Back in the ‘90s, I was a venture capitalist. As part of that process, we had to go to a committee to get new deals approved for funding with senior partners. You had to develop a business case as to why this deal was a potential home run and how it fits into the portfolio.
One of the senior committee members was an older gentleman in his 70s. Throughout his career, he had funded or passed on every type of entity. And many of his decisions were based on his extensive history of investments over 40 years. He was a thumbs up/thumbs down kind of guy and rarely could be convinced to change his vote. Depending on where your deal landed in the process, he was either an oracle or past his prime. Most of the time, he was spot on. But, things change, and we passed on some deals that ultimately became household names.
A good investor or entrepreneur builds for an unknown future by learning from their past.
Remember – Things Change
A successful entrepreneur is always one step ahead.
In the early dot.com days, I remember reading something that if you were reading a book about the Internet, it was likely obsolete. By the time the book had made its way through the traditional publishing process, the web would have changed. Jeff Bezos built a bookstore when powerhouses like Barnes & Noble and Borders (which filed bankruptcy in 2011) dominated the sector.
I was living in Chicago in the late ’90s. I lived for Border’s and spent many hours exploring music and books. Part of my buying process was this exploration practice. I typically had about $30 to spend, either 3 CDs or a book or two. To my recollection, Border’s was the first to offer a listening station for new CDs. The perfect way to survive a Chicago winter.
Then Starbuck’s partnered with Hear Music. I could now combine my love (OK, some would call it an addiction) of coffee with my exploration of new music. The offerings were always edgier, and in my mind, more sophisticated. Due to numerous Starbuck’s compilations, I now began to be introduced to new artists who dominated the airwaves.
In 2000, I moved to the Bay Area. And like everyone in Silicon Valley at the time, I spent a lot of time in my car and listening to the radio. Through the likes of Alice Radio, I discovered yet another set of artists. At the same time, Napster emerged, and now I could find any song I wanted online. The quality was iffy, songs were incomplete, but they were free. Well, sort of, OK, not. Anyone using the platform of the time knew there was always the possibility that copyright infringement would come knocking.
Thankfully, Apple launched iTunes shortly after that. I could still download music instantly (quality full versions) for a reasonable price and not risk going to jail. And get this, I didn’t have to buy the entire CD, but the just the one-hit-wonder I couldn’t get out of my head. I still bought CDs, but less frequently.
Nowadays, I listen to Spotify. I still have a wall of CDs collecting dust. But, pretty much, I can instantaneously listen to any song that pops into my head at any time. In the early days, my experience was to go to a store to hear, touch physically, and explore. But that was a different time; I was single, not a parent, etc. Today, the idea of losing hours in a bookstore or music shop seems like a luxury I cannot afford, or there is not the need. Other than a grocery store, I rarely go to stores. I shop online, I explore online, and like others, have realized through the sharing economy that I am just as happy accessing songs via Spotify instead of adding another CD to the bookshelf.
As Agile practitioners, we are taught our priority is to deliver build value for our customers. Value is generally perceived as something that solves an unmet need or saves us time/money.
Many entrepreneurs will build something and then find a market for it. This is like the aluminum siding telemarketer. They interrupt your day to ask if you want aluminum siding. They know nothing about you, but they have a product to sell. It becomes a numbers game; if you call enough people, someone is bound to say yes. On average, this approach has a 2.5% conversion rate.
Alternatively, talk to potential clients, understand their needs. Which is not being met? What do they value? And most importantly, what will they pay for? We have clients who tell us we have 6,500 users on our platform. We always ask – how many are paying? They are not a customer if they are not paying. Less than 10% of free trials convert into paying customers. Simply, not a sustainable metric.
If I can deliver x for y, what is that worth to you? This becomes the question. If I can save you $100 on your car insurance, how much would you pay to join our program? If I can save 20 hours a month on data entry per employee, what is that worth to you? If I can deliver a solution to your problem, would you buy it? If you provide value (something that benefits the client) at a reasonable price, it should be a no-brainer.
If they do not buy
- They do not have a need met by your product. It does not matter how cheap the aluminum siding is; if I live in an apartment, I will not buy it.
- They do not see that value. Maybe they can get it cheaper somewhere else or already have a solution that is working.
Bottom line – build products that people need by solving an unmet pain point. If your product solves a pain point that no one else solves, customers will pay for that all day long.
Build Small, Fail Fast
You have done your homework. You have met with potential customers. You understand their unmet needs, and you are creating a solution. When we explore what a customer wants in a solution, we use MOSCOW.
