Sounds pretty hard, right?
Creating a traditional business is a great struggle. Finding clients, polishing your product, making payroll, finding the right employees, automating processes…Since there are so many moving parts, you’re always wondering — Where do I focus now? Am I doing the right things? What should I be doing next?
And if you are trying to build a social or an open-source business or a cooperative, there are even more moving parts.
Building a business
A traditional entrepreneur has to make money to get and maintain employees. But a social, 0pen or cooperative entrepreneur has added constraints. They must also create a social impact on their community, or deliver a positive ecological impact on the environment.
Most advice revolves around how you can make money with open source. You can sell support, build an open core and sell the extension, or sell a subscription to a cloud-hosted version. But once you know how you’re going to make money, nobody tells you where you should focus your efforts at each stage of your venture.
Should I be working on my community of contributors? Should I be looking for clients? Should I hire someone to help develop the product?
I’ve been working with traditional and collaborative business owners for the last 4 years. I’ve kept asking myself if there’s a way to know I’m heading towards the right path.
There are challenges to running a business — especially an innovative and pioneering collaborative business. You feel like your situation is different than that of all other businesses around you. This often leads you into a trap. You think that the solution lies in developing something complex. But this leads to the death of projects through loss of time and money.
You’re Not Alone
The reality is that your situation is not different. Every business, yours included, depends on a very few business models. And every open community also depends on a few community models.
Entrepreneurs must accept that their business is not so unique. It unshackles the handcuffs of misery and doubt and brings the joy of liberation. They will see a simpler road ahead. If they start applying the right strategies, they’ll reach the next level without dealing with the hardships others face.
For example, say you’re just starting up and you’ve found a way to sell your product to your customers. You are starting to make payroll, but you’re still not profitable. There is no sense in hiring a customer service manager, a CFO, or in creating operation systems to make your company more efficient. At this stage you need to improve your product and get more clients.
When you’re in the startup stage of a business (and at any stage later on), there are some core areas to focus on. This focus allows you to graduate to the next level and prevents you from sliding back into previous stages.
So let’s see what these stages are and what you should be focusing on at each stage.
Stage 1: The Validation Stage
At this stage you have no business yet, just an idea. And you’re most likely filled with self-doubt, worry, and the fear of failing. Maybe you’re still at your job and have to develop your idea after work hours. Or you’ve just quit and you feel a sword of Damocles hanging over your head.
For most of us, the biggest hurdle is the fear of rejection when asking for money for something you created. If you need inspiration, go watch this video about someone who was rejected for 100 days. Then come back here.
Conquering your doubts and moving forward
Once you’ve gotten over the doubt and rejection, find a product or idea that people really need and want. When you think you have it, go validate your idea with the target group you want to serve. Go talk to people in person or by phone to find out how you can best make them happy.
Next, create the proper documentation, install instructions, and make demos of how to use it. Get a proper license that will allow people to reuse and co-develop the project with you.
Once you get someone to download or buy your open-source software or hardware, ask them some questions. Why did they download it? Why did they buy it? What problem are they trying to solve? This will give you incredible insights that will help you further develop your idea.
Until you have a product compelling enough that people will download or buy, you have no community and no business.
And the product alone will not sell itself. Once you have that, you’ll also have to find a marketing and sales system that attracts clients to your product or service.
At this stage you’ll need to put a validation system in place to understand the real needs, frustrations, and priorities of the market. Otherwise, when you launch your product, you’ll have a very slim chance of success. You’ll also waste a lot of time, money and energy.
So, make sure that:
- You have validated that your product or service works well
- People have confirmed they’re interested in using and buying it
- You have one or more distribution channel that works
- You have people interested in contributing and developing on top of your idea
Then you can confidently say that you are in business.
What you should focus on in the Validation stage:
- Developing and validating your product or service
- Developing your marketing and sales system
- Starting your community of co-developers
- Finding your first distribution channel
Stage 2: The Startup Stage
At this stage you are starting to get sales coming in. You’ve found a community of users, contributors and customers, and you feel the excitement of being in business.
Getting out of the Validation Stage sets you apart from many people who never manage to do so.
Now, you still have a very long and steep mountain to climb ahead of you. Your company is probably still not profitable. Your sales are inconsistent, and you’re doing most tasks yourself because you can’t pay anyone to help. You waste a lot of time doing things, and your doubts starts creeping in. Am I done for? How will I ever get ahead of the infinite To-Do list I have ahead?
It feels quite lonely. And it is one of the hardest places to be.
But most entrepreneurs at this stage are completely ignorant about how hard it will be. Otherwise you’d give up. But this ignorance is a blessing. It will keep you optimistic, and most of all persistent, which is the only way to get out of this stage.
