Mark Suster is interviewing a founder who used AngelList on This Week in Venture Capital. Today. This Wednesday 5pm Pacific. The show is live and you can send in questions. Watch it here.
If you’ve been reading this blog for the last few months, you know we’re big fans of Mark. You may also know Mark as the guy who wrote this.
I never miss an episode of Mark’s show—it helps me get into the work groove while I’m brushing my teeth in the morning.
Mark is being very stealthy about who he’s interviewing and your guess is as good as mine. The AngelList team is going to be watching it live. See you there.
You can’t do all the work in a startup yourself. So you have to scale. Here are four ways to scale:
People
Product
Capital
Community
In detail:
People. Hire people to help you. This will be your first instinct but it should really be your last resort.
Product. Build product to do the work for you. Every single product in the world is a type of scale. Facebook has taken this to the extreme through automation.
Capital. This is what VCs do. They raise billions of dollars, invest it, let their CEOs manage it, and hopefully profit.
Community. This isn’t a recent innovation but it might seem that way. Communities have been banding together for a long time to form countries, topple dictators, knit, save the environment and so on. But now they’re forming quicker than ever and building products like Wikipedia.
Which kinds of scale are you using and why?
Note: I prefer the word leverage to scale because it implies that there is a goal and that one should not scale for its own sake.
Remember when mainframes did all of the computing? And workstations were dumb terminals docked to the mainframes? The terminals had less power, but were more “mobile”.
Then everyone got a desktop. And the desktop is where you did most of your computing. And you carried around your underpowered laptop, which had to be synced with your desktop, or docked to a big screen, keyboard and mouse to be usable. The laptop had less power, but it was more mobile than the desktop.
Now most early adopters have a laptop as their main computer. And they’re carrying around their underpowered smartphone, which has to be synced with their laptop on a regular basis. The smartphone has less power but, well, it’s more mobile.
We’ll dock our smartphones to our laptops for a while. But, if we can extrapolate from the history of computing, the laptop is headed for the dustbin.
Which means that Apple will be OK. Google will be OK. But if Windows Mobile is any indicator, Microsoft is in deep, deep trouble.
This post is by Naval Ravikant. If you like it, check out his blog and Twitter.
This post is by Steve Blank, a serial entrepreneur with eight startups under his belt, including two large craters (Rocket Science and Ardent), one dot.com bubble home run (E.piphany), and several base hits. Steve is also the creator of customer development and this is one of his best posts on the topic. If you like it, check out his blog and tweets @sgblank.– Nivi
At an entrepreneur’s panel last week, questions from the audience made me realize that the phrase “Lean Startup” was being confused with “Cheap Startup.”
A Lean Startup is not about the total amount of money you may spend over the life of your startup. It is about when in the life of your company you do the spending.
Over its lifetime, a Lean Startup may spend less money than a traditional startup. It may end up spending the same amount of money as a traditional startup. And I can even imagine cases where it might burn more cash than a traditional startup.
Lets see why.
The Price of Mistakes are Inversely Proportional to Available Capital
In times of abundant venture capital if you miss your revenue plan, additional funding from your investors is usually available to cover your mistakes — i.e. you get “do-overs” or iterations without onerous penalties (assuming your investors still believe in the technology and vision.) In times when venture capital is hard to get, investors extract high costs for failure (down-rounds, cram downs, new management teams, shut down the company).
The key contributors to an out-of-control burn rate are 1) hiring a sales force too early, 2) turning on the demand creation activities too early, 3) developing something other than the minimum feature set for first customer ship. Sales people cost money, and when they’re not bringing in revenue, their wandering in the woods is time consuming, cash-draining and demoralizing. Marketing demand creation programs (Search Engine Marketing, Public Relations, Advertising, Lead Generation, Trade Shows, etc.) are all expensive and potentially fatal distractions if done before you have found product/market fit and a repeatable sales model. And most startup code and features end up on the floor as customers never really wanted them.
Therefore, when money is hard to come by, entrepreneurs (and their investors) look for ways to reduce cash burn rate and increase the chance of finding product/market fit before they waste a bunch of money. The Customer Development process (and the Lean Startup) is one way to do that.
Repeatable and Scalable Sales Model
In Customer Development your goal is not to avoid spending money but to preserve your cash as you search for a repeatable and scalable sales model and then spend like there is no tomorrow when you find one.
This is the most important sentence in this post and worth deconstructing.
Preserve your cash: When you have unlimited cash (internet bubbles, frothy venture climate) you can iterate on your mistakes by burning more dollars. When money is tight, when there aren’t dollars to redo mistakes, you look for processes that allow you to minimize waste. The Customer Development process says preserve your cash by not hiring anyone in sales and marketing until the founders turn hypotheses into facts and you have found product/market fit.
As you search: Customer Development observes that when you start your company, all you and your business plan have are hypotheses, not facts — and that the founders are the ones who need to get out of the building to turn these hypotheses into customer data. This “get out of the building” activity is the Customer Discovery step of the Customer Development Model:
Repeatable: Startups may get orders that come from board members’ customer relationships or heroic, single-shot efforts of the CEO. These are great, but they are not repeatable by a sales organization. What you are searching for is not the one-off revenue hits but rather a repeatable pattern that can be replicated by a sales organization selling off a pricelist or by customers coming to your web site.
Scalable: The goal is not to get one customer but many – and to get those customers so each additional customer adds incremental revenue and profit. The test is:If you add one more sales person or spend more marketing dollars, does your sales revenue go up by more than your expenses?
Sales model: A sales model answers the basic questions involved in selling your product: “Is this a revenue play or a freemium model going for users? Something else? Who’s the customer? Who influences a sale? Who recommends a sale? Who is the decision maker? Who is the economic buyer? Where is the budget for purchasing the type of product you’re selling? What’s the customer acquisition cost? What’s the lead and/or traffic generation strategy? How long does an average sale take from beginning to end? Etc.” Finding out whether you have a repeatable, scalable sales model is the Customer Validation step of Customer Development. This is the most important phase in customer development. Have you learned how to sell your product to a target customer? Can you do this without running out of money?
Scale like there is no tomorrow: The goal of an investor-backed startup is not to build a lifestyle business. The goal is to reach venture-scale (~10x return on investment.) When you and your board agree you’ve found a repeatable and scalable sales model (i.e. have product/market fit) then you invest the dollars to create end user demand and drive those customers into your sales channel.
If you confuse Lean with Cheap when you do find a repeatable and scalable sales model, you will starve your company for resources needed to scale. Customer Development (and Lean) is about continuous customer contact/iteration to find the right time for execution. (Ed: In other words, eliminate generic startup risks in the right order.)
The Customer Development Venture Pitch
At this point I often hear entrepreneurs say, “We don’t have the money to scale. We’ve been running on small investments from friends and family or angels. How do we raise the big bucks?”
How to raise real money with a Customer Development presentation in the next post on steveblank.com.
