Having spent the last 18 years building Internet businesses and studying entrepreneurship with some of the leading thinkers in the field, I’ve developed a few battle-tested opinions about what works – and what doesn’t – when launching a new business. To translate this into an explicit framework for success, I’ve developed a 7 step system for launching a successful business.
1: Where to Play
The first step in building your successful startup is to determine where you want to play.
Following the principles of effectuation, start by evaluating: a) who you are, b) what you know, and c) who you know. Then, define a playing field that is congruent with your personality and interests, and leverages your knowledge and relationships. Make sure your playing field can support the building of a very big business. What’s the point in building a small business if it takes the same effort to build something huge?
Finally, segment the playing field that you’ve created so that you have a small enough initial addressable market such that you can compete and win on that smaller playing field within your first 12 months. Some examples of how to segment your playing field might include by geography, by product, by value proposition, or by customer segment. Only once you have claimed victory on this smaller playing field is it time to move the boundaries outwards and target a broader segment.
This all may sound fairly straightforward, but getting the details right is often the difference between failure and success. For specific help in determining Where to Play, ping me to see if I might be a good match as your Startup Advisor.
2: How to Compete
Once you’ve established where you are going to play, it’s time to figure out how you are going to play the game – at least initially.
How do you plan on differentiating yourself in the marketplace? Are you going for a better/faster/cheaper alternative to an existing product or service? Or are you going ‘brave new world’ and creating an entirely new market?
In the early stages of a start-up, you don’t have the luxury of strong brand equity, stable cash flows, or existing business relationships. You’re going to need to create a sustainable competitive advantage out of thin air. How are you going to do that?
Having figured out where you’re going to play in Step 1, you now have a good sense of the type of customers you’re targeting. To determine how you’re going to play, you need to get outside of the building to talk to as many potential customers as you can before you lift a finger towards building your new product or service.
Your goal is to determine the delta between how these customers are being serviced today by your competitors, and what product/service attributes they really want that would entice them to become your customers.
As counseled in Steve Blank’s important book on Customer Development, Four Steps to the Epiphany, you want to put your customer front and center in the product development process, and let them tell you what they really want.
So, taking a customer-centric approach and being as objective as possible: a) define your competitive landscape; b) catalog your competitors’ strengths and weaknesses, and then, most importantly; c) determine what your target customers want and value the most, and what they are not getting today from the existing options.
Then, it’s on to mapping which value propositions and product attributes you’re going to focus on, and just as importantly, which attributes you’re not going to focus on. As delineated in Blue Ocean Strategy, choosing the areas you won’t be competing on will free up valuable resources for you to build competitive advantage in the areas you will – and create an uncontested blue ocean to break away from the competition.
Once again, while the theories above are fairly straightforward, it’s all about successful execution. For specific help in determining How to Compete, ping me to set up an initial consultation as your Startup Advisor.
3: How to Monetize
Over the last 50 years, a fundamental difference in philosophy has emerged between the venture worlds on each American coast.
On the west coast (mainly Silicon Valley and San Francisco, and to a lesser extent Seattle and Los Angeles), where capital is abundant and investors are swinging for the fences, the mantra is “don’t worry about revenues in the early stages of your business: focus on building a large, loyal user base and the revenue will follow.”
Of course, to put this philosophy into practice requires large amounts of investment capital to fund the early stages of a business – investment capital that is hard to come by, and often significantly dilutes the founding entrepreneurial team in both ownership and decision-making power.
It also decreases the likelihood of a successful outcome for an entrepreneurial founder. When venture investors are swinging for the fences, they are more likely to strike out – and for the founder, that means: no cookie.
But for west coast investors with a portfolio of investments, this philosophy works: one need simply study the data of investment returns for east coast vs. west coast venture capitalists to see that the majority of returns have been captured by these west coast powerhouses (Kleiner, Sequioia, Accel, Benchmark, etc.).
Even though a greater percentage of west-coast funded startups will strike out, a few of them will be grand slams (Microsoft, Google, Apple, Facebook, etc.), and will pay for all the dead ends and then some.
This is all well and good for the west coast venture investor, but you’re the entrepreneur. If you’re like me, you want to maximize the probability of a successful outcome, and will substitute a .1% probability of generating hundreds of millions or even billions in personal wealth, with closer to a 25-50% probability of generating mere millions in personal wealth. Make sense to you? Then you probably want to build an ‘East Coast’ startup.
Building an East Coast startup means we want a business model in place from day one that generates revenue, and fast.
Truth be told, if someone is not paying you for your product or service, then they are not a customer. And if they are not a customer, you don’t have a truly reciprocal relationship with them: they’re taking but they’re not giving. How can you truly know the depth of their loyalty?
So, monetize, and monetize fast. Putting a monetization model in place means that you are creating customers, not simply users – and you can start satisfying your customers and know their true loyalty to your brand, and your product or service.
While there are many different ways to monetize a business, there are really only three monetization models for an Internet startup: a) Advertising, b) E-Commerce, and c) Subscriptions.
You want your monetization model to be congruent with the value that you’re providing your customers, and as much as possible, you want to create an alignment of incentives – what’s good for your customers is good for you.
