Flywheel Construction: A How to Guide.
What does it take to build a flywheel, or more literally: “build systems, that solve the problems, that grow an enterprise”?
The flywheel is a seductive concept. Scan the internet and you will find:
The Amazon flywheel, famously drawn on a napkin by Jeff Bezos. It has a focus on lowering the company’s cost base, to lower the price to customers, while leveraging excellent customer experiences to drive growth.
The Hubspot flywheel, which also revolves around the customer experience, but naturally from the CRM perspective and managing customers through a buying cycle.
Atlassian’s take on the flywheel, which still revolves around the customer experience and customer delight, but takes more of a holistic perspective, picking up pricing and sales strategy, with a nod to Jim Collins’ classic business book “Good to Great”.
Whenever I read about, or hear people talking about “flywheels”, I feel like something is missing.
The flywheel discussion tends to be framed in a way that ignores the perspective of the person trying to build one in real time !
Flywheels and the forces that drove their success are easy to see in retrospect - see “The Historian Error” - this is something I will come back to in future posts.
When building a flywheel in the moment, as a startup or growing business, borrowing or copying what has worked for others could well be folly. Think about it - how do you beat Amazon, by copying the Amazon flywheel playbook?
My take on building a flywheel:
I have been lucky enough to have worked in organisations big and small, from deep research and niche advocacy, through to consulting, SaaS, forestry and more. This includes starting a few businesses myself and investing in other people’s businesses alongside providing “mentoring” support.
I use italics for “mentoring” because cheering from the sidelines is not my thing. I like to roll sleeves up and do *actual things* that solve problems for those I am helping. Not to dismiss the value of cheering on, but a motivated founder rarely just needs a cheer squad.
Companies I have worked in or with, have needed help building financial models, testing go to market assumptions, brainstorming target market priorities, coming up with fundamentally new product and service offerings that help them meet market expectations, and so much more.
Put another way, focusing on creating a flywheel that delights customers, when you are targeting the wrong customer segment, or targeting them with the wrong features and pricing, could set you back months if not kill your business !
Listening to this wonderful podcast between Patrick O'shaughnessy and John Harris on the role of resilience and imagination in investing, got me thinking about two things:
The first only relates to flywheels tangentially, but is important to understand. When it comes down to it, any type of business can deliver long lasting growth. Stop listening to investors and startup bros that obsess over SaaS, marketplaces, or whatever their flavour of the day is.
It doesn’t matter if your business is capital light, capital heavy, software, hardware or service focused. If an investor tells you otherwise, and says you can’t build a profitable business doing what you love, just share this podcast with John Harrison resilience and imagination with them, and remember - if you get your flywheel right, you are a red hot chance!;
There may only be three tangible things (plus one more intangible) that a business needs to focus on when it comes to building a flywheel to underpin growth. Everything else tends to take care of itself if you get these 4 things right.
Ultimately these four things provide long term sustained advantage via flywheel effects. It helps to think about the physics of a flywheel - flywheels act as a store of energy or momentum, built up by working hard at small things. The flywheel becomes an energy buffer and source of momentum, helping the system ride through bumps and interference.
Ok, on to the building nit.
How to build a flywheel: The Three Tangible Things That Grow Viable Businesses
1. Systems for understanding customers:
Chances are when you started out, you had a hunch at what the customer problem was, and what you had to do to solve it. You developed your product or service, got solid feedback, and away you went. And chances are you’ve been tweaking things as you’ve grown, meeting changing customer demands and expectations.
But there is a difference between solving a problem you get paid for, and really delighting customers in a way that gets them talking, and ultimately keeps them loyal.
Josh Harris gives great context on this from about minute 11 and a specific great example from minute 44 of a business they invested in, that delivered outstanding long term returns, whose competitive moat was no deeper than providing outstanding service to customers.
Understanding what delights your customers doesn’t just come from hunches and incidental interactions. You need to find a way of engaging your customers and gathering their feedback and stories in systematic ways. Ultimately, you need to distill feedback for insight into what delights them now, or what could delight them tomorrow.
