Startup Basics for Incubate workshop

Deﬁnition Starting P/M/T Think Customer Development Lean Startup Focus Growth Summary

Startup Basics
James Boyden,
co-founder of snapDISCO

Incubate 2012

Startup Basics 1 / 60
Incubate 2012 James Boyden, snapDISCO


What is a startup?



What is a startup?

“A startup is a human institution
designed to deliver a new product or service
under conditions of extreme uncertainty.”

— Eric Ries, author of The Lean Startup



What is a startup?

“A startup is an organization formed to search
for a repeatable and scalable business model.”

— Steve Blank,
author of The Four Steps to the Epiphany,
co-author of The Startup Owner’s Manual



What is a startup?

“Startup = Growth”

— Paul Graham (PG),
co-founder of Y Combinator,
co-founder of Viaweb



Starting a startup



5 steps to start a startup

1 Identify a real problem (an opportunity)

2 Create a quick solution
then quickly go out and talk to customers
get feedback
change your idea to meet the customer’s need
experiment, “fail fast”, iterate

3 Now ﬁgure out how to make money
a scalable business model

4 Then put it on steroids & grow

5 Execute better than anyone else



Opportunity

A problem to be solved (that you can solve)
with a market need.
Ideally, a LARGE market need
You should understand the size of the opportunity

A startup builds a business by addressing
an opportunity.
How will you address the opportunity?
(i.e., What’s your solution?)

How are people currently solving that problem?
Is your solution 10x better?



Business model

How will your startup (business) make money?

Some potential business models:
product sale
per-seat software license
“(Whatever) as a Service” subscription
transaction
advertising
add-on services (e.g., customer support)



Scalable business model

A means of making money that can scale easily
from the ﬁrst few customers to many customers.

“Can scale easily” means the scale of execution
can be increased signiﬁcantly with only a little
(incremental) extra effort



Paul Graham: How to Start a Startup (2005)

You need three things to create a successful startup:

1 Start with good people

2 Make something customers actually want

3 Spend as little money as possible

http://www.paulgraham.com/start.html



Product / Market / Team



Which would you sacriﬁce?

Great product, large market, great founding team:

If you had to sacriﬁce one, which would it be?



Product, market, team

Probably Product.
Without a market, the product won’t sell.
In a large (hungry) market,
you can iteratively improve the product
while the market accepts the current product.

Team is crucial for execution.
Investors prefer an A team with a B idea
over a B team with an A idea



Marc Andreessen: Product-market fit (PMF)

Asserts Market is most important, followed by Product.
A market with a need will accept the first
viable product that meets that need

The market doesn’t care how good the team is

Without a market, there will be no demand

Most important for a startup: Find Product/Market Fit

A startup is either Before Product/Market Fit (“BPMF”)
or After Product/Market Fit (“APMF”)

In BPMF phase, do whatever is required to find PMF



Before PMF

Until you reach PMF...

1 Keep your cash burn low

2 Focus all resources on increasing the percentage
of users that strongly want your product.
How many users would say they would be
“very disappointed” without your product?

3 Avoid bringing in VPs of Marketing and Sales
Instead, founders must target, talk to, and engage
potential users directly



Gabriel Weinberg: Traction trumps everything

What angel investors say they look for:
huge market
great team
sustainable competitive advantage, etc.

There is a shortcut: traction
If you demonstrate traction, investors will overlook
many other problems.

Traction is real customers.
If you charge for your product, it’s paying customers
If your product is free, it’s active user base

Once you have traction, you may not need
investors at all...


Questions to ask yourself
to validate your startup idea



Paras Chopra: Validate your startup idea

1 Is what you are providing creating signiﬁcant value
for anyone?
People should rely on your product so much that
they’d curse you if you took it away from them.
Do you think this would happen for your product?

