The 5 steps to turn a Collaborative Business into a Unicorn like Red Hat

Sounds pretty impossible, right?

Creating a traditional business is a great struggle. Finding clients, polishing your product, making payroll, finding the right employees, automating processes…

Since there are so many moving parts, you’re always wondering, “Where do I focus now? Am I doing the right things? What should I be doing next?”

And if you are trying to build a social or an open source business or a cooperative, there are even more moving parts.

A Traditional Entrepreneur has the constraint of making money to create and maintain the employment of its members.

But a Social, Open or Cooperative Entrepreneur has the added constraints to also create a social impact towards its community or to deliver a positive ecological impact towards the environment.

Most advice turns around how you can make money with open source: Sell support, build an open core and sell the extension or sell a subscription to a cloud hosted version… But once you know how you’re going to be making money, nobody tells you where you should be focusing your efforts at each stage of your venture.

“Should I be working on my community of contributors? Should I be looking for clients? Should I hire someone to help develop the product?”

I’ve been working with traditional and collaborative business owners for the last 4 years, and I’ve kept asking myself, “Is there a way to know if I am going towards the right path?”

The challenge of running a business, and especially an innovative and pioneering collaborative business, is that you feel like “your situation is different” than that of all other businesses around you. And that often leads to the trap of thinking that a solution lies into developing some complex solution, which leads to the death of projects by loss of time and money.

But the reality is that your situation is not different. Every business, yours included, depends on a very few business models. And every open community also depends on a few community models.

Whenever entrepreneurs accept that their business is not so “unique”, it unshackles the hand-cuffs of misery and doubt, bringing the joy of liberation.

They see a simpler road ahead and start applying the right strategies to reach the next level without the hardships others seem to be dealing with.

For example, if you are just starting up and you’ve found a way to sell your product to your customers and are just starting to make payroll, but you’re still not profitable, there is no sense in hiring a customer service, a CFO, or in creating operation systems to make your company more efficient. At this stage you just need to improve your product and more clients.

When you’re in the startup stage of a business, and at any stage later on, there are some core areas to focus on. This focus allows you to graduate to the next level in business and prevent yourself from sliding back into previous stages.

So let’s see what are these stages and what should you be focusing on at each stage.

Stage 1: The Validation Stage

At this stage you have no business yet, just an idea. And you’re most probably filled with self-doubt, worry, and the fear of failing. You’re either still at your job and have to develop your idea after work hours, or you’ve just quit and you feel a sword of Damocles is hanging over your head.

For most of us the biggest hurdle to get over here is the fear of being rejected for asking for money for something you created. If you need inspiration of someone who went through over 100 days of rejection, go watch this video, and come back here.

Once you’ve gotten over the doubt and rejection, you have to find a product or idea that people really need and want. Once you think you have it, go validate your idea with the target group you want to serve.

Here is where you go talk to people in person or by phone to find out how you can best make them happy.

Then create the proper documentation, install instructions, demos of how it can be used and a proper license that will allow people to reuse and co-develop the project with you.

Once you get someone to download your open source software or hardware, or to buy, ask them “Why did they download it? Why did they buy it? What problem are they trying to solve?” It will give you incredible insights that will help you further develop your idea.

Until you don’t have a product to sell, or you don’t have something compelling enough that people will download or buy, you have no community and no business.

And the product alone will not sell itself, so once you got that, you’ll also have to find out a marketing and sales system that work to attract clients to your product or service.

At this stage you’ll need to put in place a validation system to understand the real needs, frustrations, priorities of the market, otherwise when you launch your product you’ll have a very slim chance of success and will waste a lot of time, money and energy.

So once that you’re sure that:

  • you have validated that your product or service works well,
  • that people have confirmed they’re interested in using and buying it,
  • that you have one or more distribution channels that work,
  • and eventually, that you have people interested in contributing and developing on top of your idea…

…you can confidently say that you are in open business.

What should you focus on the Validation Stage:

Stage 2: The Startup Stage

At this stage you are starting to get sales coming in, you’ve found a community of users, contributors and customers, and you feel the excitement of being in business.

And getting out of the Validation Stage sets you apart from many people who never manage to get out of this stage.

Now you still have a very long and steep mountain to climb ahead of you, because your company is probably still not profitable, your sales are inconsistent, you’re doing most tasks yourself because you can’t pay anyone to help, you waste a lot of time doing things and your doubts starts creeping in: “Am I done for this? How will I ever get ahead of the infinite To-Do-List I have ahead?”

It feels quite lonely. And it is probably the hardest place to be at.

But nature is well made, and most entrepreneurs at this stage are completely ignorant of how hard it will be, otherwise you’d give up. But this ignorance is a blessing, because it will keep you optimistic, and most of all persistent, which is the only way to get out of this stage.

