Newsletter 54: on starting a startup #1
Newsletter 54: on starting a startup #1
15 minutes reading time. Thoughts on startups, growth, and technology 🚀
Welcome to another edition of the Struggle.
The Struggle is a bi-weekly newsletter where I share my thoughts and learnings from running a startup in Southeast Asia.
Lately, several of my close friends have decided to start a new business. In turn, I have been helping them figure out their product and go-to-market strategies. That made me document my learnings on starting a new business, irrespective of the vertical and industry.
While there are exceptions to every rule, I do think founders can loosely follow a few frameworks to minimize the risk of failure. In an effort to summarize all my learnings, I have prepared a series of essays covering the very early days of any startup and how founders must think about what’s important and what’s a distraction.
I hope you enjoy the series; as usual, any feedback is appreciated ♡
Problems over ideas
A crucial first step in my experience is to focus on a problem rather than on an idea you have. The benefits of this approach are:
Building a business is a long process. People are rarely able to create value for clients or get to an exit fast. Most companies take about four to 11 years to have an exit. In that period, the market and your solution will inevitably change. The one thing that will be permanent is the problem you are solving.
Obsessing with an idea makes you inflexible. Focus on the problem as that will enable you to iterate and pivot when you have to.
Missionaries over mercenaries. You will attract the right kind of people from the very beginning. People who care about the mission think of Tesla’s mission “to accelerate the world's transition to sustainable energy.” The problem is clear. How they plan to solve it remains flexible.
Problem first approach implies you have been experiencing the challenge personally. Your understanding of the space will be much deeper when the problem is “personal.” It’s tough to solve a problem you do not understand very well.
Once you have identified the right problem to work on, you need to summarize your understanding and early assumptions.
Summarize Your Thoughts
I'm not too fond of the idea of writing a business plan; I find it too time-consuming. Yet, I do see the value in doing some basic research that will lead to a deck or two-pager summarizing:
The problem, to help you articulate the pain better. How big is it? Who else is facing it? What are the intensity and frequency of the pain for potential clients/users?
Hypothesis on how you can create minimum viable happiness. How would you approach solving the problem when you lack resources?
Size of the market. Are you going to capture a % of an existing market or create a new market?
Competition and alternatives. Solutions attempting to solve the problem you have focused on. What are they doing poorly? Why has no one been able to solve the problem so far?
Business model. Early assumptions around the potential business model, how would you monetize your concept?
Go-to-market. How would you distribute your solution? What channels would you use?
People. What are your strengths and weaknesses? What kind of profiles will be complimentary to your strengths? How do you plan to attract them?
The Problem
Consider who else is experiencing the problem? Is it a tiny group of people? Or perhaps many people can relate to it.
What is the intensity? How important is it to solve the pain every time it occurs? For example, waiting for a taxi on the way to the office/important meeting has a really high intensity. At that moment, you would do anything to find a solution. Whereas, booking a holiday for your family does not have the same intensity since you have more time to find a solution.
Next, consider the frequency. How often do you experience the problem? Going back to the previous example, commuting to the office occurs regularly; that’s a high-frequency problem. On the other hand, you are going on a holiday just a handful of times annually.
In my experience, scoring high on all 3 criteria would definitely mean you are on something special:
Frequency x Intensity x # Users = bullseye 🎯
“I find a lot of founders think they have a good idea, but they don’t do this frequency and intensity analysis. And so if you have both an infrequent and low-intensity problem that you’re trying to solve, you’re going to have a problem getting a lot of customers even interested in talking to you. All things being equal, if you graph problems, it’s nicer for them to be higher intensity, higher frequency.”
YCombinator’s CEO, Michael Seibel
Market Size
Starting a business is a long and laborious journey. If you are about to commit to launching a new one, make sure it’s worth the effort. One of the best ways to determine that early on is by approximating the market size.
