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Early Stage

How Startups Can Benefit From A Virtuous Cycle

Amanda Price
5 min read

Most everyone is intimately familiar with the idea of a vicious circle. This is a repeating sequence of connected events in which each cycle negatively reinforces the previous one.

However, not too many have heard of the “virtuous cycle.” Here’s a definition: “a virtuous cycle is a self-propagating advantageous situation in which a successful solution leads to more of a desired result or another success which generates still more desired results or successes in a chain.”

In this article, we’ll explore:

  • How startups can use virtuous cycles
  • Gender equity and the virtuous cycle
  • What a “doom loop” is

Let’s dive in!

The dawning of the age of the virtuous cycle

In 2001, Jeff Bezos sketched one of the most influential business models ever devised on the back of a napkin. Bezos called the idea the “Virtuous Cycle.” The whole thing starts with an exceptional customer experience, which attracts customers in droves.

More customers attract more third-party sellers, and more third-party sellers drive greater product selection. More product choice lowers the cost of goods and innovation. 

All this creates an ascending spiral of benevolence which uplifts all that it touches.

Feed any part of the circle, Bezos believed, and it will immediately accelerate the rest of the loop. This helped him understand the core of his business model, which allowed the guy to build the e-commerce behemoth we see today.

Amazon has reaped all kinds of benefits from its savvy implementation of the virtuous cycle. However, sellers all over the planet are feeling the pressure from the precedent set by Mr. Bezos. 

Because the Amazon team are geniuses when it comes to the virtuous cycle philosophy, it’s incredibly challenging to compete with them on anything.

The doom loop

A doom loop is just another word for a vicious cycle, where an attempt at a solution merely makes the problem worse because of underlying systemic issues.

Let’s use an example from retail. Say store sales are plummeting with no end in sight. In response, management beefs up marketing efforts. Although this has a positive effect, when the promotion blitz ends, sales return to freefall. However, when they do, the nosedive is even more pronounced.

This causes management to step up their promotions once more until marketing costs skyrocket exponentially. This forces corporate to fire the entire management team

The doom loop results when a superficial solution is chosen without trying to understand the underlying issues. In our example, it could be that the store has lost sight of the differentiation that gives it a robust competitive edge.

Price-based promotions don’t address the real problem, so it’s like slapping a band-aid on a thousand-armed leviathan who’s bleeding from every single appendage. This kind of ignorance of the real issue is only going to make the problem worse.

How startups can use virtuous cycles

A virtuous cycle is a recurring cycle of events. The result of each one increases the beneficial effect of the next. For example, in the economy, higher wages increase consumption, which leads to higher prices and a fattening up of the corporate bottom line.

Virtuous circles are known by other names, including self-fulfilling prophecy or the snowball effect. Vicious circles are also known as the slippery slope, the death spiral, domino theory, or the thin end of the wedge.

Virtuous cycles are a vital component of systems thinking. Your company might have hundreds of them silently operating behind the scenes. These virtuous cycles could be at the industry, department, team, or individual level.

A virtuous circle can be tiny, operating over only a few days. It can also drive a whole company’s strategy for decades. Virtuous cycles can work their quiet magic on time scales of days, months, years, or even decades. 

Harnessing even a single virtuous cycle can have a massive impact on your startup's success.

In sales, a virtuous cycle happens when best practices are consistently applied to achieve results that go light years beyond the mediocre. This, in turn, creates a succession of positive effects that feed off each other to generate increasingly better performance.

If you want your startup to be successful, it's crucial to get a lot of things right. To do that, you need to figure out what's working for you. 

A significant reason for the failure of many startups is that despite raising insane amounts of venture capital, they just couldn't figure out their virtuous cycle and how to use it to build a thriving business.

Every startup will have a different set of metrics that work for them. However, the result is always the same, which is to create greater company value. If you want to build a successful business long term, it’s crucial to figure out what the virtuous cycle looks like for you.

If you don’t, you could be unintentionally choosing to send your company into a death spiral from which it might never recover.

Twitter’s example

Let’s use Twitter as an example. The more users Twitter has, the more attractive it is to app developers. If talented developers build killer apps for the platform, it will draw users to the site. This becomes a feedback loop that’ll boost the value of the company and drive growth.

You can see another virtuous cycle in the way Twitter benefits from venture capital. An influx of capital investment in Twitter drives growth, creating a more extensive user base. This, in turn, makes it more attractive to VC investment. 

Pulling investment dollars away from Twitter can have the opposite effect, transforming a thriving virtuous circle into a vicious one that can bring down the whole enterprise.

Oracle’s virtuous circle

Oracle runs a program that helps startups. This program works with companies worldwide and offers mentorship, pricing discounts, cloud credits, and access to Oracle’s marketing and customer resources. The objective is to boost startups by helping them sell their data as an additional revenue stream.

Oracle does all this because its efforts drive innovation. This not only benefits the startups, but it also benefits Oracle. Fernando Ribeiro, a senior manager with Oracle for Startups, says:

 "We like to refer to it as building a virtuous cycle of innovation where we can all win. Many of our startups are finding revenue generation opportunities as a benefit of being in the Oracle for Startups program."

Oracle doesn't have as much freedom to innovate as startups do. However, by helping young companies innovate, Oracle becomes the beneficiary of all the entrepreneurial energy unleashed by their generosity.

Green Park & Golf Ventures

Green Park & Golf Ventures invests in a lot of startups. They’ve averaged one deal a month for the past four years. No angel investor firm within a 1,000-mile radius can match the pace of its investments. The firm typically puts up a half-million dollars in seed money, including cash from other investors.

Most of its investments are in the healthcare sector because it knows this business the best. Two-thirds of the startups it invests in are from the Dallas area. This gives the local startup community an enormous boost.

If Carl Soderstrom and Dr. Clay Heighten play their cards right, they’ll eventually hit the jackpot. This means an early-stage investment that pays off handsomely and draws in millions of outside dollars.

This kind of exit would dramatically raise the profile of Dallas startups. Success stories like this encourage more entrepreneurial efforts and bring in more investors. This is the kind of virtuous circle a city needs to become known as a startup mecca. Heighten, a former emergency room doctor puts it this way:

“This isn’t philanthropic; we want to make money. But we also want to contribute and be creative. We want to build something. And if we have success, others will do it, too.”

Success begets success, with no end in sight. Such is the way of the virtuous circle.

Gender equity and the virtuous circle

The principle of the virtuous circle extends to women in business. Choosing females for leadership roles is the first step in creating a virtuous circle. When you have more women making decisions about marketing and product development, they’re more likely to recognize whether their gender is an underserved market.

This recognition results in more profits for the company, which means it can offer higher quality goods or services. Financial startups with more women at the helm have proven that not only do they have better financial performance but also tend to be more resilient when the bad times inevitably hit.

Build your virtuous circle by hiring the right people

Virtuous circles often start with choosing the right team. When you optimize your hiring process, so you have a solid pipeline of top-tier talent, you’ll have people who are passionate about your company’s product or service.

This passion is infectious and gets transmitted to your customers. In turn, your customers buy more from you, resulting in an ever-ascending virtuous spiral with no end in sight.

Unfortunately, many founders don’t have time to fine-tune their hiring process to build a pipeline that’ll give them this caliber of talent. 

If this describes you, let Hunt Club do it for you. We have the finely honed expertise and leading-edge technology to get you the hires you need when you need them.

Give us a call today!

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