovate more established competitors, rapidly identify and correct problems, iterate products and pivot business models. This type of speed is hard to put on a clock, because the units of change aren’t homogenous. But an agile startup is noticeable, and when successful founders look back, they are drawn to stories about agility.
- Time value of money. According to Peter Thiel, to be valuable, startups need to be built for the long term. Really valuable companies are those that can sustain growth rates significantly higher than the discount rate. But the value created by this delta is very significantly back-loaded, so a company can’t capture it if it can’t stick around long enough. That’s why building long-term durability is as important to creating value as revenue or earnings growth. A credible expectation of sustained high growth drives the present values of early stage tech companies and leads to the billion-dollar acquisitions and IPOs.
- Search Time. Steve Blank’s division of companies into a startup phase focused on search, and an implementation phase, focused on business model execution, has implications for the company clock. A startup in search mode is not creating value directly; it’s creating a template for creating value – a business model canvas. So in terms of the four clocks described above, it would appear to be in some kind of stasis, not moving forward at all. But in terms of its own proper goals, a startup is moving through time acquiring valid knowledge relevant to its business model. Because the end point of the search is unknowable until it is completed, you can’t directly measure progress through time. Instead, followers of the customer discovery approach use proxies like the velocity of searching for knowledge (number of interviews conducted).
What units does your startup clock measure? Can startups and investors harmonize all these measures or does using them together lead to contradiction and confusion?