Speed: A New Differentiator for Startups

Introduction

Many factors have been discussed as determinants of company’s source of competitive advantage across industries for decades including having patents, more capital, a unique team, and best company location. Technology has changed these beliefs over the past two decades making time a more recognized resource. What a startup can achieve over time determines its success. Metrics that are used to measure the health of a company including cash cycle time, inventory turnover, burn rate, order cycle time and more are just but measures of speed. It has been debated across industries on what is the best for startups between developing products slowly aligning with natural product acceptance or accelerate their product development cycles. This article discusses the importance of speed to startups regarding their operations and product development cycles.

1. Rapid Results Accelerate a Startup’s Flywheel

An object in motion tend to remain in motion — Newton’s Law of motion on momentum. Apart from science, if you read the book by Jim Collins (Good to Great) you must also be familiar with the “flywheel’’ concept. The flywheel concept explains the positive feedback loops that build momentum for a startup, increasing the payoff of its incremental effort. These feedback loops are created by a company’s brand (reputation), economies of scale and network effects. When the startup make its progress visible, the flywheel starts to turn as people want to be part of a winning team. Partners will start to flock in, the customer base expand increasing the company’s revenue and then media attention follows. Once the flywheel start running, small efforts will have compound effects. Its normal that people buy products from successful companies because they just want to be part of well-known and successful brand. Amazon grew bigger because of its flywheel model. It lowered the commission rate for online suppliers, many suppliers started to use Amazon marketplace, this created a variety of products in large volumes, customers had more choices and more customers started to use Amazon. The feedback loop here is more suppliers matched with more customers generated more revenue to Amazon quickly at low costs (and repeatedly). Because of this, Amazon became an unstoppable company and its growth kept on accelerating.

2. Shipping Fast Reduce Wastage of Resources

It’s widely known that every company have limited resources and startups normally work with tighter budgets before they are profitable. A startup that takes a long time developing its products or doing market researches will run out of resources before reaching the growth phase. At an early stage, startups must balance their speed of customer acquisition and product improvement with their burn rate. Burn rate is the rate at which a company depletes its cash pool in a loss generating scenario. High burn rate leads a startup into layoffs, limited expansion and fail to fund its product promotions. Startups that develop products quickly at an optimized burn rate have a higher chance of success. These startups can engage with customers quickly, understand their needs and make new decisions quickly. Those that produce products and ship slowly suffer from prolonged labor and overhead expenses before they get revenue.

3. Rapid Achievements Beat Competition

A simple but powerful thing that intimidates competitors is to see a startup growing quickly. Customers like service providers that have shorter lead times. These service providers can that ship new and refined products in a short window. This may not be straight forward with consumer products but well understood in Business-to-Business (B2B) transactions. With B2B projects, large machinery installations or construction can take up to a year for completion. A company that set a record of completing quickly tend to win more business contracts than a company that take ages in the planning phase. Mathematically, its pretty simple to note that a company that delivers fast can complete three to four projects in a year whilst slow ones can complete a single project. The revenue difference between these two categories also differentiates their success.

4. Rapid Results Increase a Startup’s Valuation

Investors favor startups that gives them capital returns quickly. A startup that launch its products quickly and start moving into growth hitting it targets week after week and month after month attracts investors through the fear of missing out (FOMO). Investors have the belief that fast-growing companies will find other investors who want to buy its shares later. Continuous investment into this company can make its market capitalization grow quickly as investors keep on buying its shares. This satisfies “the greater fool theory’’ of behavioral finance.

Key Takeaways

Speed is the new big. It is wise for startups to optimize their product development cycles, resource burn rate, and accelerate their growth rate for them to stay longer and profitable on the market. Snail startups always end up with financial distress before they reach the growth phase, fail to create market and investor interest.

By Upenyu Machingambi

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