Principle 1: Entrepreneurship has Three Myths
Myth 1 – The Entrepreneur Hero Myth: What does it take to be a successful entrepreneur? We all hear the same list of qualities: passion, determination and vision. But the same qualities that are heralded as traits of the successful may lead to your startup’s demise. The driven entrepreneur can fall in love with their product, ignore negative feedback from customers and spend years building a product based on a vision that no one else shares.
Myth 2 – The Process Myth: What should you do if you have a great idea for a business? Raise some money, hire a team, build the product, test the product and go out and sell it. Wrong. This is a product development focus and today’s conventional wisdom. It’s also the reason that 90% of startups fail. The new customer-based focus helps you create a product that customers actually want, and the flexibility to scrap the bad ideas and start over again if you don’t get it right the first time.
Myth 3 – The Money Myth: Do you think you need significant investments to start your business? Capital is necessary, but too much capital can handicap a startup.
Instead of focusing on what customers want, money validates your assumptions about what you think they want and gives you the green light to execute on your plan. It also encourages you to prematurely scale – hiring too many people that cranks up the burn rate and creates communication challenges, just at the time you need to stay nimble and flexible.
Principle 2: The Mystery of Market-Winning Innovation
Market-winning innovation happens when invention meets market insight. Without market insight, invention is just a cool technology. Even Thomas Edison, one of the greatest innovators, built a vote-tally system for Congress that was quickly rejected. It made the congressmen’s job faster, but he ignored their need of politics and posturing in the calling of votes. After that, he said, “I never want to build something that nobody wants to buy.”
There are thousands of patents sitting on the shelves at universities. It is only by matching them up with a real need in the market that these ideas become real businesses.
Principle 3: Get Outside
In order to understand the world, you have to get outside. Get outside your comfort zone. Talk to customers, suppliers and competitors. It is only by getting outside the building, outside the company, outside your circle of friends to see the world clearly. You can’t understand reality while sitting at your desk.
Principle 4: Fail Fast and Learn to Change
Ideas are a dime a dozen, but is that idea an opportunity? Is it worth your time, effort and money to pursue? Clayton Christensen, Harvard Business School professor says, “Successful startups are the ones who have enough money left over to try their second idea.”
Trying a quick experiment and finding out you were wrong and changing direction is not failure. That is the road to success because you saved yourself time, money are one step closer to finding the real opportunity. Failing fast is about learning to change quickly and being dispassionate enough that you can let go and move on.
Principle 5: Go For Brutally Honest Learning
You may be hearing only what you want to hear – data that confirms what you already know. You may have so much skin in the game, staking your hopes, dreams and reputation on your lean startup that your motivation prevents you from learning in an honest way. You may be overconfident at having the right product, for the right market, at the right price. Stay humble. Entrepreneurs will face risks, but the new entrepreneurship is about identifying those risks and knocking them down one at a time with determination and creativity. This is very different from overconfidence, which is being so “right” you stop listening and make mistakes that kill you.
You will learn how to seek and receive feedback – being on a quest for knowledge about the need in the market. You will gather facts and data, avoiding reliance on beliefs and gut feelings. You will conduct rapid, inexpensive, simple experiments to test your ideas in the market, rather than building products. And you will do it all in the name of accurate, brutally honest learning.
Principle 6 – Embrace the Crisis
Intuit, Polaroid, Microsoft and Dell have all had near-death experiences. A good crisis can reshape your views, business and success. Is a crisis necessary for success? It will help you if it forces you to focus, and ultimately, it can be the best thing that ever happened to your company.
The value of a crisis is that it forces you to focus, and provides renewed commitment to make the time to really nail the product or service and reshape the company. Can you do this without the crisis? Yes, but it takes relentless focus. It is easy to get sidetracked into targeting multiple markets, open multiple office locations, or to pursue “bigger” ideas while forgetting what customers wanted in the first place. Running the Nail It then Scale It process requires discipline – many CEOs want to jump ahead and sell something already. They nod their head in agreement of the NISI steps, but lack the resolve to actually run the process until they hit a crisis that leaves them no choice.
