There are so many different perspectives about the right way to create a successful startup, how do we make sense of all this conflicting advice? Do you just have to figure out what works for you and stick to your guns? Assuming people are modeling the world correcting and not attributing their successes and failures to the wrong things, (which humans are extremely prone to!) can we piece different advice together to create a coherent picture of what actually works?
I believe by filtering advice through these 6 variables we can begin to stitch together the insights entrepreneurs are documenting everyday into unified schools of thought. The leading framework right now is the Lean Startup but I believe other internally consist schools of thought will soon emerge.
Most startup advice makes sense only if you take into account a number of variables to clarify the situation you’re talking about. Otherwise, people are usually both right, but talking past each other. I believe these 6 can bring clarity to to the startup advice & theory landscape.
(See my post here about how most advice that seems to conflict usually doesn’t.)
1) Life cycle of the startup Where is the startup on the continuum of Problem/Solution fit, Product/Market, Optimization, Scaling, and Transitioning to a Large Company.
You must clarify what stage of the startup you’re talking about. “Get as many users as you can” is great advice if you’ve found product/market fit, but it’s terrible advice if you haven’t.
2) Industry What industry are you in? (Web 2.0, Enterprise, Life sciences, Bio Tech, Social Entrepreneurship) Startups can come from many industries, by clarifying upfront what industry you are operating in you can understand what kinds of risks and constraints you’ll be facing, including Technology Risk, Market Risk, Capital Requirements, Intellectual Property and Government Regulations.
Technology risk is best understood as, “Can you make it”. Market risk is, “Will anybody buy it?”
3) Target Customer At a high level that means is it Business to Business (B2B) or Business to Consumer (B2C). But this question can be answered with increasing specificity, by stating more granular customer segments such as teens, CFO’s at fortune 1000’s or any Internet user with friends.
Don’t charge for your product initially so you can learn as much as possible about your users is good advice for a B2C property but if you give your product away to businesses they won’t take you seriously and kindly show you the door.
Sean Ellis preaches creating a product that creates extremely gratified users. That’s what you should strive for if you’re creating a consumer product, but you’re going to make more money selling lemonade and cotton candy to a business than selling them on how your product makes users feel good. Business don’t care about gratification, they care about ROI.
4) Business model How does your company create value and for whom? Do you charge for your product? (SaaS, Installed App) Do you give aspects of your product away for free? (Freemium) Do you monetize your users indirectly? (ad based). David Cohen has a great list here that I think covers most possible business models for Internet startups.
Driving a lot of traffic to your site and getting users to spend a lot of time with your product may make sense if you can monetize your users through ads, but if you have a freemium business model and your users aren’t buying your premium product you’ll just have a very expensive server bill at the end of the month and little revenue.
5) Network Effects Does your service get better the more people use it? Think Marketplaces, and Social Networks (eBay, Twitter, Facebook).
6) Market Type Are you in an existing market, a new market or resegmenting an existing market?
Hiring an amazing Marketing and PR team is a quick way to flush your money down the toilet if you’re in a new market, because getting your message out will not increase your revenue as the market hasn’t fully formed yet.
7) Expected Market Size Do you have the potential to be large high growth company? Or will your company max out as a small business?
If you’re market size is small, you’re wasting your time trying to get funding from VC’s.
Depending on the configuarion of these variables for your startup you’ll change the order for how you grow your business and validate your assumptions.
Steve Blank has an amazingly detailed workflow in Four Steps to the Epiphany that describes the whole life cycle of the startup (1) but you it only applies with a high degree of accuracy to enterprise B2B startups (2,3) that monetize customers directly (4), with no network effects (5) and are in a large market (7). (He clearly outlines the different strategies you should pursue depending on if you’re in an existing market, new market or a resegmented market (6).)
Ash Maurya has created a great workflow for the first two stages of the startup (1) Customer Discovery: reaching problem/solution fit and Customer Validation: reaching product/market fit that works for web 2.0 consumer startups (2,3) using a SaaS or premium business model (4), with no network effects (5), an existing or resegmented market (6), and can be adapted to any market size (7).
Note: I don’t think the way the positioning statement are developed work well for educating customers about a new market.
Andrew Chen describes why you may want to consider building a minimum desirable product rather than a minimum viable product. However this advice only applies to the Problem/Solution & Product/Market Fit stages (1) of a consumer web (2,3) startup, where users are likely monetized indirectly (4), there are network effects (5), is in a new or resegmented market (6) [otherwise what is desirable is already proven], and is shooting for a very large market (7).
I think Brant Cooper summarized it best with his tweet: “Fat vs Lean” C’mon now, people, money isn’t fat, it’s muscle. no money isn’t (necessarily) lean, it’s skinny.”
How much capital you raise depends most on your market size (7) and VC’s trust in you. How far along the startup is (1) often doesn’t even matter if your a successful veteran entrepreneur, VC’s will just give you a few million upfront and save you the headache of raising capital multiple times. The only drawback is that you can’t aim for an early exit.
How you spend money however is still heavily dependent on the stage of the startup (1). You want to keep burn as low as possible until you reach product market fit. And how you spend money on marketing (User Acquisition, Branding and PR) is highly dependent on Market Type (6).
This framework can also help you answer questions such as, how should you react to your competitors?
The first thing to do is to look at where you are in the lifecycle (1). If you are pre-scale, you should just ignore your competitors. Focus on playing your game.
The other most important variable is again Market Type, as it will guide all your marketing strategies. You’re also going to want a very deep understanding of your customer (3) and how much you can spend to gain market share, before the costs outweigh the benefits (7).
While there are certainly more variables, I believe these are most of the limited number of variables that will get you 80% of the way to understanding the right approach you should take.
What variables have I missed that should be included?