There will be a lot of data around the size of the market for some products. Think travel, transportation, food, healthcare, insurance, etc. On the other hand, it will be much harder for other verticals to determine the market's size; that’s especially applicable when you are working on novel solutions or technologies. Most probably, even Google and Apple had difficulty estimating the exact size of the market accurately in their early days.
If you are not able to find secondary research, you can guestimate the size by figuring out:
The number of potential customers/users that would be a good fit for your business.
Multiply that number by the average annual revenue of these types of customers in your market.
Minimum Viable Happiness
By now, you must have a pretty decent understanding of the problem and market. Hopefully, you have chosen a problem that occurs to many people and has a high frequency and intensity.
Having a promising concept is a great start but not sufficient to build a viable business. It may sound counter-intuitive, but you need to start small and stay focused on solving for a small group of people.
Aiming to build a solution that caters to everyone’s needs is wrong.
You cannot start by boiling the ocean.
“To maximize happiness pick a constrained problem where you can win.”
Sarah Travel, General Gartner Benchmark
That’s why I prefer the terminology of minimum viable happiness instead of a minimum viable product.
Your goal early on is to pick a niche.
It's always better to have 100 people who love your product instead of thousands who would use it once and never return to it. Working closely with a small sample of people gives you the ability to create an experience people love. You will have great insights into the nature of the problem, how people are going around it, and how other solutions are failing. Moreover, by focusing on a small group of people, you will build relationships with your end-users, resulting in a constant stream of direct, candid feedback.
“You know users are happy not when they stop complaining, but when they stop leaving.”
Casey Winters, CPO at Eventbrite
Scaling your product too early may result in missing opportunities to capitalize on niche markets and not monetize anything at all. Instead, focus on a subset of the market to capture a critical mass of users.
Competition and Alternatives
Another common mistake is to avoid the thought of “we do not have competitors.”
In my experience, many first-time startup founders invest a lot of time and effort to craft a narrative positioning their product as not having direct competition.
Every product has competitors.
Early on, when an entrepreneur is launching a startup, he/she should not be spending too much time thinking about the competition, instead focus on "alternatives."
Alternatives are other solutions your users are hiring to solve their problems. Think of:
WhatsApp was not going up against Viber, WeChat, Line, Facebook Messenger, and other similar platforms. The primary alternative in their early days was SMS.
Slack was not competing against Hipchat, Flowdock, and many other similar project management tools for tech teams. Their alternative was email.
Skype did not compete against Zoom, Webex, Hangouts, and other video conferencing tools. The primary alternative was a phone call.
Brian Balfour wrote an article on the topic, where he describes three reasons why looking purely at competitors is dangerous:
Lack of differentiation - continually looking at competitors, you gravitate towards them and may end up developing the same features, message, and design.
Aiming too low - Alternatives, unlike competitors, have 10x to 100x the usage of competitors. The opportunities are so much more significant. How many people make phone calls VS how many people use Zoom?
You won't understand the customer's psychology - think of the example I gave above with WhatsApp vs. SMS. People form habits around alternatives with specific actions and workflows. It would be best if you considered the alternative's limitations to create a 10x better experience.
Business Model
Not all products must monetize their value from day one. Think of Facebook, Clubhouse, and LinkedIn; it took a long time for some of those companies to start monetizing. Sometimes you need to get a critical mass of users before you can start monetizing. That’s especially true for network effect businesses, as you need to focus on growing the network before monetizing.
Nevertheless, whatever you decide to do, you must have well-thought ideas on how you can monetize your product.
You can consider some of the following common models for monetization:
Enterprise - sell services or software to other businesses on a single license basis (Docker, FireEye)
Subscription (Dollar Shave Club, Revolut)
Transactional when a company enables a financial transaction on behalf of a customer and collects a fee (Stripe or PayPal)
Marketplaces when a company acts as an intermediary in the sale of a good or service between sellers and buyers (Airbnb, eBay)
Ecommerce (Amazon)
Advertising (Facebook, Twitter)
Hardware (GoPro, DJI)
Go-to-market
Peter Thiel argues that poor distribution is the number one cause of failure in the startup world. Developing your go-to-market strategy is an on-going process that boils down to figuring out:
Who is your ideal customer?
