Whenever you hear about or read about “entrepreneurs”, a word that you normally find nearby is “startup”. Entrepreneurs start startups. The two go hand in hand. And then a third term that is often nearby is “investors”, AKA “Venture Capital”, AKA “VCs”.
So what is a startup? Steve Blank famously has defined startups in this way:
A startup is a temporary organization used to search for a repeatable and scalable business model
Once the startup finds a repeatable and scalable business model, it becomes a company. The company executes the repeatable and scalable business model.
In MTMM terms we would put it this way: A startup is trying to build a machine that makes money. Once a working machine is built, then a company operates the machine, adds new parts to the machine, tries to improve and grow the machine bigger, etc.
In terms of resonance, we could say this: A startup is trying to find an idea that resonates with some audience. Usually the resonant idea also needs to be profitable, but not always. Once resonance is found, then the company makes money off the resonance.
Startups typically start in one of two ways:
- “I have an idea. How can I bring this idea to life in the real world?” Examples: Mark Zuckerberg had the idea for Facebook. Sergey and Larry had the idea for a new and better search engine.
- “I (or a group of two or three people) want to start something (because we seek fame, fortune, better jobs than we have now, etc.). What idea should/could we work on?” It is said that this is how Jeff Bezos got his start [ref].
Startups, once they get past the “wouldn’t it be cool if…” stage, are typically trying to answer questions like these:
- What are we as a new startup going to sell? What product or service are we going to introduce to the marketplace?
- How can we prove that the marketplace is interested in the product/service we are going to sell? Which often leads to: 1) How can we create a MVP (Minimum Viable Product) to prove that the marketplace cares, or 2) How can we create a landing page that proves that the marketplace cares?
- What is the best way to monetize our idea? Example: Some web sites are free, and then make money from advertising (most news sites work this way). Other web sites make you sign up for a subscription, and then you pay a monthly fee (the Wall Street Journal works this way). Some web sites are free up to a certain point, and then try to charge heavy users (Dropbox and the Washington Post follow this model). These are three different ways to monetize something.
- How are we going to fund ourselves until we reach profitability? (This is where the whole topic of angel investors, VCs, etc. comes in – many new startups need investors (or some other source of funding) in order to answer this question)
The “Industry-approved” answer today to several of these questions comes under the banner of the “Lean Startup”. If we are a startup that is accepted to Y Combinator (or any of the hundreds of other startup accelerator programs that Y
Combinator has spawned), or if we are students in the entrepreneurial program at Stanford, NCSU, etc. , then the “Lean Startup” approach is what people follow. It is currently the gold standard in how to start a startup.
So where did the idea of “Lean Startups” come from, and why did it become the gold standard? It is a pretty amazing story. If you go back to 2005ish, a guy named Steve Blank got the ball rolling with a book he self-published (on Cafepress!) called “The Four Steps to the Epiphany”. This book was basically a manifesto that said, “we have been doing startups all wrong, and here is my better idea.” And then he proceeded to invent a whole bunch of new stuff, including the MVP (Minimum Viable Product), “get out of the building” (to learn about real customer needs), the “customer development process”, pivoting, etc. And all of his thinking became, eventually, the “Lean Startup”.
You can see where Steve is coming from if you read the first two pages of his book (and I urge you to give it a try, because it is not often a person can create a whole new thought-space with a self published book):
Then, several years later he encapsulated the book, and what he subsequently learned after publication, into this seminal Udacity class (which is, amazingly, free):
So, using the Lean Startup methodology, how would we find out if a product/service idea would work in a marketplace?
- Steve would advocate that we “get out of the building” and start talking directly to potential customers to understand their problems and needs. Then we come up with an idea based on those needs, formulate the feature set for an MVP, develop the MVP, test it with the people we talked to, and start refining it with this core set of initial customers. Once they are happy, take it out into the wider world.
- Or, alternatively, we could develop an MVP ourselves based on an idea, and then start shopping it around to see if anyone cares. Get their feedback, adjust the product, rinse and repeat until the product is a no-brainer for people to buy. But in this case the MVP has to really be an MVP – a prototype developed in just a few weeks that we can show to people.
- Or we could come up with a description of an idea, put it on a landing page, drive some traffic to the landing page (e.g. with Facebook ads), and see if anyone will push a “buy” button even before an MVP exists.
- Or, if it is a web idea, we could simply create an MVP web site, put it out in public and see if it resonates at all. This is how Google and HowStuffWorks got started.
All of these represent fundamentally the same process – do something to find an idea that resonates.
If we want to go talk to an angel investor or a VC to raise money, we would need to prove resonance/traction in the marketplace, and there are at least four ways to do that:
- (weakest) Use industry statistics, surveys of potential users, quotes we gather from interviews, etc.
- (better) Show positive (and impressive) results from a landing page, i.e. you have people fill in their email addresses on a landing page to learn more, and 10,000 people give you an email address. Or you put a “buy” button and 1,000 people click it.
- (better) Get signed letters of intent from potential customers.
- (best) Show real traction in the marketplace, i.e. be actively selling an MVP product and show that sales are easy and rising.
You generally cannot go to an investor and say, “I have a great idea”. You need to have some way to show traction. #4 is generally a no brainer for a VC. The fire is already started, and the VC money is used as fuel on the fire to: a) speed up development of new features, and/or b) marketing, which will accelerate sales. The only condition is size-of-market. A VC wants to know that sales will eventually grow to, say, $10 million and up (depending on the VC).
So, to recap, What is a startup? It is a small group of people trying to find an idea that resonates in a marketplace. The IPESSI process described on this web site will help you do this quickly and efficiently.