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What unicorns can learn from dinosaurs

Fast growing mid-stage start-ups are increasingly wrestling with the challenge of attracting capital. Here’s what they can learn from established companies.
The Strategy and Corporate Finance blog

– We live in a world of unicorns and dinosaurs. Now before you think I’ve lost my mind, in my world start-ups valued at $1 billion or more are affectionately – and frequently disdainfully—referred to as unicorns. And dinosaurs? Well, they’re big and they’ve been around for a long time...

Typically, my clients ask what they can learn from start-ups. But as more and more mid-stage start-ups grapple with the challenge of attracting capital, it’s probably time to look at what unicorns can learn from T-Rex.

Here are 4 pieces of advice for fast-growing companies:

Understand your customer more deeply

Many entrepreneurs are inspired to develop new businesses after experiencing poor customer service or seeing an opportunity for value in an unmet need. Most invest in some formal or informal customer research but often they rely too heavily on their personal experience and intuition.

Big companies have the benefit of a long, intimate relationship with their customers. The best ones systematically collect detailed insights from many sub-markets and analyze the changes they notice. While established companies may be slow to respond to these insights - and tend to underestimate the pace of change or hope it’s merely a passing fad - start-ups can underestimate the stickiness of existing habits, focus too much on success with early adopters and underestimate the time it will take for the mass market to shift.

Be more commercially shrewd

Executives in big companies are often criticized for being too focused on the short term. It’s not surprising. Their job-security and compensations are largely based on delivering good quarterly and annual results. In contrast, entrepreneurial dreamers tend to shape their strategies around stock compensation that may pay out years down the road.

Ironically, the short-term focus for which large firms are pilloried could actually benefit starts-ups—especially in decisions on pricing and commercial terms.

Plan for more things to go wrong

Some of the most successful entrepreneurs failed early and modestly enough to apply what they learned from the setbacks to their future ventures. Of course it’s hard to find evidence on fail cases—what Nasim Taleb refers to in The Black Swan as the graveyard of silent failures—but it’s wise to plan for more things to go wrong. This is something executives in big companies often do well.

To be sure, some executives are too risk-averse, but many others wisely manage risk by developing contingency plans rather than betting it all on one approach. They start with a relatively contained investment—perhaps on initial design—and keep cash in reserve to support the unexpected but inevitable late fixes.

This is an approach more start-ups should adopt. Remember, many early-stage companies have great innovations but run out of resources to bring them to market. In his wonderful book on distance running, Christopher McDougall describes how female and older-male ultra-runners use better energy planning and mental perseverance to beat young men in extreme terrain. Similar strategies work in business.

Set specific expectations and hold people accountable

It seems counter-intuitive to say that small companies can learn about managing people from big companies. Aren’t start-ups better at motivating young talent by offering them leadership opportunities and operating non-hierarchically—both factors that our research suggests are as, or more important than the level of pay? The problem is, start-ups often underestimate the importance of performance management processes.

Here’s how it happens. In the very early stages, the start-up team is small, often located in one open space and mutual accountability develops organically. As the company grows, some of the founding values and culture continue to shape behavior, but this natural immunization to the malaise of big corporations gradually starts to wear off. Often, this happens when the business is rapidly scaling up and pressure rises. Leaders are focused on getting to market quickly and are slow to adapt their backbone processes. Without a concerted effort at this stage, accountability will erode.

As they grow, start-ups need to supply their managers and employees with clear, fair and measurable goals. Because of their bias to optimistic mind-sets and action, start-ups are very exposed to the Texas sharpshooter fallacy with managers defining what is good based on what they have, not on what needed to done. They must make people accountable for their actions and define success before, not after, the results are in.

Clearly unicorns and dinosaurs have much to learn from each other.

Here I’ve tried to compare the often asymmetric pitfalls that separate smaller (and especially younger and fast-growing) companies from large ones:

exhibit

Yuval Atsmon is a senior partner in McKinsey’s London office.

An edited version of this article also appears on LinkedIn.