A 12 year old startup is a 10 year old failure.
Startups are about the search for a business model; in a large company, it's about the execution. During the transition, you have cashflow break-even, you're profitable, you're scaling. In a large company, you're worrying about traditional accounting, balance sheet, cash flow statements, and income statements. It's imposible to run a large company without all these things, but in a startup, you want to know:
- Customer acquisition cost
- Viral coefficient
- Customer lifetime value
- Average selling price/order size
- Monthly burn rate
No Business Plan Survives First Contact with Customers
You can write a 49 page business plan with a 53 page Excel spreadsheet, you polish it for three months, your professors have given it an A, you've been in a business plan competition and won it, but you step outside and show it to a customer, who laughs hysterically.
Assume your Business Model is Correct
The solution is, we want to structure the search with a business model. Any company's business model can be described in nine boxes:
- Who are our customers?
- What's our value proposition?
- How do we take our product to the customer?
- What are the relationships we have with those customers?
- How do we make money?
- What key resources do we need?
- What are the activities we need to do?
- Who are our partners?
- What is our cost structure?
These nine boxes can describe any company's business model.
There Are No Facts Inside your Building
Formalize testing your hypotheses outside your organization. Entrepreneurs are incredibly passionate and want to execute their business model. We need to plant the idea: "Maybe I'm wrong." Testing the business model is called the customer development process. Test your hypotheses. What's my market?Do I have competition? Who's the customer? Who pays? What's the channel? Test all these outside the building. One of the major failures is thinking that this research is done on the web or in a library.
A Mistaken Hypothesis Creates a Crisis
Startups are fun when you work hard for a while, you ship to the customer and have a party. But really, the only people who should be celebrating is Engineering; Sales and Marketing should be checking on the customer. In the traditional startup, we're programmed to iterate business strategy by firing executives in a startup. But really, maybe failure is what startups do. Maybe a mistaken hypothesis shouldn't create a crisis, but instead create a pivot: a key change in the business model. Maybe we were wrong about our customers, or our pricing, or what features people need.
We Have Plenty of Time
Successful startups are built for rapid search and pivot. Cycle time matters, and you don't have time. You're going to be iterating your business model, and the speed of the cycle time minimizes cash needs. A minimum viable product allows you to compress the amount of time.
There are reversible decisions and irreversible decisions. Laying off 100 people is irreversible. Changing your business model is not, and the faster you can do it, the more likely you can succeed.
Q: How do you go through a customer development process if you don't have funding?
A: One of the fallacies is that you deserve to be funded. It's not in the constitution. People think that in SFO, VCs will be standing there waiting for you to get off the plane. In a standard VC pitch, the only thing the VCs are thinking is "Am I going to lose my money or am I going to make some, and how can I tell?" A different VC pitch is, "Here's what I thought, so here's what I did, and here's what I learned." Imagine three cycles of that. Now, the VC knows you've done a bunch of learning on someone else's nickel. That search in customer discovery doesn't take a ton of money. It takes a credit card. It's a different way to think about the problem.
My other mistake was to think that my job was to get funding. No; your job is to find a business model. How do I find something that people other than me think is valid?
Q: What's the best way to know when to pivot and when to stay the course?
A: The short answer is, this is why startups are not done by accountants. Every one of you who is an entrepreneur, is also an artist. Going outside the building is not taking the sum of customer requests, adding them up and building them. The real answer is, you're focused on a customer segment, pricing model, etc. and you're not getting the value that you want. Rational entrepreneurs will think, it's time to pivot. A pivot is not changing the price, it's changing the model; going from a one-time fee to a subscription model to a direct sales force. Only you and your board can say "wait, this isn't working. This is not a case of we're not trying hard enough, this is a case of wrong assumptions." And that's why it's an art.
Thanks to Steve Blank for the talk