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Startups 101: What Business School Teaches You
And what you can only learn from experiencing startup life yourself
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There’s no such thing as “a startup”
The first thing to know about startups is that there’s no such thing — startups are a category, and that category is so broad as to be nearly meaningless.
At one end of the spectrum, you have a ragtag group of <10 people, working to build a first product and sell something (anything!) to someone (anyone!). And at the other you have Stripe, a $74 billion behemoth that employs 4,000 people and took in $7.4 billion in revenue in 2020.
In this post, I’ll help you understand all the subspecies of startups — consider this your Startup 101 education.
To simplify things, we’ll divide up the “startup” category into four stages: Drunken Walk, Product-Market Fit, Hypergrowth, and Scale.
For each stage of startup, we’ll talk about what it’s like to work there, how much equity you can expect to get as an employee, what kinds of fundraising are available, and far more.
⭐ Make sure to scroll all the way to the end — I’ve recorded a video that covers examples of each kind of startup. ⭐
Drunken Walk is the craziest stage of entrepreneurship — you’re blindly rooting around in the dark, hoping that your intuition about where to search is well-founded.
In a word, this stage feels volatile. With every win, wild elation; with every loss, crushing defeat. There was a day in the early history of my last startup where I thought I was going to win $1 million — but won $0 instead, and my co-founder quit to join Facebook the next day. That was par for the course: high highs, low lows, and little in between.
If you join a company at this stage, you are part of the founding team. You’ll be asked to do a little bit of everything, you’ll have to be an independent worker, and you’ll know what every other person is doing. You and your teammates will probably all have lunch together; and at this stage, teammates feel more like family, as you’re all fighting to stay alive together, often every minute of every day.
The goal of a Drunken Walk-stage startup is to find a product that people want, and to recruit the core of a team that can build it.
I expect most Outsiders know that product is important, but recruiting as a primary goal may be surprising — but if you think about the long-lasting impact of hiring those first employees, it makes sense. Patrick Collison (Stripe founder) said that the first ten people you hire are important because:
[you] aren't just hiring those first ten people, you are actually hiring a hundred people because you think each one of those people are going to bring along another ten people with them. And [you need to decide] exactly what ninety people [are like] that you would like those first ten people to bring on.
Hires at this stage normally come from the extended networks of the founders, and are given a substantial equity stake in the company in exchange for taking the risk of joining so early. Startups this early aren’t for everyone, but if you have the financial stability, risk tolerance, and/or burning desire to bring a particular piece of technology into the world, they can be exciting and career-shaping adventures.
The second phase of startup growth begins once you have a product in the market, you’ve raised some real money to pay the salaries of your newly-recruited team, and it’s time to prime the company for rapid scaling.
Product-Market Fit (PMF) is the goal. PMF is a core concept of Silicon Valley, one that has inspired well over 1,000 blog posts. (My favorites: Sam Altman defined PMF as the stage when users spontaneously tell other people about your product; Rahul Vohra said it’s when 40% of your users say that they would be “very disappointed” if they could no longer use your product.)
To me, Product-Market Fit means that each sale of your product no longer requires a Herculean effort from your founding team. You have found a market that wants what you’re selling. Congratulations! Your reward? Series A financing. This is very hard to achieve: less than 10% of all companies that raise seed rounds ever raise a Series A.
Operationally, being an employee at a PMF-stage company feels the Drunken Walk vibes, just slightly diluted. You can still make a difference by being a generalist, but most employees are tasked with specific functional goals. To extend the fire analogy, there are still 100 fires at the company, but only 10 of them fall within your domain, so you’ll share the responsibility for fighting those fires with the other people in your function.
The company is still likely to be small and tight-knit at this stage, because everyone is united behind the same end goal: convincing an investor that, if given more money, you can scale this business like crazy.
The Hypergrowth stage is the stage where company-builders shine: after each injection of investor capital, the team will recruit as fast as possible and prioritize growth at all costs. It’s also when what was previously a ragtag group of entrepreneurs becomes a capital-C Company. The implications of that shift are massive:
Communication becomes more challenging. You can’t all sit around one table and eat lunch anymore, and informal communication channels become unreliable. Culture has to be codified, as not everyone was at the company when [foundational event] happened, or else it will be (heavily) diluted.
The specialists arrive: these folks are generally more senior in their careers, and are experts at what they do best. Both sides have to work hard to work together: the generalists might think they’re about to be out of a job, and the specialists might look at the founding team as a tight-knit group of insiders.
Layers emerge. Where before there were just teams and team leads, Hypergrowth is when super-senior VPs and C-Level execs join the team, roles titles start to matter, and reporting structures emerge. Company leadership is less present, as exec time is exceedingly precious and new employees don’t get to spend as much time with the founders.
All of these changes, and many more, contribute to informal and formal systems breaking every time the company triples in size. This is the rule of 3 and 10; the transitions necessary to scale beyond 30, 100, and 300 employees all hit you quickly, and can slow growth — a cardinal sin! — if you’re not careful.
This makes scaling the primary activity of every function in the Hypergrowth phase. Being a Hypergrowth employee means focusing on two things: finding places to contribute within the emergent organization and increasing your personal leverage as fast as possible. It’s not good enough to just put out fires anymore; your job is to build systems and recruit teams that can put out any conceivable fire, once and for all.
That kind of responsibility can be exciting or scary, depending on your disposition. It is likely that your job will fundamentally change with every few months of true Hypergrowth, and if you are caught sleeping, you may very well be left behind. But at the same time, if you can match or exceed the rate at which your company is growing, the sky is the limit for your personal impact.
Some former startups try to maintain the Hypergrowth dream, and hang onto their startup status as long as possible. Amazon famously calls itself a “Day One” company, because, in Bezos’s words:
Day two is stasis. Followed by irrelevance. Followed by excruciating, painful decline. Followed by death.
That is clearly the ethos of Hypergrowth, but — even if they still have some growth hacks up their sleeve, like hiring 427,000 employees in 10 months — Amazon is firmly a company. They’re at Scale: they have finished starting up.
Precisely where to draw the line between Hypergrowth and Scale is hard to do, and given the existence of massive and still hyper-aggressive corporations like Facebook, Google, Amazon, and the rest, this may be an unknowable question. For now, let’s just agree to stop calling public companies “startups.”
To understand what these stages mean for fundraising and employee equity — and to see examples of companies at each stage — check out the video below.
Believe it or not, this was the least manic of the three thumbnails YouTube suggested for this video.
We’ve got many more lessons where this came from. To see all of the content from MBA 80/20: Silicon Valley Startups, subscribe today!
Next time — how to be a founder.