Guest post by Tom Hogan and Carol Broadbent, Crowded Ocean.
New Ways to Build
When it comes to actually building out your business, we liken it to building a house. This is not just some cute analogy (“Measure twice, cut once”): we’re talking about two industries (housing and startups) that are undergoing major changes and are the better for it. Think about home construction for a moment. For the past four thousand years, it’s been the same process: design the house; dig a foundation; truck your materials to the site; build outside in the elements; walk-through inspection on site; then move in. But now, with modular and sustainable building techniques, entire homes (as well as rooms and wings) can be built off-site, then assembled at the site. Think about the benefits. Time-wise, you can now be building your house while you’re digging your foundation, cutting construction time in half. Quality-wise, you’re no longer hammering up on a ladder, squinting into the sun: you’re getting all the accuracy that comes from a factory setting. And you can see and catch mistakes much earlier in the process, holding down costs.
Now look at how startups are built today. Previous startups were mini-enterprises, with every function having to be addressed by full-time (or sometimes part-time) resources, leaving the founders stretched, mentally and financially. These days startups are dividing their requirements into three areas: what is unique (or ‘central’ or ‘core’) to their business, what functions they can virtualize, and what is commodity. On the front end of this equation is your Core – the vision, technology, product, culture that drove the founding of your startup. Core differentiates your company.
When it comes to virtual, you have a number of different options (see below) on how to move quickly to market by turning to a variety of best (or best-of-breed) available resources. In the beginning at least, these are functions that do not need to be on your headcount/payroll. They are essential building-blocks but also services you can outsource or virtualize to maintain flexibility in reducing your fixed burn rate and to build-in scalability or elasticity in these supporting functions.
- Virtual or outsourced resources for marketing, engineering, sales, product testing, legal and staffing;
- On-demand services for HR, accounts payable, customer service, eCommerce, transactions: tools that are easy to learn and can be integrated into your systems;
On the back end, you can choose commodity components for platforms like WordPress, Paypal and AWS that can handle your infrastructure.
On a related note, while these are not virtual or commodity components, startups today can also make these choices to build your startup quickly:
- Physical community workspaces like incubators and accelerators for housing and support services;
- Crowdfunding communities like Kickstarter and Indiegogo that help prototype and validate early products to accelerate your customer and product development
We’re big proponents of virtualizing as much of the company as possible. The resources and expertise are there and at a fraction of what bringing them all in-house would require.
– Michael Shraybman, CEO, Cogniance
With those supporting functions in place, this new startup model frees you up from having to learn and hire for every component from HR to finance to legal, allowing you to focus on the two areas that matter most: your product and your customer. Just like home construction, where certain pioneers are leading the way in modular and sustainable building, there are three visionaries you should read and work into your planning process: Steve Blank, Eric Ries and Geoffrey Moore. The books they wrote—and the terminology and exercises they spawned—have changed the startup landscape and the thinking behind it.
‘Developing’ the Customer
In the mid 90’s, serial entrepreneur and business leader Steve Blank realized that all the formulas and paths to success for startups had to do with products and technology. And yet, he also noticed, the primary reason that startups fail isn’t because of a lack of technology—it’s from a lack of customers and the validation/feedback of customers to focus the application and adoption of innovative products. The customer development focus and methodology he created caused enterprise and consumer-facing startups to shift their focus from a laser-like preoccupation with product development to an expanded focus that included the market and customers these products were intended for. The methodology consists of:
- Customer Discovery: It’s a simple enough idea—find out who really wants your product, then test your hypotheses (product, problem, solution and price) with them, not with your peers or investors. The keys here: A) Get out of your echo chamber and go where the customers are; and B) Be flexible, both in your mindset and your technology, so that you can incorporate what you hear and learn. As Blank puts it: “In a startup no facts exist inside the building, only opinions.”
- Customer Validation: Start implementing what you learned above. Your goal here is to, by trial and error (and a lot of flexibility on your end) to create a proven, repeatable sales process. The validation is dual: the customer input to you is validated (which makes your customers feel like they’re being listened to; and your hypotheses about the product and customer are validated as well. Each sale is both a lesson and a validation.
- Customer Creation: This is where you move out of trial-and-error and into the mainstream. You know enough about the customer to invest in marketing and start driving demand into your sales channel.
- Company Building: Now—and not before— is the time to start investing in the infrastructure (more sales reps, marketing, customer support) to support your model. You’ve proven it, now it’s time to invest in it. You should have been keeping your burn rate low until now; if so, now is when that restraint pays off—with a steady pipeline of strong customer prospects.
Many startups want to deliver a broad platform. Invariably, they have to start with a point solution and then wedge out. There can be a lot of confusion if you start out as a platform and then end up collapsing back to a single tool. – Gary Little, Canvas Ventures
Startups Get Lean
There are few startup ideas as influential—or controversial—as ‘The Lean Startup’. Originated by Eric Ries, a disciple of Steve Blank, ‘the lean startup’ takes customer input to the next level. A technologist with a series of failed startups on his resume, Ries decided to forego the standard ‘locked away in a lab’ form of development and instead developed what he termed a ‘minimal viable product’. The key component in his thinking was to get this ‘MVP’ into the hands of the market early, then iterate on it often, based upon real customer feedback. It’s a concept that builds upon the agile software development approach that has been widely embraced in Silicon Valley. The concepts behind the lean startup are often misunderstood as ‘throw it against the wall and see what sticks.’ It is hardly that random or capricious: instead, its proponents (and there are many) use advanced metrics, key performance indicators and A/B testing to measure and formalize each phase of product development.
