Four-part test for how start-ups evolve to be matured | Knowledge@Wharton

Sky-high valuations for start-ups have become common. But are these companies really worth it?

Entrepreneur Derek Lidow offers a four-step test to find out.

No stage can be skipped and each has its own leadership and strategy imperatives.

These four stages must each be navigated in turn as a company evolves from what the founders think to what they know. Stage One is customer validation. Stage Two is operational validation.Stage Three is financial validation, when you discover if your business can survive in the hurly-burly of a competitive market place. Stage Four is self-sustainability. At this stage, the strategy focuses on innovation as you introduce new products to attract new customers.

Companies rarely get large valuations at stages one or two — for good reason. Repeating stage one, the team behind PayPal then developed the technology to turn PDAs into digital wallets. Few customers, however, were interested, so stage two could not be completed.

Stage three is often where a company makes headlines for its product or service — and for its valuation. Look at the recent high-profile downfall of artisan cupcake company Crumbs.

All markets change, at times abruptly, and most customers eventually depart. That is why every enterprise with staying power learns how to develop entirely new products for new customers. For now, these firms are still completing stage three. Without processes in place to continuously reinvent itself, a company — even a hot start-up — is on a slow trajectory to irrelevance and failure.Only after completing the fourth stage of maturity is an enterprise truly self-sustaining.

Stage three is where most companies are sold and where many go public. At the end of stage four is where they show whether or not they fulfill their promise. A stage three company is a top draft pick, full of potential; a successful company at the end of stage four is a wily veteran.

Stage four is both frightening and perilous. Many founders and CEOs never even attempt stage four — it is simply that challenging.

Google has shown itself skillful at creating new products while simultaneously honing existing ones.

They will not be afraid of stage four.

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