Getting out of the Startup stage
To get out of the Startup stage, you should focus on solidifying your Open Source Community and your sales, marketing and product. If you focus on anything else you’ll be wasting energy and it will take you longer to get to the next stage.
If you’re not marketing savvy, learn and put systems in place to get your product or service in front of others. You want to get them sharing, talking, and most importantly, buying.
Here are some examples you can use.
Hashids, created by Ivan Akimov, is a phenomenal open source project that could have marketed itself. But Ivan knew better. A product, however good it may be, is never good enough to market itself. So he created a thoughtful plan to promote his idea.
He emailed some famous technology newsletters. He submitted the project to forums where it might interest people. He answered relevant questions on popular forums and wrote blog posts. And this got him 1 million downloads over 5 years. Pretty good…
So at this stage, focus on inviting and attracting people who would love your project. Check your to-do-list. If most tasks are not geared towards marketing your idea, you should redirect your attention. And if you don’t know how, learn. Otherwise, it’s going to take you forever to leave this stage. You might be tempted to give up.
For example: You need $5000 a month and your product sells at $500? Then you need to create a system that consistently brings 10 buyers every month (10 x $500 = $5000). You won’t be out of this startup stage until you can reach your minimum number of sales.
What you should focus on at the Startup stage:
- Keep developing your product.
- Solidify your marketing and sales system.
- Keep nurturing your community of co-developers.
Stage 3: Optimization Stage
You’re past the startup level. You’ve have managed to have enough revenue and profit to be more relaxed. You get enough prospects and clients to support the kind of life you are looking for. Now you can focus on the project you’ve been longing to bring to life for so long.
But you are constantly laboring. Most of your time is spent thinking about your business and your community. And this leads you to feel stressed and overwhelmed.
Most entrepreneurs reach this level through their persistence and hard work. But most of the time, it is also their glass ceiling.
Not because what they created isn’t appealing enough to their customers and community. But because they have focused on developing their product, marketing and sales skills. They don’t know how to put operational systems in place.
And that can make you overwhelmed. You see that you are working very hard, but can’t see how you can extract yourself from your business. You can’t see how you can trust or delegate to others. If you take yourself out of the equation, the business wouldn’t be profitable. This might be leading you to the edge of burnout.*
*There might be a service business at this stage that brings a phenomenal style of life. Still, setting some operational systems in place can bring in really powerful wins.
Getting your systems operational
So at this point you need to be spending more time on the operations of your business. Focus on administration, financial systems, internal communications systems, quality control, fulfillment, customer service, administration, billing, software and logistics.
These are all the areas that slow you down and can suck the life out of you.
You are the king or the queen of bootstrapping and think you can do it yourself. But now that you have enough revenue, consider hiring some people. A project manager, consultant or operations manager can help you put these things in place. They’ll develop technology that will smooth the process out. This will become the support structure of the business.
What should you focus on at the Optimization stage:
- Build a support system to help you deal more efficiently with the operations side of things.
- Keep nurturing your Community of co-developers and creating systems to simplify their interactions. Focus on forums, improved documentation, easing the installation of your open source code or design, and so on.
Stage 4: Scale Up Stage
Once you get past the Optimization Stage, you’re free from most daily activities that were keeping you on the hamster wheel of entrepreneurship. You have a LOT of free time.
At this stage, profits decrease because you’ve likely invested a lot in systematizing your operations. But sales and revenues are likely to increase. Your team has a lot more bandwidth to work on developing new distribution channels and finding new markets for your products and services.
Sometimes, the founder stops trusting everyone to do their jobs. They begin micro-managing all the systems and processes that the team has put together. This is likely to frustrate everybody, and will drive your team or open source community out of the company or project.
Avoiding pitfalls and investing in people
Make sure you attract more talented people to your business or project and invest in their leadership skills. Invest also in the culture of the company to drive the business forward. Give up the operations to a COO and instead focus on the strategic vision of the project. And start a new project.
Most entrepreneurs are more comfortable starting rather than running things. So take a look at what suits you, decide if you are better at “starting” or “running” a business, and stick with it.
For example, Red Hat reached this stage by developing their company on top of Linux. They used their Linux foundational playbook to develop different spin offs. There is the Red Hat of containers, the Red Hat of OpenStack, the Red Hat of middleware, virtualization, storage and a whole lot more.
What should you focus on at the Scale Up stage:
- Develop new distribution channels and find new markets for your products and services.
- Invest your time and resources to attract qualified talent.
- Develop the leadership skills of your team and community of open source co-developers to build a great team and culture.
Stage 5: Leader up Stage
So you have finally made it. Your company is profitable, automated, and has great people working to move it forward. At this point your company has reached the peak of the entrepreneurial mountain.