Product and people: entrepreneurs should be laser-focused on that. And be ready to change either one based on what they discover. – Theresia Gouw, Aspect Ventures
There was a time when Crossing the Chasm was required reading for every startup. And it’s still valuable reading. The author, Geoffrey Moore, argued that achieving early sales traction requires the recognition of a chasm that exists between early purchasers of technology (usually called Early Adopters because they’re willing to experiment with an early-stage product in the hopes of being able to influence its final form) and the ‘early majority’—the audience you need to get traction with to ultimately grow and succeed. But these are very different audiences with very different needs and purchasing processes—and how you adjust to them will determine your long-term success.
The key concept for our purposes here is the ‘early adopter.’ These are enthusiasts who love not only seeing how sausage gets made but want a say in the recipe. If you’re creating a new car, they want to be among the first to drive it. They’re willing to put up with breakdowns in return for having input in the car’s development (Their ultimate dream: to be able to point to the car and tell their friends: “See that bumper? I helped design it.”) These are the people you will be targeting initially, looking for early sales traction, but more importantly, they’ll be the ones to fuel word-of-mouth via social media channels and eager to talk to press, analysts, and other early adopters.
Combining the teaching and practices of these three, you should be proceeding well on your key fronts: cultivating your customer and learning tons about what they want/need and how that matches your product; developing that product and getting it in front of the customer early and often, gathering their feedback; then seeing how you can combine the two (products and early customers) to figure out how best to move into the mainstream.
Don’t try to do this as a hobby. You need to quit your job to do a startup, otherwise it’s like trying to build a company with just your left hand. – Juha Christensen, serial entrepreneur, Chairman of Cogniance
Before We Go Any Further: what market are you in?
This may seem obvious, but trust us, it isn’t. If you’re starting up a new business—and if you’ve gotten funding to back it—it means you’re probably doing something new and different. Which means that the companies and people you’re trying to reach probably not only don’t know that you exist, they may not even recognize they have the problem your solution is solving.
If you want to get found, you have to be somewhere that people are looking. Which means you need to establish what market category you’re actually in. This step is critical both for the experts who follow and recommend and for the early adopters who are looking for the kinds of solution you’re providing.
Here’s our first piece of advice about market category—and we can’t say this strongly enough. No matter how unique or compelling you think your product is, you don’t have enough money—or time—to create a new category. Roughly half of our startups, when we initially meet, will tell us that they’re in their own category or that they’re redefining an existing one. The problem is: companies don’t establish new categories. Analysts (and customer adoption) do. But companies don’t.
ASIDE: There has been a lot of recent attention being paid to the idea of ‘category creation’ and the resulting winners in these categories, called ‘category kings.’ The companies that get cited include Xerox, Google and Uber. And while we admire the thinking that’s gone into this discussion, as well as the supporting science and facts, it also reflects an ‘all or nothing’ approach to a market that we don’t believe the majority of startups can afford. Our recommendation to our clients is to find their unique space in an existing market, work to expand the definitions and criteria for that market in a way that uniquely fits your capabilities, and only then try to leverage your existing success into a major play to create/define a new market category.
Category creation is more about category extension or segmentation. No matter what you do, if you can’t differentiate it’s going to be difficult. – Asheem Chandna, Greylock Partners
Case Study: We had a startup that made collaboration across different departments easier. So they said that they wanted to launch a new category: the work processor. (The founder, doubting our intelligence, helpfully explained: ‘Get it? Instead of ‘word processor’, it’s a ‘work processor.’ Get it?) We helpfully explained back: “Who at Gartner (a major market research firm) follows the ‘Work Processor’ market (since analyst recommendations are critical to shaping customer choice and market preference and a startup’s market entry)? And on which aisle at InterOp (their major trade show) would we find ‘Work Processors?’
The Work Processor’ died a quick and deserved death. (NOTE: It would have been fine to call the product ‘the first work processor’, since that’s marketing hype. But that hype doesn’t extend to market categorization, although many have tried.)
Why is market categorization so important? Because in the world of inbound marketing, it’s all about “getting found” online. Which means influencers—those guys who shape market opinion (and they can be the media, professional market analysts, bloggers, industry pundits or influential customers or partners)—need to be able to Google their problem or area of interest and find your startup’s product or service. And market analysts—the next level up from influencers—need to know which person in their company to assign to follow your company. And early-adopters—the people you really want to reach, since they’ll buy your product and help you refine it—need to be able to find you online in all of the right places – social media sites or news sites or product reviewers.
Tom Hogan and Carol Broadbent are partners at Crowded Ocean, a Silicon Valley-based marketing firm that has launched 44 startups, including Palo Alto Networks, Nimble Storage and Sumo Logic. Individually, they have been CMOs at both Fortune 500 companies and a number of startups.