Why do big technology companies like IBM and Oracle have trouble sustaining rapid growth that drives up the value of their shares? In a nutshell, they’ve lost that startup feeling.
In recent interviews with four startup CEOs and a few of their investors, I’ve observed that despite not being required to report quarterly financial results to the public, the dance between startup CEOs and their investors reveals useful insights for these tech giants about what that startup feeling means, why it is so important, and where they might look to acquire some of the growth that these startups are enjoying.
IBM and Oracle surely are in need of growth. After all, IBM has suffered a 5.1% annual rate of revenue decline in the last five years while Oracle has been eking up at a 1.4% rate since 2014. And their shares are lagging — IBM stock is down 3% through July 13 this year while Oracle has risen a mere 3.7%, according to Morningstar.
These startups only get funded if they have what these big companies need. That means a big market, unrelieved customer pain, a great management team, and the ability to get and keep customers without spending too much money
As I described in my book, Startup Cities, startups whose CEOs are marathoners — e.g., founders who lead their companies from idea to huge public company — go through four stages of scaling — each of which requires different sources of capital. Here are the first three stages and how four CEOs are raising capital for each.
1. Winning the First Customers
A startup’s first customers and investors are likely to sign on because of personal relationships with the founders, and stay because the startup makes them better off.
That’s why the first stage in scaling requires a startup to fit its product’s features to benefits for which a customer is willing to pay.
Edgard Capdevielle, CEO of Nozomi Networks, a San Francisco-based supplier of cybersecurity solutions for industrial control systems — raised $22.5 million. Capdevielle’s got his first customers this way and won initial capital from a government-funded competition.
As Capdevielle explained, “Our first two to three customers were willing to serve as design partners who are suffering the most pain and will work with you to build a product that will relieve their pain — to achieve product/market fit. We got our first funding with help from an EU sponsored award for the most innovative solution — which we developed for Enel, an electric utility.”
2. Building a Scalable Business Model
The second scaling stage is to design business processes that will make the startup’s costs drop and value of its product to the customer rise as it grows. Startups with scalable business models lower their costs to acquire new customers as they get bigger.
What’s more, a scalable business model increases the lifetime value of that customer because the startup adds valuable product features and provides excellent service — so the customers keep using the product, keep buying more from the company, and recommend the company to others.