Hockey Stick Confessions
This year we saw already again many pitches from very interesting and promising companies, both during investor meetings as well as sitting on the jury of startup casting events. Almost without any exception each and every startup had an element of viral adoption of their business model, product or service. Meanwhile the startups I am working with know me well that I like to come up with a question and drill down a little bit to probe and find out if the team has really thought about the issue and is on top of their business.
One theme which captivates my interest is “Viral Growth”. And I like to start with simple questions such as: “So, it looks like you are betting on a viral growth in your business, right? How do you want to make it happen?” or “Enlighten us where your customer base will be in 12 and 24 months from now?”. Surprisingly a very common answer is: “well, we don’t really know”. While I do appreciate the honesty, I find it “fascinating” to say the least how business plans are drawn up in PowerPoint, but if we have a peeling-the-onion conversations it turns out that it is often a wild guess, based on hope and best effort. That is not a method. And it rarely results in feasible plan. But that is what I am looking for in a project – regardless if it is a campaign, a startup, or a new corporate venture. And in a world where success and failure is increasingly depending on rapid, exponential adoption and competitive agility it is quite stunning how far this skill set is still underutilized and underdeveloped.
We wanted to take a closer look and generating some ideas about this issue. In a recent survey, conducted by WITTIGONIA Insights, we offered a small game-survey. We launched it as a mobile friendly survey, which is a must-have today, if you want to get the attention and engagement of the audience. We kept it simple and gave a highly simplified, and fairly deterministic scenario of viral adoption through word-of-mouth promotion. Participants were asked to estimate three things:
- The size of the customer base at different time steps (6, 12, 18, 24 months)
- The time when sales volume would reach a maximum.
- And the size of the sales volume in that month.
Sounds like basics every project manager, founder, asset manager should be able to answer?
The findings and insights were more than interesting:
- 93% of participants over-estimated short term growth.
- Short term estimates were too high by a factor of 2 and up to 8 times.
- 87% of participants under-estimated the long term growth.
- Long term estimates were under-shooting by 25-35%.
- The sales volume was over-estimated by a factor of almost 4 times.
- And peak sales was estimated too late by 73% of participants.
These challenges of estimating and managing exponential growth exist for startups, investors, managers and policy makers alike. There are little to no differences.
But the real bottom line here is twofold: First, the ability to wrap our brain around exponential growth and estimate the order of magnitude seems to be somewhat “distorted”. In the short run we believe that exponential change happens faster – but it doesn’t. And in the long run we underestimate the order of magnitude. This may explain why some people loose patience with projects and why some policy maker loose control over snow-ball like phenomena. It helps to understand why companies often miss the point of renewal. And this is often planting the seeds for the major revenue crisis and for competitive exposure.
And more importantly: there is a high need for systemic leadership skill. Being system savvy can be a make or break in the business world and other sectors such as NGO or crisis response teams. What does “system savvy” mean? Well, first of all it means being aware and developing a system mind-set, to recognize and understand how structures of a system (and characteristics of its agents!) translate into dynamic, emerging behavior. Furthermore, it means designing and managing effective policies, which make the right decisions and allocate the right resources at the right time, place, quantity and quality.
My observation and experience is that some leaders do have what it takes, either through years of experience or through the nature of their education. And for the rest of us? We have to learn it one or the other way. Certainly it is desirable to fail cheap and early and in an environment where it is safe. Here comes value of discovering, learning, and training in a safe environment such as “management flight simulators” such as the series “The Shape of Growth“.
Guidance to project leads and to investors.
Findings like those from our survey do have some implications for entrepreneurs, investors, and business angels / coaches. Investors should not only check the product and team, but also assess if the players have a clue about managing complex systems. For entrepreneurs there is no need to submit hockey-stick shaped forecasts. Instead they should play through “potential futures”, in other words “scenarios”. The coaches and business angels should ask the right questions, including but not limited to: addressable market, timing of product releases, factors which are driving growth/churn/renewal. The rule of thumb for business plan reviews is to be more cautious with short term forecast and especially timing of acceleration, and to challenge to growth potential.
For Enterprise innovation is a matter of survival to identify the point of renewal and to shift resources from legacy products to new product innovation. Timing is vital to have a product ready for the launch corridor and before the legacy business system is running out of steam. With the variation in opinion and forecasts – as we have seen from the simple game-survey exercises – it is vital to engage the team in system mind-set a scenario planning exercise.
Systemic Leadership is a new requirement and a new way of alignment, change and innovation leadership.
Percentage over-estimating short term growth
Over-estimating short term growth by a multiple
Percentage over-estimating short term growth
Under-estimating long term growth by a fraction
Percentage estimating maximum sales too late
Multiple of over-estimating maximum sales
Thomas Wittig is CEO of WITTIGONIA, an independent business advisory and development partner for startups, Enterprise, NGO and Boards. In his recently launched series with the title “The Shape of Growth”, Thomas is taking system leadership development onto a pragmatic roadmap. Details can be found at academy.wittigonia.com