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Building a startup that will last

Building a startup that will last

For the past decade, growth rates have defined success for most technology companies. Moore’s Law enabled unprecedented computing power, setting off a sprint in winner-take-all marketplaces with increasing returns to scale.

Growth hacking became the entrepreneurial mantra of the early 21st century, resulting in the creation of new tech giants, entirely new industries and an era in which online community, content and commerce have redefined how we live, learn and work.

In a marathon, pacing and perseverance are paramount. Few companies from the tech boom of the mid-2000s had the foresight to temper their pace in anticipation of the long journey that lay ahead.

We are only now recognizing how untenable the “move-fast-and-break-things” attitude would become.Our collective obsession with disruption made us look at decades-old companies as something to dismantle rather than admire. The potential for career-defining gains got the best of many investors and advisers, and we failed to coach founders on the fundamentals of sustainability.

An enduring business

Longevity in business creation is taken as a given — nobody sets out to create a company with an expiration date. That said, very few early-stage companies think critically about the strategic principles needed to endure. We think this is essential going forward.

Looking at long-standing companies across various industries, we were able to identify several foundational elements contributing to these companies’ tenures. They include society-first principles, adaptable long-term strategies and scalable leadership.

By adopting such standards, startups can increase the odds of long-term sustainability without negatively impacting short-term growth or society at large.

Articulate a value framework oriented toward societal impact, not just financial achievement

In Jim Collins’ and Jerry Porras’ research of “visionary companies” that had endured for more than 50 years, they did not find a single company that stated “maximizing shareholder wealth,” “profit maximization” or even “maximizing growth” as a driving force of their activity.

They all accepted profitability as core to sustainability, but that wasn’t what motivated or guided them. Instead, what defined the companies Collins and Porras described in Built to Last was a deep commitment to a core set of values that provided the company with a sense of purpose — an understanding of the role they played in society and how they created value for others.

Core values served as these companies’ conscience, providing guidance for not just what ends to pursue, but what means to use to achieve their aims.

One example of putting mission ahead of profit comes from Intermountain Healthcare (IHC) and their decision in 2016 to cannibalize $700 million in patient revenues to begin its transformation from a volume-based, fee-for-service healthcare operation to a value-based model.

“Few early-stage companies think critically about the strategic principles needed to endure.”

IHC launched in 1975 with a mission to help “people live the healthiest lives possible.” As the healthcare system grew more complex, IHC recognized they needed to champion dramatic change to do right by their mission and to orient themselves toward a sustainable future. As Laura Kaiser, IHC’s COO, noted, their decisions were not acts of charity but acts of strategy.

It will take time to measure IHC’s success as an early adopter of this operating model, but the organization’s bold commitment to its core beliefs could play a significant role in maintaining its position as the largest healthcare provider in its regional market.

With AI, privacy and behavior-manipulation concerns, modern tech companies today face significant and complex problems. They can’t disrupt and ignore the effects of their products and operations on the broader ecosystem.

The most stable foundations are those built on mutual respect between business and society. Thus, it is important to demonstrate clearly the social and economic benefits of being first-principled when it comes to corporate values.

“Roughly half of the S&P 500 will drop off the list during the next 10 years if they don’t reinvent themselves.”

Demonstrate the ability to execute second and third acts

Enduring companies are not one trick ponies. Founders with a long-term vision will recognize that they need to make transitions beyond a highly successful first act.

Market preferences, technological capabilities and regulations change. What was once novel becomes a commodity over time. Successful businesses anticipate that they will go through cycles of maturation that demand systemic transitions.

A great example here comes from American Express, which one of us (Ken) led as CEO for most of the last two decades. The company started out in 1850 as a regional freight express business, but a realization in 1892 transformed the company into a financial services powerhouse.

While traveling, Amex’s president, J.C. Fargo, had a hard time converting his letters of credit into cash. He thought: “If the president of American Express has that sort of trouble, just think about what ordinary travelers must face.”

The solution was the ubiquitous “American Express Travelers Cheque.” The mechanics of the business — the fact that they sold more orders than were redeemed — also created another opportunity for company: the float.

Amex did not explicitly set out to become a financial services company — they were excelling as freight operators. However, their ability to take a new opportunity and fold it into their existing operations demonstrates their unique ability to execute new acts and evolve.