Be careful about using requests for reviews/feedback and fancy tools/services that offer this as “the answer” to understanding your customers - often the most valuable insight is revealed by your customers by accident. If they are trying to give you a nice review, that they think will play well on socials, it may not be the thing you need to hear.
How do you know when something you are doing truly delights your customers? They will tell you, they will beam when they tell you, and when you approach a new customer explaining that’s what you do - they will beam and probably signup too. Here are questions you can ask your customers directly in a call to get them going:
Why did you choose to work with us, over other options you were considering
What is it that we do for you, that really helps you sleep well at night / makes you want to fist pump / makes you want to share what you’ve achieved with colleagues, peers and friends?
Don’t accept the first answer they give you either, keep asking “why did that happen for you?”; “why do you see it that way”. t’s amazing how forthcoming people will be once you establish some rapport, and they feel they are getting some value from their relationship with you. Be prepared to ask them the same question a few different ways, and most importantly, just get them talking without thinking too hard…
Gathering this data can be as simple as using calendar reminders/schedules to call customers in a disciplined way, and a spreadsheet for recording interview notes. Remember - insight will come from the quality of the conversation, not for how sophisticated your data gathering systems are. Doctors know that the thing their patients tell them as they walk out the door, is the thing the patient is actually worried about and wanted to discuss… that is the kind of insight gold you can get on a call if you are prepared to stay patient.
Put another way - if a flywheel depends on delighting customers (and evidence suggest it does), then you need to build the systems that help you uncover what delights your customers.
The system that builds insight is the cause - the delight the effect. Focus on cause, and effect takes care of itself.
2. Systems for understanding your Product/Service priorities
For startups, this is arguably the most important system to have in your business. It is also very important in big organisations - but the consequences of getting it wrong just aren’t as profound in the short term.
First let’s understand the problem.
It is so common to see investment - usually large amounts of unpaid founder time and sleepless nights - in developing a product or service in a given direction, without a clear sense of why it is the priority this week / month / quarter / year.
Without critical reflection and perspective, work loads often form as habits and can be hard to shake off - the problem you worked on last week/month/year, just shapes the one you work on today by linear extension. At worst, you double down on a strategy that is not working, because to change strategy would be to admit you got it wrong or wasted your time - sunk cost fallacies are real and dangerous.
Think of this problem as being a bit like a maze game.
Taking one route into a maze might lead to a dead end, or even worse, lead you to a circular trap without an obvious exit- in a maze, it is easy to go over the same ground without realising, because you lose your directional bearings, and maze features become indiscernible across paths.
Take the wrong path, and you walk in circles for hours before your folly becomes clear. Another route may take you deep into the maze and open up new pathways you couldn’t see before.
Prioritising “the right” next problem to work on in a business - the next feature, the next service detail, the next partnership to pursue, is what takes you deep into the maze and out the other side, fastest.
I like to think of a solution to this problem with an easy decision gateway/framework you can piece together yourself:
Develop a list of all the main features, product evolutions, service evolutions, partnerships etc that you can come up with, that you think will grow your business. The idea isn’t to create an exhaustive list, just focus on the big ones. It should probably be less than 10 items long
Next, figure out what each of those things do for your business, by asking, do they:
Help you win customers for the first time in the market you are targeting (i.e. are you still at proof of concept stage)
Help make the existing customer experience better them / more efficient for you to deliver
Help you win customers in existing markets you serve (become more competitive)
Help you win customers from new markets/segments (grow addressable market)
Help you serve those customers likely to come from new markets/segments (become more competitive in new markets you’re exploring)
Now think about your capital runway, in context of your 1-5year plan
Do you need customers to get going? Or have you got capital/runway to work with that doesn’t care about customer traction?
Can you meet your growth targets by serving existing customers/markets only? Or do you need to expand into new markets and segments
Do you need a capital injection, that depends on growing your addressable market?