In every company, ultimately, an individual is making the buying decision. Identifying who is the most typical buyer takes time and many conversations with prospective clients. What is their job title, how large is the company, their daily activities, and many more?
As you talk to more prospective buyers, you start recognizing patterns, and it gets clearer. Over time you need to iron out all the details and have a crystal clear picture of your ideal customer profile and buying personas.
How are you going to reach them?
In the beginning, you will rely on referrals and your friends’ support. As the company is growing, identifying which channels to explore becomes an increasingly important task.
How are you going to scale?
“Scaling means thinking about how to price our product and when.
Many B2B companies have different pricing strategies. These are mostly relevant once your product is outside of its first ~5/10 users.
Pricing is another important metric. Most users think about pricing in terms of level (the amount to charge), when it's really important to think about metric (when to charge), and structure (volume, discounts, and free trial vs. not).”
Caroline Clark, Go-To-Market Team at Jira Service Desk Product at Atlassian
People
“Ideas can pivot and evolve as they grow, funding can always be found somewhere else, the market will always change with a never-ending supply of competitors. But the team that brings it all together forms the company’s DNA.”
Nathan Chan, CEO at Foundr
Be honest with yourself about what you are good at and where you will need help. At what point in time you will need to bring more people, for what roles and why.
In today’s highly digital world, you can run on your own for a long time, and there are plenty of successful solo founders. Yet, do consider where you want to outsource, hire freelancers, full-time employees or bring a co-founder on board.
As a general rule of thumb, consider that your business's most important thing should rarely be outsourced. You do not want to be dependent on external parties for core projects.
Perhaps the most important decision you will make is getting a co-founder who complements your expertise. Do consider that the business model you are going after will inevitably impact the skillset you need.
If you are working on an enterprise product, industry experience, and business development are super important. Whereas if you are building a marketplace, you need people who are good at community building, operations, and financials.
Like any other recruiting process, it’s important to have a scorecard of attributes you’d look for in a co-founder — in a two co-founder scenario, you’re each essentially hiring each other. A good co-founder should be someone who can (1) help you solve core risks to the business and (2) agrees with you on first principles on company building.
Erik Torenberg, Co-founder @Villageglobal & @beondeck
Key Takeaways
Summarizing all that information either as a deck or a two-pager will clarify where you have a great understanding of what you want to do and where you need to do some extra research.
Starting a business is tricky, and there will be many unknowns, but you need to do your best to build assumptions and methodically validate them as you make progress towards bringing the product to life.
Walking away, I hope you remember to:
Focus on the problem. Ideas for solutions will come and go. The problem will remain the same.
Build a summary (deck or two-pager) covering all major aspects as it relates to your new business. It will help you structure your thoughts.
Great problems have in common three characteristics: high intensity, frequency, and appeal to many people. You need to score high on at least one of those factors.
The market size matters. Starting a company is a long journey; make sure it’s worth your time and efforts.
Focus on creating the minimum viable happiness for a small group of people before targeting a larger segment of your target market.
You do not need to have all the answers, but having a well-articulated hypothesis on how you plan to monetize is important.
Your go-to-market breaks down to three major phases:
Who is your ideal customer?
How are you going to reach them?
How are you going to scale?
Selecting the right co-founder is amongst the most important things you will need to work on. Spend some time reflecting on what skillsets or unfair advantages this person needs to bring to the table?
Over to You
I’d love to hear about your perspectives on the very first steps a founder must take before starting a company?
What is of the utmost importance when starting a new venture?
Popular frameworks on identifying problems/ideas?
How do you select the right co-founder?