To get out of this stage, you should now focus on solidifying your Open Source Community and your Sales, Marketing and Product. If you focus on anything else you’ll be wasting energy and it will take you longer to get to the next stage.

So if you’re not marketing savvy, you’ll have to learn and implement systems to put your product or service in front of others, to get them sharing, talking, and most importantly: buying.

Here are some examples you can use:

Hashids, created by Ivan Akimov, is a phenomenal open source project that could have marketed itself. But Ivan knew better. A product, however good it may be, is never good enough to market itself. So he created a thoughtful plan to promote his idea.

He emailed some famous technology newsletters, submitted the project to forums where people could be interested, answered relevant questions on popular forums, wrote blog posts, and a few more things. And this got him 1 million downloads over 5 years. Pretty good…

So at this stage focus on bringing more people in inviting and attracting people who would love your project.

Check your to-do-list, and if most tasks are not geared towards that, you should redirect your attention towards marketing your idea. And if you don’t know how, learn. Otherwise it’s going to take you forever to leave this stage, and you might be tempted to give up.

You need $5000 a month and your product sells at $500? Then you need to create a system that consistently brings 10 buyers every month (10 x $500 = $5000). You won’t be out of this startup stage until you can’t reach your minimum number of sales.

What should you focus on at the startup stage:

  • Keep developing your product
  • Solidify your marketing and sales system
  • Keep nurturing your community of co-developers

Stage 3: Optimization Stage

You’re past the startup level and you’ve have managed to have enough revenue and profit to be more relaxed. You get enough prospects and clients, you can support the kind of life you are looking for and you can focus on the project you’ve been longing so long to bring to life.

But you are constantly laboring and most of your time is spent thinking at your business and your community. And this leads you to stress and overwhelm.

Most entrepreneurs reach this level with their persistence and hard work. But most of the times, it is also their glass ceiling.

Not because what they created isn’t appealing enough to their customers and community, but because they mainly have developed their product, marketing and sales skills, but don’t know how to put operational systems in place.

And that can get you overwhelmed because you see that you are working very hard, but can’t see how you can extract yourself of your business, or how you can trust or delegate to others. If you get yourself out of the equation, the business wouldn’t be profitable, and this might be leading you to the edge of burnout.*

*There might be here and there a service business at this stage that brings a phenomenal style of life, but setting some operational systems in place can bring in really powerful wins.

So at this point you need to be spending more time on the operations of your business, like administration, financial systems, internal communications systems, quality control, fulfillment, customer service, administration, billing, software or logistics.

These are all the areas that slow you down and that can suck the life out of you.

Even if you are the king or the queen of bootstrapping and think you can do it, now that you have enough revenue, consider investing in bringing or hiring a project manager, consultant or operations manager to help you put these things in place or develop technology that will smooth the process out. This will become the support structure of the business.

What should you focus on at the Optimization Stage:

  • Build a support system to help you deal more efficiently with your administration, financial systems, communications systems, quality control, documentation, fulfillment, customer service, administration, billing, software and logistics.
  • Keep nurturing your Community of co-developers and creating systems to simplify their interactions (like forums, improved documentation, easing the installation of your open source code or design and so on….)

Stage 4: Scale Up Stage

Once you get past the Optimization Stage, you’re free of most daily activities that were keeping you on the hamster wheel of entrepreneurship, and have a LOT of free time.

At this stage, profits decrease because you’ve likely invested a lot in systematizing your operations, but sales and revenues are likely to increase since your team has a lot more bandwidth capacity to work on developing new distribution channels and find new markets for your products and services.

The risk with of all this free time is that the founder starts not trusting anyone to do their jobs and micro-managing all the systems and processes that the team has put together. This is likely to frustrate everybody and drive your team or open source community out of the company or project.

To avoid that, instead of micromanaging, you should be investing your time and resources in any of these three:

  • Attracting more talented people to your business or project and invest in the culture of the company and in their leadership skills to drive the business forward
  • Giving up the operations to a COO to run the show and working on the strategic vision of the project
  • Starting a new project

Most entrepreneurs are more comfortable at starting rather than running things. So take a look at what suits you, decide if you are better suited at “starting” or “running” a business, and stick with it.

For example, once Red Hat had reached this stage by developing their company on top of Linux, they used their Linux foundational playbook to develop different spin offs like Red Hat of containers, the Red Hat of OpenStack, the Red Hat of middleware, virtualization, storage and a whole lot more.

What should you focus on at the Scale Up Stage:

  • Develop new distribution channels and find new markets for your products and services
  • Invest your time and resources to attract qualified talent
  • Develop the leadership skills of your team and community of open source co-developers to build a great team and culture

Stage 5: Leader up Stage

So you have finally made it, your company is profitable, automated and has great people working to move it forward. At this point your company has reached the peak of the entrepreneurial mountain.