2 Is there is big enough market for the service?
Is the market easy to reach (without spending
boatloads of money)?

3 Are you enjoying doing this?
Do you see yourself doing this for several next years?



Matt Barrie: Validate your sales assumptions

1 Can you actually make any money from this?
Who will pay for this? Will they really pay?...

2 Who speciﬁcally will be your ﬁrst sale?




3 How much revenue do you make from each sale?
How much does it cost to make that sale?

4 Is revenue > cost? (i.e., what’s your proﬁt per sale?)




5 How will you get to a million dollars in proﬁt?
How many sales do you need to make?
Actually do the maths: $1M / $X per sale = N sales.

6 Is that number (N) of sales realistic?
Are there that many customers available?
Will you be able to sell to that many customers?



Customer Development
(Steve Blank)



The Four Steps to the Epiphany (2005)



The Startup Owner’s Manual (2012)



Product-centric ignores the customer

Product-centric development never leaves
the company’s own building.

Customer input is merely a checkpoint,
not a constant compass.

After Requirements, the customer is ignored
until Release.



The Product Development model



Product-centric doesn’t fit startups

Product Development is a good fit for:
an existing class of product
in an established, well-defined market

Unfortunately, few startups fit these criteria.

Greatest risk in a startup is not in product creation,
but in creation of customers & markets.
Startups don’t fail because they lack a product,
they fail because the product doesn’t sell.



Questions to answer about your customers

Before we can sell a product, we need to understand
the customers & market:
1 What are the problems our product solves?
2 Do customers perceive these problems as
“MUST solve” or just “would be nice to solve”?
(Are we selling a painkiller or a vitamin?)
3 Do our product features solve these problems?
4 Who would we make the ﬁrst sales call to?

You can’t answer these questions inside your building!

Inside, there are no facts about your customers, only opinions.

“Get out of the building!”



Early startups need to focus on learning

Focusing on “execution” will put an early startup
out of business.

You need a “learning and discovery” process
to ﬁnd and learn about your initial customers.



The Customer Development model

Note the circles around each of the stages
Also, the loop back from Validation to Discovery
Keep your cash “burn rate” low until you reach the third stage



Customer Discovery

Find out:
who the customers for your product are
whether the problem is important to them
whether your product will solve their problem

Leave your guesswork behind and “get out of the building”

Note: This is not about running focus groups:
The initial product speciﬁcation must come from the founders.

Product Feature Set Hypothesis:
The smallest set of features that customers will pay for
(in the ﬁrst release).



Customer Validation

The most reliable method of validating that
your customers are serious: Get them to buy.
more concrete than polite words
tests the “perceived value” of the product
establishes your pricing

Only advance beyond this stage when you have found:

a group of repeatable customers
with a repeatable sales process



Customer Creation & Company Building

Customer creation:
Begin marketing, to scale demand in the validated market

Company building:
Create and scale the company (hiring, etc.)



The Lean Startup methodology
(Eric Ries)



The Lean Startup (2011)



The Lean Startup idea

Apply experiment-driven hypothesis testing
and data-driven decision-making to the
Customer Development model.

Verify, modify & evolve your customer assumptions
(i.e., your Customer Discovery and Validation) in terms of
Validated Learning:
quantiﬁable results
yielded by experiments
that are measured in terms of quantitative metrics

Any development (whether Customer or Product) that is not
directly for Validated Learning is WASTE — a waste of time,
money and runway.



It’s NOT about being frugal

The Lean Startup method is NOT about building
as cheaply (or frugally) as possible.

It is about minimising waste.



Lean Startup principles

Minimise the amount of wasted effort:
1 Launch / get to market as quickly as possible,
so you can start getting customer feedback

2 Measure your Customer Discovery and Validation progress
against a set of quantitative metrics
You want to improve over time, thereby demonstrating
that you’re getting closer to what your customers want.

3 All customer hypotheses and new product features should:
be implemented as scientiﬁc experiments
be measured in terms of these quantitative metrics
attempt to improve your performance against these metrics



Lean Startup principles

4 Do not build anything unless it helps you learn...
So you only ever build:
experiments
analytics infrastructure to measure those experiments



An equation

Lean Startup = Customer Development +
Agile Development +
Experimental Hypothesis Testing +
Analytics To Measure +
Continuous Iteration +
Zero Unnecessary Work



Minimum Viable Product (MVP)

The Lean Startup definition of MVP:
“the smallest amount of work you can possibly do
in order to get sufficient data about whether
customers will buy it”
Note: Not a minimal product, but rather
a minimal amount of work per learning iteration

Entrepreneurship in a Lean Startup is a series of MVPs,
each designed to answer a specific question.

