Expert Interview: Matt Lerner on Growth

A quick update before we start

• LinkedIn: Counterintuitive insights on successful founder personality types. Interesting discussion in the comments!

• Helping out two friends: If you are looking for either (1) a purpose-driven brand strategist or (2) a senior interim CEO / hands-on advisor, please reply to this email.

• Forbes: I wrote an op-ed on different modes of personal change.

This week, I am trying out a new format: I am interviewing a book authors who write about entrepreneurship, personal growth or creativity. Dig it? Let me know!

For this first instalment, I welcome Matt Lerner of SYSTM. He just released his book “Growth Levers” this week.

Why interview Matt? Matt’s approach is exactly how I run my initial sessions with my clients: we create a flow chart that maps how their personal, relational and business challenges are connected and influence each other. It builds the blueprint for the coaching sprint we then begin. Every session, we would spend diving deep into one of those topics to unlock issues and problems, sometimes involving shareholders, co-founders or key executives at the company. We basically keep going for as long as we feel we are producing net positive value in our coaching partnership. 

I found it intriguing when I discovered that Matt uses the same method but, instead of personal growth, he applies it to company growth! I could not resist and asked about growth for coaching businesses as well as for startups.

Without further ado, let’s jump in and learn more!

__________________________

Julius: Matt, I faintly remember meeting you when you in London in 2015. Since then, I have been reading your newsletter and following your advisory firm SYSTM. Your concise, high value-per-word writing and systems thinking language really resonate with me. It’s a bit like Farnam Street for startup growth.

You write about mapping your “growth model”. Many others use the term “flywheel”. What’s the difference?

Matt: The flywheel as described by Jim Collins, is a metaphor for the process of building business gradually and steadily. He says that consistent disciplined efforts gain momentum over time, leading, eventually, to huge breakthroughs. He’s talking about cumulative effort and the compounding effect of small, continuous improvements.

A growth model, by contrast, is literally a mathematical model of how your business attracts and delights and monetises customers. It can actually be modeled in a spreadsheet. And rather than slowly building momentum, compounding marginal gains, a growth model is designed to help you spot areas where you can achieve step-function growth quickly.

Julius: My coaching practice run on a set of metrics:

• MRR in €

• profit, measured by an absolute € amount

• # of coaching slots booked out

You call this the “North Star Metric” in your book. Why is it a bad idea to pick these kind of metrics? What would be a better NSM for a coaching business?

Matt: I recommend avoiding revenue or profit as a North Star simply because there are so many ways to increase profit without delivering value to customers. (E.g. raise prices, bundle, lower cost of materials, smaller portions, etc.) In a big established company with brand loyalty, you can get away with that. But a startup can only succeed by delivering outsized value. (People might remain loyal to an expensive inferior product, but they’ll never knowingly switch to one, especially in Germany!)

As for your coaching practice, I think it’s less of a risk, because it’s just you - and you’re not going to sacrifice quality, because your name is on the door - it’s your reputation and your sense of pride.

For my business (I have 12 ppl with the title “coach”) our North Star is number of companies helped. That’s the number of companies who come through our program where the team gives positive feedback (likely to recommend, expected return on investment). My coaches look very closely at company feedback they get - both on the programme overall and on their coaching. It’s led to an obsessive culture of perfectionism - the team do exceptionally well and have an incredible sense of pride. I’m incredibly proud of them!

Julius: What do mean by “growth levers” in the context of a growth model?

Matt: Levers represent the work you do to move the North Star. It’s hierarchical: North Star on-top (e.g. weekly active users), that’s moved by “key drivers” (e.g. signups, activations, engaging user experience). Each driver is moved by some levers (e.g. signups can come from referrals, ads and SEO). We need that third layer because drivers are too abstract to action, you can’t just go “do” signups, that metric needs subdividing.

Julius: How do you recommend involving the team you work with?

Matt: Questions are my weapon of choice. So I start by explaining the North Star to everyone in the company. (They’ll have a lot of questions and clarifications, it takes time). Once they understand it I have line managers ask each person (or I ask them myself):

1. How does your work drive our North Star? (Give them time to think it through).

2. Which work should you do to have the greatest impact on our North Star.

Unless you tell them otherwise, your employees will define success based on generic “best practices” for their discipline, which means each team will be pulling in slightly different directions. (E.g. Marketing wants more leads, sales wants better leads. Engineering wants quality, product wants fast.) By asking everyone to think, instead, about the North Star, they will begin to refactor how they measure their own success.

Julius: Measuring customer value is inherently tricky in coaching. Could it be some proxy like “unsolicited recommendations from existing clients”?

Matt: We survey all participants mid-way through the programme and at the end. The questions include “likely to recommend,” plus questions about how aligned they feel as a team, how confident they are in their strategy, and estimated ROI for the programme. I think unsolicited recommendations is an excellent metric.

Julius: What is the most common NSM you’ve seen in start-ups over the last years?

Matt: Typically SaaS or apps will use “active users” (daily, weekly or monthly, depending on the natural usage cadence of the product). eCommerce would use repeat purchases, purchases or retained subscribers (after the first month) for subscription ecommerce like Hello Fresh. For B2B companies where revenue is concentrated among a few super-big customers, they might use a transactional metric as the North Star, like “total server usage” or “number of transactions processed.”

Julius: In every coaching mandate, there are a couple of leverage points that have outsized impact on my clients and their businesses. In your method, you talk about the “rate-limiting step” (RLS) as the single most important growth lever. How do these concepts relate? Is it stepping off the brakes vs stepping on the gas?

Matt: I think the brakes / gas analogy is excellent. I stole (borrowed?) the idea of a Rate Limiting Step from the Theory of Constraints in Operations Management. It posits that any system is limited in achieving more of its goals by a very small number of constraints or bottlenecks. If you apply resources to the bottleneck, the whole system runs faster. If you apply resources anywhere else, it will be extremely inefficient.

In a tech business like software, it’s a bit more complicated to find the constraints. That’s why I encourage teams to start with mapping their growth model and filling in data. At that point, often, the bottleneck becomes obvious.

However… often teams identify and begin working on the bottleneck in their business, only to discover that the true constraint is in their culture. For example, they may realise have a CTO who’s uncomfortable taking risks and avoids unconventional solutions. Or they may realise that the founder has everyone too frightened to try anything bold or disagree with him. So in that way, this probably connects quite deeply to your coaching.

I really enjoyed this conversation with Matt… after I finished the interview, I started drawing out my growth model in Miro.

If you are curious to read “Growth Levers” by Matt Lerner, you can order it here.