Everyone wants to partner with you, you’ve got a great deal of negotiating power, making it easier to get favorable terms and deals done, and publicity and press is easy to get. You’re at the virtuous cycle where “the rich gets richer”.

If you were a traditional company this would mean you’d be on your way to become Google, Facebook or Airbnb big. If you were an Open Source project this would mean you’d be on your way to become Linux, Sparkfun or WordPress big. And if you were a cooperative you’d be on the same league as Mondragon, John Lewis Partnership or Organic Valley.

When you manage to reach this stage it means that you have coped with tremendous challenges like market slides, new disruptive innovations and other kinds of sharks that wanted to take your business down.

And even if you’ve managed to get over these pitfalls, you are now risking a very new set of challenges, like leadership failure, or other human vices like greed, power and vanity. This has happened to a few traditional and open source companies, making them collapse in face of faster innovators or under the weight of their own vices:

  • Kodak became obsolete because of its leadership failure to see that the digital camera boom would take them over and bankrupt their company
  • Enron’s and Worldcom’s fraudulent accounting made them the largest bankruptcies in the world at the time
  • Apple failed from 1986 to 1996 without Steve Jobs because of leadership failure that allowed their products to become too complex and cluttered. Once Steve Jobs came back and simplified its products to only 4 computers everything started taking off again
  • Taxis are becoming obsolete because of more convenient on-demand apps like Uber.
  • Uber power and vanity is starting to create scandals of sexual harassment, technology theft or illegal practices to avoid local law. This is likely driving quality leaders from the company and eroding the perception of the company among its drivers, employees and users.
  • Makerbot has seen its latest innovations fail when they decided to close all of their open source designs. This made their whole open source community feel betrayed and abandoned. Which ultimately lead Maketbot to lose their market share in front of more hacker friendly products and forced them to fire 120 employees.

To counter the risk of slow decay, traditional companies launch new innovative products, buy complementary companies or buy companies that could become serious competition.

Steve Jobs made a responsible leadership move by launching the iPhone, effectively killing and replacing the market for the iPod that was their most profitable product at the time. The iPhone eventually became Apple’s new flagship product.

When Google bought Applied Semantics it allowed them to build the biggest and most profitable ad network in the world on top of the biggest search engine in the world. Then they also bought Android to create the most used mobile OS to compete against the iPhone.

Facebook bought Whatsapp to avoid getting another big messaging competitor, and they bought Oculus Rift to pave their way to the upcoming wave of Virtual Reality.

Red Hat also acquires other companies to bring in new offerings for their clients.

So the acquisition of promising startups or new product launches become the moves that keeps vulnerable but cash positive companies afloat.

In the Open Source and cooperative worlds there is a less competitive landscape. Instead of one company acquiring the other, two complementary companies can become part of the same cooperative or foundation and develop new win-win partnerships to reinforce all of its networks. This way they can build economies of scale and also strengthen their distribution power by enlarging their pool of clients and also by enriching its suite of products and services.

For example, Sparkfun offer other Open Source projects to manufacture and sell their designs in exchange for royalties on every product sold.

The smaller and more innovative open source companies get access to high quality manufacturing and to the large audience and distribution channels Sparkfun has build over the years.

Sparkfun gets to offer more valuable products that it couldn’t offer otherwise. But it also gets to avoid competing with all of these smaller companies by partnering with them, which is another great advantage.

What should you focus on at the Leader Up Stage:

  • Keep all of the business’ key areas optimized (product, sales, marketing, distribution channels, operation systems, technology, finances, team and leadership…)
  • Keep an eye on acquiring or partnering with complementary or competing companies to keep developing new distribution channels, new products and services and attract qualified talent and leadership skills
  • Innovate by developing new products
  • And invest in developing the leaders of your company to keep moving the business forward

In Short

Let’s summarize the 5 stages your business will go through:

  • At the Validation Stage you have to validate your product or service idea and find your first clients and open source contributors
  • At the Startup Stage you have to improve your product and solidify your marketing, sales and open source community
  • At the Optimization Stage, you have to create systems to deal with your administrative, logistical and financial operations
  • At the Scale Up Stage, you have to focus on bringing in talented people and building a great company culture
  • At the Leader Up Stage, you have to work on Innovating, building new partnerships or acquiring other companies

Use this tool to liberate yourself and figure out if you are walking on the right path or you are stuck somewhere. Don’t look for perfection, but use this framework to find out where to focus your energy while growing a business.

The path is the same whether you want to remain a small business or spread your innovations all over the world. This path is the same for every single business.

In fact, if you feel at any of these stages of your business and would like to get unstuck or moving faster, I’m giving away 7 free consultations until the 16th of June to help you get you out of your rut. So if you’re interested just fill out the form here and we’ll schedule a time to work over your business.

Todd Herman’s Five Stages of Growth

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Jaime Arredondo
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