They let their commitment to providing “unsurpassed service” to their customers drive their strategic thinking, allowing them to sense both new marketplace opportunities and forces that might jeopardize their existing business. This attitude has allowed Amex to execute third, fourth and fifth acts during its century and a half of operations.

In the tech industry, Microsoft is a great example of the power of executing more than one act. CEO Satya Nadella understands the necessity of a “growth mindset” rather than a fixed one. He recognized that Microsoft had to move beyond thinking about Windows as its core, so he pushed the company to build Azure, the cloud computing service that now accounts for more than $34 billion in annual revenue.

There is a graveyard of companies such as Data General, Digital Equipment Corporation, Wang Laboratories, Burroughs Corporation and Sperry Corporation that weren’t able to make these transitions.

Recent studies suggest that roughly half of the S&P 500 will drop off the list during the next 10 years if they don’t reinvent themselves. If Microsoft had continued operating with a singular focus, it may have joined that list. Instead, it embraced continual (and radical) transformation to become one of the most valuable companies in the world.

“The faster founders implement a system of leadership, the sooner they can empower all others across every level of the company.”

Move beyond founder-driven decisions to a scalable system of leadership

A successful startup is often driven by the vision of its founders and their core team. Most of the key decisions are made by a small group of individuals who have the will and drive to steer the company through the early stages.

In backing any company, we’re acutely aware of founders’ mindsets and rally behind those that are building with an attitude of responsibility.

While a principled founding team can create a great company, an enduring company requires a system of leadership that is implemented very early in its history. The framework enables the delegation and distribution of decision making throughout the organization.

It is rooted in people practices that help a company constantly recruit, develop and retain leadership talent at all levels — and make decisions that are aligned with the company’s visions and values.

The Walt Disney Company is an example of a business in which adherence to strict core values and a transformative attitude came together under a system of leadership that allowed the company to rapidly iterate and cement itself as a leader in content, commerce and experiences during the past half century.

In the 1950s, founder Walt Disney pioneered a multi-strategy approach for his company that served as the template for “sustained growth,” not only for Disney but countless other organizations. Every Disney employee goes through the same rigorous development process that emphasizes vision and values, behaviors over intentions and purpose over task.

By committing to such training, Disney trusts every employee as a brand steward who can make decisions without onerous oversight.

Disney CEO Bob Iger has enabled the company to remain an innovative powerhouse by opening the process for creative decision making to other leaders. As the company acquired widely recognized brands — from Lucasfilm to Marvel and Fox — he provided those leadership teams with autonomy so that they could thrive within the Disney ecosystem. Disney’s continuing success long after the passing of its iconic founder is a testament to the power of a system of leadership that endures over time.

A key transition point for founders comes when they build an incredibly strong team that runs itself, freeing them up to focus on making sure the culture, mission and values seep deep into the ethos of the growing organization. The faster founders implement a system of leadership, the sooner they can empower all others across every level of the company.

“By thinking about endurance as a core element of their DNA, the current generation of high-growth companies creates moats that help them build superior products and services while avoiding ethical conundrums.”

Endurance

We focus on endurance as a fundamental design principle because we believe the best businesses are intrinsically aligned with the long-term interests of society. Economic gains hinge on respect, and companies today cannot earn respect unless they are committed not only to objectively examining the consequences of their creations but also evolving to have a holistically positive impact on society.

We’re optimistic here because, despite the current news cycles, there are contemporary companies we work with like Gusto and Stripe that have taken the long view since inception. Both have spent their early years focused on measured, sustainable growth and on how they can address societal challenges directly through their work.

At Gusto, an online payroll services firm, we see this articulated in their guiding philosophy, “Short-term gains never justify long-term sacrifice. Invest in the future.”

More recently, with the launch of their flexible pay product, they’ve shown the foresight to both contend in a competitive market and commit to servicing and empowering employers and employees alike.

For Stripe, an online payment processor, this is reflected in their discipline in executing against their mission to increase the GDP of the internet. Rather than attack that mission from all angles, they’ve grown steadily and deliberately from a payments processing product for small U.S. businesses to a full-stack global commerce platform for all businesses.

By thinking about endurance as a core element of their DNA, the current generation of high-growth companies creates moats that help them build superior products and services while avoiding ethical conundrums.

Developing clarity about the core value they create for society, the adaptive capacity that will enable them to transition as markets evolve and the system of leadership will increase the odds they endure beyond their founding generation.

Republished with permission, this article first appeared on Harvard Business Review.

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