If you dot point answers to the above in a simple table, it quickly becomes clear what your priority needs to be depending on your capital/funding runway:
If you need proof of concept / customer sign ups before anything else can happen, then that is your focus. Don’t worry about improving the experience too much for customer’s you don’t yet have. Let your product/service break with early customers, before worrying about fixing it. Does that sound crazy? Listen to Gabriel Leydon in this super entertaining and informative podcast, and stop fixing broken things if you are signing up customers!
If you’re running out of money in 6-12 months, chances are you have a different focus. Ask yourself:
is my product good enough to sign up customers as it is? if yes, you need to double down on the customer experience and drive word of mouth with like-for-like customers, setting aside new fancy features or new customer segments;
is your product luke warm with customers you are targeting? if yes, then it is time to switch it up before you run out of cash - you need to look to some adjacent market opportunities, and potentially rush through new features that those new segments tell you they want. If this gamble works, it will give you organic traction/cashflow and/or proof points that investors can back. If it doesn’t, you are now worse off because you can’t build a business off luke warms.
And of course if you’ve got customer traction in a big addressable market, and no obvious need for capital, then don’t worry too much about solving problems for customers you don’t yet know, chasing new customer segments, or doing that trendy thing the investor said (they probably just came off a call / podcast / webinar and are brain dumping on you). Chances are you can probably hone in on refining the experience for customers you’ve already got, and grow organically with word of mouth, allocating capital in increments to test adjacent markets for accelerate growth opportunities.
Of course the opposite is true - customer traction in a small or shrinking addressable market (hello internal combustion engine old friend), means it is time to slow down, reflect, and take risk on new directions
There is real discipline + art, to focusing the majority of your time on solving the next most important problem.
It is so easy to jump to tasks based on feedback you get from friends, advisors, investors or customers. We are social creatures and rely on social cues to guide our behaviour. Sure, gather their feedback. But you need your own filtering and distillation systems for making sense of it, and turning it into priorities for the week.
I am yet to come across a perfect way of doing this, and you may just need to find your own method. Finding your own method is useful in that it becomes a learning process, and can help make the method more robust for you (it’s easier to give up on someone’s else’s method - if it’s not working for you, you decide you don’t like them, not the method. But if is your method, a good founder will feel obliged to improve it).
I have been through this process for Bodyguide, helping the founder focus on a B2C go to market, not because that was the best way to grow long term, but because B2C success was needed before B2B success could be possible, and B2B is what investors were willing to back. And I have done it with Hero Software (focusing on internal systems that make serving existing customers more efficient, leaving more time to win new ones, before worrying about new features - this is because the product was winning customers as it was, and only had a small % of the market). I will be doing it with wood4good, and businesses/projects I’ve started myself….
Could I help you?
Final thought: If you can’t quickly answer the question “why are you working on XYZ this week/month” to an impartial 3rd party, you probably aren’t thinking hard enough about why you have made it a priority.
3. Systems for Sales and on-boarding
I won’t go over old ground on this one. Check out the The Hubspot flywheel, which revolves around managing the customer experience through a buying cycle. Just be aware you don’t need a hubspot CRM to get going :)
Intangibles: Culture building
Not everyone wants to build a company, or even have equity in one. I’d guess most people just want work to be interesting, and for their work to give them financial security and a sense of purpose.
It is incredible what people will do, when you look after them. Here is the story of Dan Price, CEO of Gravity Payments, who increased wages well beyond minimum rates, and then together they shot the lights out as a business.
Culture is an under-appreciated flywheel. Good people attract good people, and want to work with good people.
In the long run, its is possible that culture is the only flywheel that matters. Why? Because good people create competitive advantage - an asset that has to be renewed day after day, year after year. This is an under-appreciated factor in Tesla’s (and SpaceX’s) success, with Tesla and SpaceX being the top two most attractive companies for US engineering graduates.
Intellectual property, technology, systems, cost base, brand…. none of these forces alone or combined can ensure company survival in the face of competition, because competition is dynamic over time.
Did you find this article interesting or helpful? Need help building a flywheel?
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