They think they already know the answer, or they can’t seem to abandon a customer and they go after everyone as a potential target, or they spend all of their time pleasing investors and raising money instead of satisfying customers.
A crisis forces your company to create the most value for the most valuable customer. A crisis creates urgency and commitment and embraces honesty. Suddenly, everyone realizes that nothing else matters except saving the company; and to save the company, the truth must be known. Ironically, a crisis also creates time. In cutting the team, expenses and burn rate, two months of runway can be transformed into twelve months; time to take two, three, four or twelve swings at the plate. Then, when the team has found the real market for the product or service and it has been validated, they can scale up and take a big swing.
Can you run the Nail It then Scale It process without a crisis? Sure. Constrain the money invested in your lean startup by staging the investment into smaller tranches. Use milestones and budges to simulate a cash crunch as you would in a crisis. Better yet, fully run the Nail It then Scale It process without skipping steps or phases. You’ll save money, time and give your business the focus it needs without going through the pain.
Phase 1: Nail the Customer Pain
Does your idea solve a big customer pain – one so big that if they don’t resolve it they’ll die? If so, you have a Monetizable Pain Hypothesis. If there is significant pain, you can attract enough customers to build a large and successful business. No pain, no business. Then you will create a Big Idea Hypothesis – your idea about the solution for the pain. You will get specific about the details of the customer and market, but not your solution just yet.
Now you will test your ideas out on real customers through cold calls and emails. Good responses will give you indications about a real pain in the market. You will try out a variety of tests, looking to listen to the customer pain to understand all of the nuances and facets of the pain. And you will talk to all the potential customers – end user customers, technical customers and economic customers.
Once you have spoken with customers, you gather data – market information, competitive analysis, and patterns or cycles of the market. Now you have enough information to start nailing the solution.
Phase 2: Nail the Solution
In this phase, you will develop and test your hypothesis about the solution. You start by turning your Big Idea Hypothesis into an idea about a minimum-feature-set solution. Then you will run three sequential “tests” of your hypothesized solution – a virtual prototype test, a prototype test, and finally a validation of the solution. During this phase, you will be asking the customers, “Is this what you were looking for?” You will avoid selling because once you start selling, you stop listening. Customers will provide open and candid feedback if they know you are listening and that you really care about solving their pain.
As an entrepreneur, you are responsible for defining a solution to the customer’s problem once you accurately understand their pain. Asking customers to come up with the solution will bring you unimaginative or iterative solutions to the pain, like having a hotel ask what they could do for you to improve your stay and you saying, “a more comfortable bed.”
You will be able to determine if they are willing to pay for the solution or if they would be willing to be beta customers. In the end, you will develop a product that fits the customer’s need perfectly. Customers will say, “Wow, they really nailed it!”
Phase 3: Nail the Go-to-Market Strategy
At the time of their IPO in 1987, Cisco was already worth several hundred million dollars but had no professional sales staff, no standard marketing campaign and didn’t purchase advertising. But they nailed both their product and their go-to-market strategy. Early on, they turned their customers into partners, even to the point of allowing them to modify the router source code.
This phase is actually run at the same time as Phase 2, Nail the Solution. In this phase, you understand the customer buying process. How do they find out about new products? What does the market infrastructure look like? (The groups that sit between you and your target customer.) This includes partners, influencers, advertising, marketing and social media. These important stakeholders are important and influence your customer to make a purchase decision. Most likely, you won’t be creating a new market, so you will identify the key players and find ways to influence and monitor them. Startups differ in the way they leverage the infrastructure than a big company, so just mapping the landscape won’t be the whole answer.
During this phase you will also build customer relationships that will lead to pilot and reference customers – people who will be the beta sites for your product. Maybe you think that in the era of free-ware, charging customers to be pilot customers is out of line, but if your pilot customers aren’t willing to pay, it’s a good indication that you haven’t solved their pain (or solved a big enough pain).
Phase 4: Nail the Business Model
Nailing the business model is usually where entrepreneurs excel? Right? Not so fast. In a traditional model with a business plan, the entrepreneur tries to execute on the plan, even when the numbers, milestones and strategy were still best guesses. As soon as these guesses get written down, they get “institutionalized.” Money gets invested on the guesses and unexamined assumptions. Just sit in on board meeting of a startup that has started to “miss” the numbers in the business plan and you’ll see founders and sales teams start making excuses.
