A lot of start-up blogs and books talk about how important it is to have the three Ts when you start a company: technology, team, timing. So what exactly does it mean to be tier 1 or top 2% in this?
Tier 1 in timing:
Timing is the most obscure thing for anyone who wants to found a new start-up. But it is not the hardest. It is actually the easiest of them all. So let’s look at timing first.
Timing means, that there is a demand for your product – sales side -, for your start-up – VC / financing side – and for a potential buyer – exit side. It is really that simple. Let’s look at the exit side, first. What are your total runways from an exit perspective. Let’s say you want to IPO, you would look at 6 to 10 years and probably you want to scale up to 600 to 2000 employees. Yes, in 6 to 10 years. You will go through 1.5 years in financing and likely lead up to a an E or F round, ideally to a D2. So total 6 finacing rounds. Good.
At the end, with 2000 employees at 100k per person, you will end up with labor 20m. Add 50% to that for other overhead and you are at 30m COGS + SG&A. Gross margin expectations will put you around 250m in revenue and with your successful growth in a winning category, you valuation will be 6 times revenue, so 1.5bn. Good, you unicorn.
So from an exit perspective, you want 1.5bn revenues, if your product costs 5 per users and has a total annual revenue of 7 per person, you need 21.5m customers for your B2C business. If your average annual revenue for B2B is 40k, you need around 38k customers. If your contract value per annum is 120k, you need 5000 customers. You do the math, how much overhead this creates and how efficient you need to be to run on 20m personnel costs. This is why B2C is easier to get to that level, but it is harder to penetrate the critical mask for you to fly with 40k customers. So if you earn 70 cent per annum per customer, and you want a 1.5bn valuation, you need 400m customers.
That much to expectations. Now you need to understand what pain you can solve to actually get so many paying customers willing to spend this amound of money you want to earn per customer. And you understand the TAM/SAM/SOM concept. If this market demand is plausible, you have to sell the idea that you can reach this amount of money you are raising in 6 to 10 years. Assuming you make roughly 5 (B2B) to 1000 (B2C) customers in one year, think about the growthin customers you are looking at and what effort that will put on sales/marketing and customer success, for you. Thinking Sales and product development. Look at what is necessary to start with 2 people, go to 5 in one year and end up with 2000 in 10 years and what strain that puts on your operations. And so forth.
As for timing, the biggie here is how to scale up customers. If your CACs are 3 EUR, and you need 400m customers, you have to spend 900m on CAC alone, plus your overhead in personnel and COGS of around 250mn per annume times 10 years heading you towards 2.5bn.
Did you ever plan to raise this much of money? Or do you want to reduce your CACs?*
So knowing that TAM/SAM exists within the 6 to 10 years range is the first step. Managing to keep CACs low is the next step. Knowing your competitive forces and risk of loosing TAM/SAM and having a SOM / go-to-market strategy to compete on low CACs while still growing faster than competition is the other question. if this all adds up and makes sense to you, you look at your Zuckerberg case. But the pain you solve, as you can imagine, must be big in this B2C case, and your partenrships will be your friend to lower CACs. Hard enough, right? If you are on par or below par on anything we just covered, you are not tier 1. Period.
Tier 1 in technology:
Technology is a bitch in its own respect. How realistic is it to be top here given the previous considerations if you fail at tech? Tech means, you are interesting enough to attract the best talent. It means community and global tech ecosystem around your stack is low enough to still keep talent cost affordable while also ensuring execution at a rate that support the growth implied by the dynamics covered ebove. And you need a tech stack that scales on other economic aspects such as licencing, infrastructure, etc.
Yes, all that combined is hard, too. You need a good team to start with, a good growth story to be financially attractive for your talent incentive scheme. You need to be a cut throat negotiator in keeping cost per employee low while you manage costs of atttrition and retention of your employees. You need a culture that attracts your talent. You need a ridiculously well suited HR function, a great team spirit, a crazy good organizational design, etc. etc.
Tier 1 in team:
Now all of the above give you a roadmap for how great your team-built has to be. But how hard is it to built a tier 1 team? What is a tier 1 team?
It is fairly on a theoretic level: get the head of engineering from Google/Facebook/etc.; get a former industry leading CEO to lead a winning sales team, have Steve Jobs on your product engineering team, a tier 1 HR guy, etc.
Easier said than done.