Customer Development & Product Development processes
cycle continuously, in parallel, performing the smallest
possible amount of work in each iteration.



In combination with Product Development

Problem Customer Product Solution

Feedback

Problem/Solution
Validation
Customer Product
Development Development



Pivot

Based upon some result just learned,
change one element of your startup approach
(problem, customer, solution, product, business model, etc.)
to correct the startup into a more favourable direction.



Updated Customer Development model



“Focus, focus, focus”
(Mick Liubinskas)



Key principles

Customer Development with smallest (Leanest)
learning cycles

Focus users/market (deep, narrow niches)

Focus product features (as few as possible)

Always “test” customers before building



Focus user/market

Find a niche.
Don’t try to compete head-to-head with the big guys.

Instead, focus on a niche, and be the fastest in that niche.

... a deep niche.
Go for “depth” of market (deep penetration of a
narrow vertical niche) rather than “breadth” of market.

Mick recommends targetting markets in which you can
realistically get at least 20% depth.



Focus product features

Determine the fewest possible product features.

Focus on the one key feature that will make
your business succeed.

A lot of startup success is saying “No”
to the appropriate feature requests.



Find the shortest path

Follow the shortest, cheapest, quickest path
to a paying customer (or at least,
to putting a product in front of a customer).

Spend at most 5% of your total budget
on each iteration.



“Test” customers before building

Always test customer interest before building
What’s the shortest path (the cheapest/quickest test)?

When you test customers, test:
value creation (Is it useful to them?)
value strength (would they pay a certain price for it?)



“Startup = Growth”
(Paul Graham, 2012)
http://www.paulgraham.com/growth.html



A startup is a company that grows fast

This is the only criterion.

Criteria that are not necessary to be a startup:
being newly-founded
work on technology
take VC funding
have an “exit”

To be able to grow fast, a startup needs:
the ability to grow fast (scalability)
a large market to grow into



Scalability

You need scalability:
of ability to reach your market with your product
of ability to execute/deliver to meet market demand
scalable production
scalable business model

Example of non-scalability: a barbershop
Everyone needs haircuts
but a single barbershop can’t reach everyone who
needs haircuts
nor service all those people



Wider access means more competitors

Downside: Ability to reach a large market means that
you probably have more competitors
(competitors can access the market just like you can)

Local barbershop: only competitors are other barbershops
in the same local area.

You can’t access customers in other areas
⇒ Barbershops in other areas can’t access your customers
⇒ This limitation is also protection

But if you can access the whole world (e.g. via the web),
so can all your competitors.



How will you compete?

So, how will you compete (or escape competition)?

Startups need a few of these key differentiators:
you’re working on something novel
you have some competitive “secret sauce”
you target an overlooked niche
there’s some other barrier to competitor entry



Measuring growth

Measuring the growth rate of a startup:
Best: growth rate of revenue
Next best: growth rate of active users

This is NOT a rate:
“Our number of customers goes up by a hundred per month.”
You need to know the ratio of new customers
to existing customers.
Recommends week-on-week growth rate of 5–7%
during the YC incubation phase.
You hit 10% per week ⇒ You’re doing great.
You only manage 1% per week
⇒ You haven’t found Product-Market Fit yet.



In summary



Paul Graham: Startups in 13 Sentences (2009)

1. Pick good cofounders.
2. Launch fast.
3. Let your idea evolve.
4. Understand your users.
5. Better to make a few users love you than a lot ambivalent.
6. Offer surprisingly good customer service.
7. You make what you measure.
8. Spend little.
9. Get ramen proﬁtable.
10. Avoid distractions.
11. Don’t get demoralized.
12. Don’t give up.
13. Deals fall through.


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