Startups sometimes reach out to me on how to be successful by the likes of Unicorns. They see software companies like Slack reach its Unicorn status and immediately become jealous. The commercial email service, Slack, just raised $427 mill., pushing up its valuation to $7.1 bill. In another example denoting success, I worked for an early stage telecom company that, in spite, competing against 299 other similar companies, it was the only one that filed for its IPO. Later on, it raised over a billion dollars. obtained additional financing. Yet, those jealous startups’ failures stem from their inability to address their strategies to fit a more distinctive business model. How did Slack and my former employer reach that exalted status? I sum it up with 2 words: momentum and scale. These are the strongest characteristics sought by investors that enhance valuations and reach either Unicorn status or IPO.
Looking at Slack, momentum is defined by its strong enterprise collaboration tools that left Microsoft in the dust. The company doubled its daily users in one year to 8 million. A 100% increase. My former employer exceeded its monthly telecom traffic consistently every month. What makes momentum is simple: fast sales or subscriber base. Another approach is fast geographic expansion and industry expert recognition — but combined. One is not enough.
Scale addresses both sizeable addressable market and minimal incremental costs to handle that market growth. In the case of Slack, email servers are cheap to install, easy to maintain, and demand little or no software adjustments — in other words, the initial framework becomes”shrink wrap.” Investors observed similar shrink wrap features on Facebook, Yelp, Reddit, Hotmail, and Yahoo. In earlier blogs, I refer to extremely profitable Internet models with high gross margins. Seasoned investors saw this in Slack. Telecom has a similar model where incremental, interexchange traffic charges for data cost less than a penny. On the other hand, infrastructure capital expenditures can be daunting in the telecom space. That is why Google abandoned terrestrial fiber optic networks. Google’s shrink model has better profitability.
Going back to my first paragraph, I always revert the startup’s problems to reach the stratosphere by pointing out what is its strategy. Unless the strategy addresses both momentum and scale, then that company will not reach the same levels as successful Unicorn companies like Slack. That alone requires careful analysis and foresight by experienced managers and consultants.
As an opposite example of what constitutes momentum and scalability, look at a corner Mom and Pop grocery store. Can it scale? Not. Does it have momentum? Most likely, not. As an investor, would I participate in funding this grocery store? Not possible.
Note that strategies can be modified to fit the right model. I myself have done so. One example is AOL’s early stage that first promoted itself to Apple. Found itself a different calling by marketing itself and, with aggressive marketing, get the momentum and scale needed to be bought out for billions. I have helped companies change those strategies after careful due diligence and analysis. In one case a redesigned a data storage technology to focus on the corporate market rather than the scientific. Companies can be led to faster lanes that generate greater growth. But it takes forethought, restructuring, and smart investments in implementation.