Startup CEOs: Forget “Full Stack” and Focus on Creating Real, Differentiated Value

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Recently, I read a great post by Andy Weissman that prognosticated on the future of startups’ organizational structure. Rather than building “full stack” businesses (organizations with a broad range of skills and the ability to manage every function in-house), Weissman argued we’re trending toward a “no stack” future where startups focus only on “the last mile of value” — the one or two things they’re truly great at — and outsource the rest.

I tend to agree with that prediction, but I don’t necessarily believe it’s a new trend.

Instead, it’s just a new way of suggesting companies should invest the bulk of their time and energy on creating real, differentiated value. Everything else — commoditized services or outsourceable functions that don’t add unique value — can be managed through external vendors, platforms and APIs.

Where Are Your Biggest Opportunities to Create Differentiated Value?

Importantly, I don’t think this movement toward “no stack” means that specific functions or organizational components will become irrelevant. In some industries, for instance, UX/UI will continue to be a critically important area in which startups can deliver differentiated value. In others, UX/UI will be less important — an area of the business that can be easily outsourced to save money, improve overall customer experience and improve organizational focus.

For instance, here are four examples of successful companies that have created unique value in areas where others might see a more commoditized service:

  • Rackspace: Because Rackspace’s differentiated value is rooted in providing computing infrastructure and hosting services to customers, it’s incredibly valuable to the company — and its customers — to build and maintain its own servers. Conversely, a social marketing business like Spredfast (OpenView is an investor) has no incentive to build that infrastructure in-house. Doing so creates no real differentiated value, which makes outsourcing that aspect of the business to services like Rackspace a no-brainer. Similarly, Rackspace would never invest in building its own custom social marketing platform because doing so would add no differentiated value to its market.
  • Microsoft: Microsoft recognized that its primary value to customers was the software it built, not the hardware it ran on. As such, it focused almost all of its initial energy on building proprietary software solutions, and it left the hardware delivery piece of the equation to other vendors (Dell, HP, etc.).
  • Apple: Unlike Microsoft, Apple recognized an opportunity to differentiate in how it controlled the entire product stack. It owns hardware and software design, manages and oversees the application ecosystem for its products, and controls end-to-end UX/UI. It was also one of the first in its industry to open company-owned retail stores to improve its control of the end-to-end customer experience. On the flip side, Apple outsources commoditized components (e.g., microphones, glass, headphone jacks, etc.) that don’t add unique value to its products and customer experience.

The key point is that tech startups — like each of the companies above — must identify their opportunity (or opportunities) for differentiation and invest the majority of their time and resources in those areas. Everything else — the commoditized areas that create little unique value to a customer or market — can (and probably should) be left to third-party vendors.

How Value Changes as You Scale

With all of that said, the differentiated value you create as a startup will almost certainly evolve as you scale.

As a business grows, it often makes more sense to hire certain functions in-house and build expertise in areas where the business can create new, unique value. Rather than outsource UX/UI, you might take it in-house to add a new layer of differentiation within your product. Rather than tackling customer service ad-hoc, you might hire an internal customer success team to add a new, differentiated layer of value to your users.

Throughout that process, however, I think it’s important for startup CEOs to revisit the question above: Where are your biggest opportunities to create differentiated value? If you use that question to guide every investment of your time and resources, you’ll find yourself focusing only on the things that set you apart from your competitors.

In that sense, I’d argue that it’s never made sense (and will never make sense) to build a full-stack company. After all, your goal shouldn’t be to be pretty good at a lot of things. It should be to create unique greatness at a few really important things. Doing so creates value that cannot easily be replicated and separates truly great businesses from the rest of the pack.

Photo by: Vassilis