Using OKRs to scale: a cautionary tale

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Entrepreneurship involves a never-ending search for new ways to do the things we do. In 2013, app-based, direct-to-consumer businesses like Airbnb, Uber, and Warby Parker used technology to disrupt established industries. They weren’t profitable in their early years, but at that time a solid plan for accelerated growth was often enough to secure investors.

Skyrocketing from startup to established business is rare – up to 90 percent of new ventures fail in their first year. Spending too far ahead of generating revenue is one common culprit. But even with a great idea and great operations, many companies still misread product-market fit.

One startup learned that lesson the hard way. The company, whom we’ll call “Egan,” sought to transform the custom framing industry the way ride-share apps changed cab rides. By bringing the framing store to a smartphone, they saw an opportunity to move into the $1.9 billion market for custom framing.

The concept was simple. After uploading photos and selecting the matting, frame, and finish, a courier would pick up the order from the customer’s home and bring it to Egan’s warehouse to be shipped out to their network of framers. Egan guaranteed a three-day return, much faster than the big box retail chains – all for a small surcharge over costs.

Initial research confirmed many customers thought traditional framing services were too expensive and time consuming. By making the process more convenient and affordable, they also thought customers would be more likely to order more frames for their keepsakes and photos. All signs looked like a go. Investors agreed.

Driving business growth with OKRs

In their first years, Egan raised over $50 million in funding. Customers loved the experience and spread the word. The board got excited, then investors got excited – everyone pushed harder for growth. The pressure was expected, and Egan’s leadership team remained confident about rising to the challenges. After all, they’d been successfully using the OKR (Objectives and Key Results) goal-setting system for years. The system had helped the company stay focused on executing easy customer experiences on the app, flawless pickup logistics anywhere in town, and an aggressive marketing and referral strategy to kickstart growth.

“They were wonderful users of OKRs,” says Ryan Panchadsaram, a partner at Egan’s lead investor, Kleiner Perkins.“They had direction. They had cascaded and laddered OKRs. They were moving every number and hitting their goals.”

With each success, Egan set their sights higher. Egan’s founder and chief engineer believed the app was foundational to the service and focused on putting better technology into the hands of the consumer. Reliable technology meant couriers could accept pick-ups faster and framers would have shorter turnaround time on the keepsakes.

Soon, Egan expanded to new cities. Scaling to five new markets in a year was a giant risk, but acquiring new customers was critical. They also built a marketing strategy to reach older audiences who, as parents of young adults, often had more mementos to preserve. Egan’s topline Objective was to find and attract more individual users, growing to 13 million customers in just 10 months, and they were succeeding cycle after cycle. But rapid expansion placed enormous pressure on Egan’s operations. Between inventory, packaging materials, renting space, sourcing, and paying couriers, Egan was losing money on every order. Consistently meeting their growth OKRs had made the financial risks even greater. Simply put, the business model wasn’t sustainable.

“There’s nothing wrong with a growth mindset for when you use OKRs,” says Panchadsaram, “But what are those OKRs asking the team to do?”
Despite following many of the best practices for OKRs, Egan had fallen for a common – but fatal – mistake: committing to OKRs on an unproven market. Egan’s OKRs were clear and aligned, but focused on the wrong strategy. Individuals placed small orders, and used the service only a few times each year. The costs to maintain couriers and warehouses in multiple cities were high. To sustain growth, Egan needed customers to place larger orders repeatedly. By the time Egan pivoted to more profitable partnerships with small business owners, art galleries, and schools, they’d run out of capital.

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Use ‘Learning OKRs’ to validate strategy

Critics of OKRs often advise against adopting the framework until a company is ready to scale, citing a danger that OKRs will push teams to optimize for performance before fully vetting their strategy. Panchadsaram sees the risk differently. “Far too often, people blame OKRs when the company fails,” he says, “OKRs don’t magically prescribe the right thing to do. OKRs capture the direction you’re feeding your team.”

As a venture capitalist, Panchadsaram notes that a ‘growth at all costs’ mentality often skips this experimental phase. “When you’re doing new things like building a new company, starting a new team, trying out a new entry of a market,” he says, “setting an OKR that’s purely positioned around output might send you down a path that you’re not ready to take.”

Setting direction is rarely obvious, especially with any new venture. In early stages, there’s often more than one viable direction, and teams can struggle without enough data to commit to any single path. In these cases, Panchadsaram shows startups, research groups, and big companies “a different way to craft an OKR – through a learning lens.” He calls it a ‘Learning OKR,’ and it helps teams use OKRs effectively during the proof of concept phase.

Anyone who has read Measure What Matters may already be familiar with two categories of OKRs: committed and aspirational. Both represent ambitious goals that teams must achieve. But Learning OKRs allow teams to prove – or disprove – critical assumptions before fully committing attention and efforts in one direction. Learning OKRs shift the discussion from “What are we trying to accomplish in the next 90 days?” to “What are we trying to learn in the next 90 days?

In Egan’s case, a Learning OKR might have looked like this:

o
Prove that customers need our framing service.
kr1
Customers order more than $60 per quarter.
kr2
Net Promoter Score over 85 in each region.
kr3
Lower the cost of courier services below 50% per order.
kr4
Establish performance metrics of small businesses compared to individual customers.

When a Learning OKR falls short, it’s a clear signal to revise the strategy before proceeding. In the example above, KR4 would have shown stronger profitability in small businesses, art galleries and schools. Framing the OKR as an experiment in product-market fit would have revealed that individuals ordered only once or twice a year, and typically only one item per order, falling short on KR1 and KR3. In short, individual customers weren’t the right first market for Egan’s services. In order to sustain the high costs of the couriers, warehousing and shipping, they would first need to build the business around a more sustainable customer base, then expand to individual customers. KR4 might have shown that small businesses or local schools, who would order more frequently and in larger quantities, were a better way to scale.
Egan had been conceived as a direct-to-consumer business, so its focus on individual customers was understandable. However, committing to growth OKRs without learning more about the market may have contributed to Egan’s shutting down – despite customers who were wildly enthusiastic about the service. Balancing growth with learning is a tricky dilemma that every organization faces. Panchadsaram readily admits that demonstrating growth independent of profits is often required to unlock funding from investors or donors. “There are going to be times with rapid growth that you focus on just numbers,” he says, “but in setting strategy, there are a lot of equally important measures before growth. Don’t forget to measure the other KRs needed for a stable and sustainable foundation.”

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