I love start-up. The early ‘wouldn’t it be great if …’ conversations, the commitment to going on a journey into the unknown, the first days when absolutely nothing is in place and things like name, logo, and website are the focus of endless creative conversation, the first customer, the first hire …
Its a hell of a ride.
There’s a huge amount of start-up advice around for the would-be entrepreneur. May favourites are the writings of Steve Blank and Eric Reis; Customer Development and Lean Startup have more to say about how to go from a vague idea to a functioning startup than any other business approach I’ve seen. There’s an increasing amount of support for start-ups, in the UK at least, from various tax breaks for would-be investors to the well-intentioned but somewhat ill-executed Startup Britain. There’s also a lot of very early stage investment money washing around from Angels and Micro-VCs; let’s face it if you’re going to invest in a hare-brained, high-risk scheme dreamt up by a bunch wide-eyed idealists you’re probably better off taking a punt on someone’s idea for a new type of social network than buying Euro-zone bonds.
Start-ups will save us from the global economic crisis!*
But once you’ve started your startup, you’ve done some customer development, you’ve perhaps pivoted your idea, you’ve reached a core of a product and you have some paying customers, then what? Its time to stop being a start-up and establish your business. Steve Blank calls this phase ‘Company Growth’ in Four Steps to the Epiphany.
In my experience** there are a few things you need to stop being a start-up:
A sustainable business model
On day one of your start-up you are concerned with the necessary detail of the company: what are we called, what do we do, where do we work? On day two you should be out there discovering your customers and understanding your potential market. On day three you should be trying to show those potential customers why they should become actual customers. And so on. You shouldn’t be worrying about sustainability, about what you need to keep being successful in 12-18 months time because unless you focus on finding your customers and your product-market fit you won’t be around in 12-18 months time.
But at some point you’re going to know roughly who your customers are and your product will have demonstrated a reasonable fit with the market. At this point you need to be worrying about sustainability because things like cash-flow, excessive overheads, technical debt and the like might just prove fatal if you don’t deal with them.
A sustainable business model is simply one where the revenue exceeds the cost (and beware hidden cost; many lean start-ups rely on the early joiners living with a reduced or waived salary in return for a stake in the long-term success of the company, which is an inherently unsustainable situation). It doesn’t necessarily have to be by a lot and it doesn’t necessarily have to make month-on-month profits, but it does need to support itself. But whilst it is defined by financial security, sustainability is about more than just about the money: a sustainable company will retain its employees, improve its processes, and learn from its internal influences as well as its external ones.
Less Product-Market Fit, more Market-Product Fit
A good product, one that meets the needs of its customers and has established itself in the market, should start to distort that market, no matter how niche (“Find your niche and dominate it”† was one of the excellent pieces of advice we were given on starting Singletrack). Disproportionately successful products like the iPad and Facebook demonstrate this in extremis; the newly-perceived tablet market is actually an iPad market, many times greater in size than the tablet market ever was, and early social networks simply never imagined the market was as big as Facebook has demonstrated it to be.
But all successful products demonstrate this effect to a degree. The current dominant player in our market does one thing well and many other things poorly (according to their customers we’ve talked to). They have distorted the market to be all about their core strength and we are actively seeking to displace them by redefining that market. Some of their customers will buy into us, some won’t, but we hope that in the next couple of years, when people talk about the market we’re in, the conversation will be much more diverse than it is today.
What I’m not saying is that Customer Development is a short-term process, or that an established company no longer listens to or learns from its customers. What I am saying is that in the early days a lean startup will do almost anything (within boundaries of ability, desire and possibly legality) that customers commit to paying for. But as time goes on you have a lot more data to go on and a lot more experience in your market and there will come a time when leading your customers on a market-defining journey is more valuable to you and them than focusing on fitting your product to the market.
Weaning off the founders
In the early days the founders are the company. As the company grows this effect lessens but it will be quite some time until the company is immune to the loss of some or all of its founders. But that is precisely what an established business needs to be. In the early days people will buy into the founders of the business as much as they buy into the product.
In fact I’d go so far as to say that believing in the founder has far more to do with an early customer making a commitment to buy something that doesn’t actually exist yet as whatever it is the product is portrayed as shortly to be doing.
But as time goes on the founders’ need to replace themselves with others who do the jobs they’ve been doing better than they can. They need to reduce their day-to-day involvement and ensure they are steering the company in the right direction. This doesn’t mean they need to make themselves redundant or irrelevant, just that the company should continue on if and when the founders decide to leave.††
These are the things I think you need to stop being a start-up and get established. But I’m sure there are more and am interested in other people’s experience. It seems to me that with all the buzz about start-up around at the moment, a good body of experience and knowledge about how to successfully stop being a start-up is going to be increasingly important.
*Actually start-ups won’t save us from the global economic crisis but they might just create a few much-needed jobs, create a bit of excitement and confidence, and instil more entrepreneurial spirit in this country.
** Background: I’ve started three companies. The first never got out of being a start-up and died midway through its second year. The second was modestly successful and is still around after 10 years. The third is currently making the transition from start-up to established business.
† Parker Harris, co-founder of Salesforce.com
†† I’ll know Singletrack is doing okay when the team start telling me to shut up and let them do their jobs. I’m looking forward to that day.