Category: Strategy

Startups need to figure out how to compress time. Compressing time doesn’t mean doing things half way but rather testing assumptions and getting feedback from people in as short a period of time as possible. I was talking to an entrepreneur a few days ago and he described compressing time as talking to as many relevant people in quick succession to validate that the idea should, or should not, be pursued.

Here are some ideas to compress time:

• Call 100 potential customers in one day and get their thoughts on the idea (10 calls per hour times 10 hours of work is 100 calls)
• Talk to 10 angel investors with at least 10 deals under their belt to find out their thoughts
• Reach out to 20 active entrepreneurs and ask for 15 minutes of their time for insights

Startups need to figure out how to compress time to focus in on something that has a high likelihood of succeeding. Too often, startups start working on a product, but don’t spend enough time getting feedback from potential prospects and other people with relevant experience.

What else? What are some other ways startups can compress time?

One of the common questions I hear is, “Wouldn’t your employees rather have higher pay checks and less benefits?” It’s true that more individual choice is often the better route, and I’m a fan of pushing the decision making down as far as possible. There’s two factors at play here 1) the culture of the company with it’s values and 2) the government’s tax code. Assuming the company places a high value on great benefits, let’s look at how the tax code promotes employer paid benefits.

Take an example benefit of $1,200 per year per employee for housecleaning provided to all employees:

• Employer paid benefit cost: $1,200
• Employee paid benefit cost: $1,200
  Plus employee paid federal income taxes (~30%): $514
  Plus employee paid state income taxes (~6%): $77
  Plus employee paid payroll taxes (~6%): $77
  Plus employer paid payroll taxes (~6%): $77
  Total cost for the employee paid benefit including the employer’s taxes: $1,945

So, for the employee to pay for the same $100 per month housecleaning on their own, it costs a total of $1,945 to be paid by the employer to a combination of the government and the employee. For the employer to pay directly for the employee’s housecleaning, it costs $1,200, or 38% less. There’s a serious difference between employee and employer paid costs for benefits.

What else? What are some other thoughts on the cost difference between employee and employer paid benefits?

Over the past few years I’ve had the opportunity to talk with a number of startups that have gone through 90 day accelerator programs, some regional and some from the most well known brands. There’s typically two lean startup approaches that are related but different. The difference is characterized by the extensiveness of the customer discovery methodology and the timing of building of a minimum viable product.

Here are the two approaches to the 90 days of a startup accelerator:

• Build Something Simple Immediately and Iterate with Customer Discovery – The thinking here is that there’s a general market idea and opportunity, an extremely simple product is built, and the product is then constantly improved after getting input from prospects. As an approach, this solves the common mistake of startups building their product in a vacuum, only to emerge with something that doesn’t fit the market’s needs, have code debt, and usually run out of money before they can find product/market fit.
• Do Customer Discovery Without Product Building Until a Clear Need is Identified – The thinking here is that even with a general market idea and opportunity, you really don’t know what the market needs until you talk to so many people that a high percentage of a large enough demographic jump out of their seat and say they must have it. Only when it’s abundantly clear what the product needs to do it, prospects are ready to sign to be customers, and there’s a big opportunity should work be started (e.g. talk to 100 people and 15 out of a demographic of 20 say it is a “must have”, then start work on it).

As you can see, the big difference here is whether or not a simple product is started immediately and improved upon as more prospects are talked to vs talking to as many prospects as needed to find a clear market opportunity, and only then starting to build it. Most startups should do the second approach where no product work is done until a clear need is identified so that all the co-founders are focused on customer development and not distracted by product building, since they don’t actually know what the market needs. This approach is at the other end of the spectrum from building a product with tunnel vision for a year before coming up and talking to prospects, but it’s the right way to do it since time and money are so precious. As for the first approach where a product is started right away, it works well when the co-founders have extensive domain expertise in the market they’re going after and have experience first-hand with new product development. Both styles have their pros and cons and are much better ways than the traditional approach.

What else? What are your thoughts on these two lean approaches in the 90 day startup accelerators?

Timing a new market is one of the most difficult things to do in a startup. If you’re too earlier, there’s a serious chance you’ll run out of money or run out of energy by the time the market takes off. If you’re too late, which can be hard to tell, you’ll rapidly see a handful of competitors separate themselves from the pack and take disproportionate market share. Like Goldilocks and the Three Bears, you want to be just right.

