Unit of Progress

Descending Everest

Perhaps the most recognised New Zealander ever is Sir Edmund Hillary. In 1953, at the age of 35, he climbed his Everest, which just happened to be the actual Everest. After that he got on with quite a few other things. He lived a life full of adventure and also did a lot to help people less fortunate than himself. These days he lives on the $5 note.

I often repeat this quote from Peter Hillary’s eulogy to his dad (please excuse me if I don’t have the wording exactly right):

Don’t wait for great things to happen to you, or else you might be waiting a very long time.

I’m interested in the language we use to describe Sir Ed’s original achievement. For example, an article on the official Ministry for Culture and Heritage website starts:¹

A beekeeper from New Zealand, Edmund Hillary, and the Nepalese Sherpa Tenzing Norgay became the first people to stand on the summit of the world’s highest peak.

Sir Ed himself had a great line about this. He was asked about the possibility that a previous expedition had reached the top before them. He immediately replied (and again I’m paraphrasing):

I always considered it a return trip.

He’s right. The reason we remember him and Norgay is because they were the first to reach the summit who also made it down to tell their story. The second half is what made them famous.

A unit of progress

Our landing is what determines if we were flying or falling.²

During the early years of Xero there were two stories that dominated media reports:

1. Xero reports another loss.
2. Xero raises massive amounts of new capital.

Both of these stories were true. But the connection between these two facts wasn’t often explored. That capital was funding the losses, but what were the outcomes that were being achieved in the meantime? As a public company, Xero released their results every quarter, so a more interesting story was hiding in plain sight: the consistent growth in customer numbers; the hugely valuable sales channel that was being forged to small businesses via accountants and bookkeepers; and the remarkably low churn rates, which underpin high customer lifetime value.

It’s curious to me how we mostly celebrate startups when they raise investment. It’s like we’re applauding the pilot for refuelling the plane. It’s now so common we’ve all normalised this. Imagine if the airline industry was as excited about refuelling and as blasé about crashes as startups are.

When we fly, the type of jet fuel used, the name of the company supplying it and even the amount of fuel supplied isn’t the story. Obviously it’s important that the pilots responsible for flying the plane keep a constant eye on the fuel gauge. But that will only be the headline in the news if they don’t. The thing we should talk about is where we are heading and why.

The lesson for anybody who wants to raise capital to fund a startup and for everybody who might be tempted to invest (and also for those who argue that the government should subsidise aviation fuel) is: describe a clear and measurable unit of progress. What are the improvements we believe we can make in the immediate next stage of the business; the specific things that will demonstrate our momentum? We don’t need to predict or even describe our final destination. While it’s important to think several steps ahead and understand how this next step will open up opportunities beyond that, it’s best to avoid getting too distracted by the end game. Smart investors know that great companies are bought not sold, so the immediate goal is to create the sort of business and team that will eventually be attractive to potential buyers rather than focus too early on difficult-to-predict “exit” plans.

Remember, we use evidence to identify problems, but we need experiments to solve problems. When flying long haul, pilots only take on as much fuel as they need to complete the next sector. This is also why startups are funded in stages. Each investment into a startup is described as a round. These are given esoteric names: Seed, Series A, Series B, and so on. Each round of funding typically provides enough capital to cover 18–24 months of expenses. This time period is sometimes called the runway – another aeronautical metaphor. We hope new funding buys enough time to get airborne, before we get to the end of the runway.

A well-articulated unit of progress is a great way to determine exactly how much capital is required. Startups usually spend all the money they raise in each round, often faster than they expected, so it never really helps to raise significantly more than is required to fund the next experiment – it only increases the dilution for founders and existing investors, with limited additional upside.

The unit of progress will change with every round, each building on the one before, as the startup moves from early-stage to high-growth. For example, in a Seed round, we might want to prove that we can build a prototype product and find some initial customers to give us confidence we’re making something that people want to buy. In a Series A round, we might need to demonstrate a repeatable sales process and a channel that allows us to acquire customers at an acceptable cost. In a Series B round, we might want to show we can attract the people we need to grow the capacity of the team, especially in engineering and sales and perhaps expand beyond our local market into different geographies. In later rounds we might need to hire a more experienced exec team, to move beyond the reliance on the founders and generalists who created the foundation in the early stages, and focus on improving unit economics. These examples map nicely onto the four stages of growth: do it once, do it again, do it multiple times at once, do it at scale. Every stage in this model builds on the lessons of the last.

When we choose to take investment it’s vital we are specific about the things we hope to prove or disprove in that limited time; that we are confident that we can complete the experiments in that timeframe; and that, if we do, it will leave us in a better position at the end. Again, the real test of an investment round, once we have the benefit of hindsight, is whether the additional capital created more value than it cost.

So don’t be distracted by other founders announcing their large capital raises. The reason we fly is to get somewhere, not just to marvel at refuelling. So let’s be clear about where we are going and what it will take to get there.

18 months later

Some unsolicited advice for business journalists, building on the lessons from the early Xero days…

Anytime a startup wants you to publicise their capital raise, ask then insted about their unit of progress, and write about that. Not the amount they have to spend, but the outcomes they want to achieve with it. If they can’t answer or don’t want to share that, then I’d write about that.

Then, 18-24 months later, follow-up to see if those things were achieved or not.

Doing this would quickly uncover all the important patterns. Who is consistently doing what they said they would do? Who are the investors who repeatedly back those founders? Those are the startups and investors to follow closely. It’s a simple way to get beyond the current situation where founders and investors who make the most noise or have the most recognisable names get the most coverage.

I also realise this is probably impossible, since people are generally only happy to tell their story in those moments where they have just launched their product or raised new capital, when their potential is all ahead of them, than later when they would be judged much more on actual results.

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