Everyone wants to partner with you, and you’ve got a great deal of negotiating power. This makes it easier to get favorable terms and deals done, and publicity and press is easy to get. You’re at the point in the cycle where “the rich get richer.”
Enjoying the success and avoiding the flop
If you were a traditional company, you’d be on your way to becoming Google, Facebook, or Airbnb big. If you were an Open Source project this would mean you’d be on your way to becoming Linux, Sparkfun or Wordpress big. And if you were a cooperative you’d be in the same league as Mondragon, John Lewis Partnership, or Organic Valley.
When you manage to reach this stage, it means that you have coped with tremendous challenges. You’ve overcome market slides, new disruptive innovations, and other kinds of sharks that wanted to take your business down.
And even if you’ve managed to get over these pitfalls, you are now risking a very new set of challenges: leadership failure and other human vices like greed, power, and vanity. This has happened to a few traditional and open-source companies. They collapsed in face of faster innovators or under the weight of their own vices. For example:
- Kodak became obsolete because its leadership failed to see that the digital camera boom would take over and bankrupt their company.
- Enron’s and Worldcom’s fraudulent accounting made them the largest bankruptcies in the world at the time.
- Apple failed from 1986 to 1996 without Steve Jobs because leadership allowed their products to become too complex and cluttered. Once Steve Jobs came back and simplified the products to only 4 computers, everything started taking off again.
- Taxis are becoming obsolete because of more convenient on-demand apps like Uber.
- Uber’s power and vanity is starting to create scandals of sexual harassment, technology theft or illegal practices to avoid local law. This is likely driving quality leaders from the company and eroding the perception of the company among its drivers, employees, and users.
- Makerbot has seen its latest innovations fail when it decided to close all its open-source designs. This made its whole open source community feel betrayed and abandoned. It ultimately lead Maketbot to lose their market share to more hacker friendly products and forced them to fire 120 employees.
To counter the risk of slow decay, traditional companies can launch new innovative products, buy complementary companies, or buy competitors.
Steve Jobs made a responsible leadership move by launching the iPhone. It effectively killed and replaced the market for the iPod (Apple’s most profitable product at the time). The iPhone eventually became their new flagship product.
When Google bought Applied Semantics it allowed them to build the biggest and most profitable ad network in the world on top of the biggest search engine in the world. Then they bought Android to create the most used mobile OS to compete with the iPhone.
Facebook bought Whatsapp to avoid having another big messaging competitor. They bought Oculus Rift to pave their way for the upcoming wave of Virtual Reality.
Red Hat also acquires other companies to bring in new offerings for their clients.
Acquiring promising startups or launching new products become the moves that keep vulnerable but cash-positive companies afloat.
Some benefits of Open Source projects
In the Open Source and cooperative worlds there is a less competitive landscape. One company doesn’t acquire the other. Instead, two complementary companies can become part of the same cooperative or foundation. Then they can develop new win-win partnerships to reinforce all their networks. This way they can build economies of scale while strengthening their distribution power. They also enlarge their pool of clients and enrich their suite of products and services.
For example, Sparkfun allows other Open Source projects to manufacture and sell their designs. In exchange, they get royalties on every product sold. The smaller and more innovative open source companies get access to high quality manufacturing, as well as the large audience and distribution channels Sparkfun has built over the years.
Sparkfun gets to offer more valuable products that it couldn’t offer otherwise. But it also gets to avoid competing with all of these smaller companies by partnering with them, which is another great advantage.
What should you focus on at the Leader Up Stage:
- Keep all the business’ key areas optimized (product, sales, marketing, distribution channels, operation systems, technology, finances, team and leadership…).
- Acquire or partner with complementary or competing companies to keep developing new distribution channels, new products and services and attracting qualified talent and leadership.
- Innovate by developing new products.
- Invest in developing the leaders of your company to keep moving the business forward.
Let’s summarize the 5 stages your business will go through:
- At the Validation Stage, you have to validate your product or service idea. Find your first clients and open source contributors.
- At the Startup Stage, you have to improve your product and solidify your marketing, sales, and open source community.
- At the Optimization Stage, you have to create systems to deal with your administrative, logistical, and financial operations.
- At the Scale Up Stage, you have to focus on bringing in talented people and building a great company culture.
- At the Leader Up Stage, you have to work on innovating, building new partnerships, and acquiring other companies.
Use this tool to liberate yourself. Figure out if you are walking on the right path or you are stuck somewhere. Don’t look for perfection. Instead, use this framework to find out where to focus your energy while growing a business.
The path is the same whether you want to remain a small business or spread your innovations all over the world. It’s the same for every single business.
Todd Herman’s Five Stages of Growth