It is usually not on failing to execute the plan, but to ask if the plan is any good in the first place. Instead of creating a business plan, create a business model. By this time you should have solid data and facts, not guesses. Now that you understand the customer buying process, you now understand the distribution channels, revenue streams, purchase acquisition costs and lifetime customer value. You know who is involved in the decision process.
With so many customer facts in hand and an understanding of the market infrastructure, you can build a financial model. Can you make money on this idea? Do you know your fixed costs and variable costs? Do you understand your margins? Do you know how much it costs to acquire a new customer? Do you know your break-even point? If you do, you are ready to build your product and start selling.
As you launch the product, your goal is to develop a repeatable business model. You put money or effort in and you get money out – predictably. The key to your continued success as a business depends on two things: continuous data flow and measuring the right things. By continuous data flow we mean continued interaction with your customers.
Phase 5: Scale It
Now that you’ve discovered a repeatable business model – one that predictably generates revenue – you can scale your business. But be aware, as the company grows, things will change. Few things in life resemble a straight line.
Even CEOs who successfully bring a product to market, raise the next round of funding and meet major milestones are sometimes asked to step aside by “vulture” capitalists. Investors may recognize something the founder may not have – whether he or she has the ability to grow the business.
As startups grow, the nature of how they operate begins to change. At the core, startups are engaged in a creative act of discovery. As more customers come on board, the company has to change to be able to serve the customers well. You start needing automated billing, a support call process, a growing sales team, a benefits plan and policy, tiered compensation, and a web of distributor and strategic partner relationships.
A shift occurs from facing an unknown problem/solution which required radical exploration to facing a known problem/solution that requires execution. It is the growth from a child to a teen to an adult, all which have different needs in order to grow and be happy.
Your areas of focus will be 1) market, 2) process, and 3) team transitions. As startups begin to scale, they see early success followed by a period of stagnant growth. They are trying to “cross the chasm” in the technology–adoption life cycle. Geoffrey Moore describes this deep chasm between visionary customers and mainstream customers in his book Crossing the Chasm.
If a startup is lucky, it has reached the chasm. Most die before they ever get to this stage. The Nail It then Scale It process will help you get to this step, but how do startups cross the chasm? They make early majority customers feel comfortable. Mainstream customers are pragmatists who want to buy from a legitimate market leader. By spending money on your product, they won’t lose time, money, prestige, or whatever else they value – they want to make a solid, branded choice. You will be focused on a single beachhead and will have to focus your resources on making a few early majority customers extremely happy.
With process, you will have to list all the jobs being performed and define them. You will also document key processes. As a new venture CEO, you may be the VP of Sales, Product Manager, Director of Business Development and Janitor. But as you grow, you will look forward to handing off the various hats to someone else as you decide which hats to keep for yourself.
Because you’ve defined and externalized the processes, you can communicate and transfer them to your new team members. Then, you can create a reporting and accountability system for the new process owners. Just like in lean manufacturing, you will give employees the big picture, break it down into major objectives, break those objectives down into individual ownership and keep the picture visual so that everyone stays aligned and motivated. At Infusionsoft, the company lives by the motto, “Goals are dreams with deadlines.”
Your critical task will be to identify the correct things to measure and then turn them into measurable, time-bound objectives. Just measuring financial metrics on your income statement will have low value. Measuring costs of customer acquisition, rate of adoption, turnover of customers, and fully loaded cost of producing a good or service will give you a better gauge of success.
As you scale, communication will be key and you will need to take more time to coordinate efforts through daily synch meetings, all-hands meetings, team meetings, one-on-one meetings and skip-level meetings. Communication will be critical to help your entire team understand what is going on and pull together in the same direction.
As you scale, sometimes people have to change too. Some people just enjoy the early stage more than later stages. Other people will to adjust to the difference in operation between a startup and growth company. This is okay.
As your company scales, what you did in the past won’t necessarily make you successful in the future. Your market, process and team will all need to be transitioned, but once something works, scale it until it breaks.