- Must Have
- Should Have
- Could Have
- Won’t Have
And when we build, whether it is a prototype or an MVP – we build only the must-haves. We then go to the customer and demo the prototype for feedback. Is this what they were thinking? This Lean approach saves money and reduces waste – the further into the build you get, the more that has to be reworked if it did not meet the customer’s needs. If it is wrong, back to the drawing board. By failing fast, you kept the build cost to a minimum and can pivot depending on feedback.
Up to this point, most startups have bootstrapped these efforts. After having a product that customers are willing to buy (we call it “When the dogs are eating the dog food”), it’s time to scale. Go big or go home. You may add staff, create a sales team, take out a business loan, or raise capital – all of which allow you to execute your Go-To-Market strategy.
Building a Defensible Position
As history reminds us, many me-too companies try to follow the current trends, but they are too late to the party for the most point. Trying to be the next Amazon seems foolish, but many will try, and a few will succeed if they have a clear differentiator that meets an unmet market need. But this is a risky path. You will spend all the time validating a market need to have a larger player simply reverse engineer it and take over. Best case scenario, they acquire you. Worst case scenario – you are a roadkill footnote in the digital timeline.
To survive, you need both a disruptive technology and a defensible position. If one is missing, you are toast. For many, a defensible position is a patent. For startups, that is not the answer. Patents are expensive and timely. And to be effective, you must have the capital to defend against any infringements on your claim (According to the American Intellectual Property Law Association, the average cost to litigate a patent infringement case through trial is $2.8 million).
So, we must consider other means to create a defensible position.
- First Mover Advantage – You will have the time advantage over another entrant as they will still be reverse engineering a solution and establish a market position.
- Economies of Scale – Your product’s success has given you the resources to establish supplier relationships, distribution channels, and other advantages that another startup will not have.
- Brand Reputation – Your brand is known for innovation and quality (Apple), your customers trust you to deliver (Amazon), or you have established a community around your product (Slack).
Any new entrant in the space must recreate what you have accomplished. Ideally, while they are playing catch up, you continue to innovate and deliver.
Scalability – KPIs for your ROI
Once you go to market, it becomes a numbers game. If I can deliver $3 of value for every $1 spent, I will be successful.
These are a few metrics to consider
- Customer Acquisition Cost – CAC – What does it cost you to acquire a customer. All the ads, marketing costs, free versions, and overhead.
- Average Spend – what is the average ticket spend.
- Lifetime Value – LTV – Over the product’s life, what is the margin or profitability per customer.
- Churn – For every customer that goes at the top of the funnel, how many customers leave. If every month 10% of your customers leave, you need to replace your entire customer base every ten months. A good churn is below 5%.
- Break Even – (Sales – COGS) divided by overhead. How long until you reach profitability?
- Burn rate – How much you are losing every month (negative cash flow). You need enough working capital to reach breakeven.
- Payback period – This is a risk assessment. A product with a shorter payback period is less risky.
- Net Present Value – Taking into consideration the time value of money. $1 Million is worth more today than receiving the same amount 5 years from now. We discount some Future Value by a discount rate to determine what it would be worth today. We often use NPV to decide between competing projects.
- Return on Investment – ROI – (Revenue – costs)/costs = %. For example (30,000-20,000)/20,000 = 50% ROI. The problem with ROI is it does not consider the time value of money.
- Internal Rate of return – IRR – IRR is the same calculation as NPV, where NPV is 0. The IRR indicates the annualized return rate for a given investment-no matter how far into the future and a given expected future cash flow. ROI indicates total growth, start to finish, of an investment, while IRR identifies the annual growth rate.
Understanding these metrics will help you make productive decisions when growing your business.
Build, Grow Convert
We believe there are three phases to any successful venture – Build, Grow Convert.
- Build – Understand user personas and unmet needs to develop an MVP that demonstrates value to your clients.
- Grow – Once clients are buying the product, it is time to scale. Launch marketing efforts, build a sales team, advertise, partnerships, and distribution channels.
- Convert – Understanding what resonates with your potential client so you can convert them from a visitor to a paying customer.
We base our approach to coaching & consulting on concepts from Agile methodologies – Deliver value early and often while reducing risks, driving efficiencies, and focusing on the bottom line. Depending on the client’s needs, our consulting services can last a week, a month, or much longer. We may also work full time or just a few hours a day or week to provide guidance, support development, and instill fiduciary accountability to stakeholders.
Our executive team offers insight, experience, and a hands-on approach to cultivate early-stage concepts, products, and services into commercially successful business opportunities.