4: Define the Mission
Defining a very clear, quantifiable mission (plan) in terms of revenue, customers and functions (sales, marketing, product, operations, etc.) is critical to moving forward once you have come up with the answers to your first three questions (where to play, how to compete, how to monetize).
Just as no battle plan survives first contact with the enemy, no business plan is likely to survive first contact with its customers. However, I am often amazed at how few entrepreneurs actually understand the basic economics that drive their startup. Doing the work of putting a financial plan together helps inform important decisions like product pricing, staffing levels, necessary infrastructure, etc.
In an East Coast startup, it is necessary to substituting over-reliance on external capital with disciplined financial and business planning, such that we can get to that all-important break-even point with minimal capital investment. For specific help in determining how to put together a world-class Business Plan, ping me to set up an initial consultation with me as your Startup Advisor.
5: Field the Team
Now that you know what game you’re setting out to play, it’s time to staff the team. There are schools of thought, most notably led by Jim Collins (Good to Great, Built to Last), that believe it’s more important to figure out who’s on the bus before you determine where the bus is going. That’s certainly a valid approach, but it’s also more ‘West Coast’ thinking.
When building an East Coast startup, we don’t have a lot of extra breathing room to cycle through multiple business models and opportunities after committing to a founding team. Remember, we’re playing with limited financial resources. You’re the founder, so it’s important you have a good idea of what you’re building before recruiting your key teammates. There will be plenty of strategic decisions you’ll need to make along the way together, but you should already know whether it’s important to recruit a rockstar user experience designer or a business development ninja from your initial planning in steps 1-4. Are you building a web site or a mobile app? A clothing brand or a fast food franchise? The key team members you need to recruit will differ greatly depending on where you are taking the bus.
Another important factor in recruiting your team is cultural fit. I find that it’s very helpful to explicitly lay out your key company values that you strongly believe in and that will define the company culture you are creating from scratch. By delineating what these values are (here’s an example from our latest business, Borrowed & Blue – scroll to the bottom), you now have a framework for evaluating potential new team members. Does this person embody the values we hold most dear to the new company we’re creating?
One of the most important indicators of success for a startup is the quality of the ‘starting five’. Just like a basketball team, the first 5 employees that you bring on board will have the greatest impact on your company’s success. In fact, they may have 100% impact on your success or failure. So….follow the mantra: hire slowly; fire quickly. Ease new people on board slowly so you can squeeze out maximum risk before bringing them on board full-time. When people aren’t working out, it’s generally obvious. Don’t dawdle – go your separate ways quickly and compassionately. There’s absolutely zero benefit in burning bridges. Be honest, forthright, and people will respect you for it.
6: Build the MVP
The key to building a successful, sustainable business is knowing that every day you are expanding your competitive advantage. It’s time to build the machine that makes the doughnuts. So many startups fail because they think everything needs to be ‘perfect’ before launching a product or service to the world. Unless you’re Apple, and have more money in the bank than the US Treasury, you don’t have the luxury of that option, nor would it increase your probability of success. Iteration is going to be your friend, and you’re going to iterate based on what the market tells you are the most pressing things to work on – not what you think are the most pressing things to work on.
So build your MVP – the Minimum Viable Product – by figuring out what is the absolute minimum amount of time and effort you need to launch the most basic version of your product or service (not a shoddy product, just a simple one), and ship it. Get it out there. Start having actual conversations with real customers.
Once you have a product, and your first customer, congratulations – you are in business! Replace the theoretical late-night conversations about what might be true with actual customer conversations about a real product that generates cold hard cash revenue.
7: Listen, Learn, Adapt, Iterate
The last step in the LaunchPad is ‘Listen, Learn, Adapt, Iterate’. Here is where you start to build upon your simple but strong foundational MVP based on real feedback from real customers. The key caveat here is not to try and please all the people all the time. It is not your goal to do *everything* that *everyone* tells you to do from here on out. Absolutely not.
One rule of thumb I use here is, if 10 customers ask for the same thing, it’s probably a good thing to invest in. We launched Borrowed & Blue and kept hearing that vendors wanted to be able to host video as part of their listings. A year later, we rolled out a new premium advertising package that included video hosting, realizing that we could serve a common need and monetize it as well. We felt confident investing in this new functionality because we heard lots and lots of feedback from real customers that this was a feature they were willing to pay for.
The most important function of a business co-founder or CEO is deciding how to allocate your very precious resources – your team’s time. What should we be spending our time doing? That includes, what product functionality should we be investing in? What marketing campaigns deserve our attention? What communication channels are most important to us? What stakeholders should we be reaching out to and cultivating relationships with? These are the key functions of a business leader, and they are constantly changing and evolving. A startup founder needs to take responsibility not just for his own time, but for how his entire team’s time should be allocated. Having KPIs, or ‘key performance indicators’, can be a valuable yardstick for whether or not you’re moving the needle in the right direction. Good old intuition, from the Steve Jobs school of leadership, works well too, if you happen to be both spiritually aware and absolutely brilliant.
At this point of your startup, you are in flight and heading into orbit. Just one more word of advice here: make sure you enjoy the ride! You have already made it farther than 99% of the ‘wantrapreneurs’ that simply dream of one day starting their own business. Now it’s time to execute, execute, execute. With the right attitude towards continuous improvement, you’re on your way to building a great business and being a successful entrepreneur.