How do you time a market? From my limited experience, you want to be in the middle part of the early adopter phase and before the chasm has been crossed, but not at the end of the early adopter phase. Depending on how fast the market develops, this is somewhere between 4-7 years before the market becomes mainstream. A number of anecdotes are available regarding companies that were too early but had some notoriety (e.g. Friendster) while the market is shaking out and winners emerge (e.g. Facebook and Twitter) and other once high flying competitors are almost no more (e.g. MySpace).

The next time you think about your market or a startup opportunity, ask yourself the following questions:

• What percentage of the market has a vendor currently?
• How fast is the market growing?
• Do you have to replace an existing vendor or are you the first vendor a customer has ever had?
• When will the chasm be crossed over into the early majority? How will you know? What will be the percentage of market adoption?
• What position do you need to be in once the chasm is crossed to be relevant going forward (e.g. one of the three largest vendors, a certain number of employees, etc)?

Timing a new market is one of the most difficult things to do and results in many startups going out of business or pivoting to find a market opportunity with better timing.

What else? What are some other thoughts on timing a new market for startups?

One of the challenges entrepreneurs have is finding the balance between one-off revenue, like consulting services, compared to scalable revenue, like recurring Software-as-a-Service (SaaS) revenue. When times are tight financially, or it’s a bootstrapped startup, one-off revenue can become a necessity and highly desirable to get cash in the door.

Entrepreneurs need to continually ask the hard questions internally about what scalable revenue is being sacrificed for one-off revenue.

There’s no simple formula for determining when to give up one-off revenue in lieu of harder, scalable revenue. As the business grows and gains momentum, more opportunities arise for one-off revenue. Customers will ask for more consulting services, potential partners will reach out about one-time opportunities, and so on. When revenue sources arise, stay opinionated about what does, and does not, fit with the long-term vision.

What else? What are some more examples of trading one-off revenue for scalable revenue?

Bootstrapping technology entrepreneurs are a special breed, especially once they cross the desert to profitability. There’s a real challenge that occurs when attempting to shift away some of the scrappiness inherit in a bootstrapped culture to being more aggressive with resources so as to maximize growth. Here’s one question I like bootstrapped startups to think about annually:

Where would you direct your resources if you had an extra $1M/$10M/$100M that you had to spend in the next 18 months?

Thinking bigger, especially when it comes to resources and money, isn’t done frequently enough with bootstrapped startups. With this question, the goal isn’t to encourage entrepreneurs to go about raise institutional money, rather, the goal is to stretch the mind and contemplate putting a significant amount of money to work in a short period of time  in new ways. Thought-provoking questions like this are good for entrepreneurs on a regular basis.

What else? What are some other questions bootstrapped entrepreneurs should think about annually?

While we haven’t done any tuck-in acquisitions, I’ve talked to a number of entrepreneurs who’ve made small acquisitions for their startups with success. Tuck-in acquisitions, by their name, are smaller acquisitions that open up new opportunities or jump start a strategy change. The idea with these types of acquisitions isn’t to bet the farm, but rather to take advantage of an opportunity.

Tuck-in acquisitions make sense for a variety of reasons:

• Key employee talent is desired and the tuck-in acquisition brings it on board (e.g. an acqui-hire)
• Cross-sell/up-sell of an existing customer base with little risk
• Startup wants to introduce a new product without distracting the core engineering team working on the mothership
• Time to market for an opportunity that is moving quickly
• Geographic expansion, especially if an office is desired in a certain city

Tuck-in acquisitions, even if it is acquiring assets, are a good way for startups to grow faster and do it in a way that is more of a known quantity. Time and money are always constraints making tuck-in acquisitions more desirable if the capital or equity is available.

What else? What are some other reasons tuck-in acquisitions make sense for startups?

Ideally, an entrepreneur would show an angel investor a demo of a product prototype online or on an iPhone, get it, and write a check. Unfortunately, angel investors still look for an executive summary or slide deck as the standard document that starts the investor + entrepreneur dance. The executive summary is best thought of as a business plan boiled down to one or two pages. Business plans should be avoided in favor of business model canvases, so it’s best to only write the executive summary.

Here’s an example format for an executive summary:

• Team – the top three of four members of your team with one sentence each
• Description – what does the business do
• Product – what is the solution or service
• Market – how big and how fast is the opportunity growing
• Customer Benefits – why do companies/people use the product
• Competition – who else is in the market
• Company Stage – where are you currently
• Investment Opportunity – how much are you looking to raise and what are you selling

This seems like a good amount of content, and it is, but each section should be super short and the whole thing should fit on one page. Most people are fine with a two page executive summary, but I prefer one page as the goal is to get the reader exited enough to want a meeting, and the more content you have, the less likely it will get read.

What else? What are your thoughts on executive summaries and what would you recommend?