startup basics for incubate workshop

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Definition Starting P/M/T Think Customer Development Lean Startup Focus Growth Summary Startup Basics James Boyden, co-founder of snapDISCO Incubate 2012 Startup Basics 1 / 60 Incubate 2012 James Boyden, snapDISCO

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What is a startup and what should you know when you decide to do a startup: the basics. Insights from the likes of Steve Blank, Eric Ries, Steve Blank and others. Presented by James Boyden, CEO SnapDisco, for Incubate workshop 2013.

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Page 1: Startup Basics for Incubate workshop

Definition Starting P / M / T Think Customer Development Lean Startup Focus Growth Summary

Startup Basics

James Boyden,co-founder of snapDISCO

Incubate 2012

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What is a startup?

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What is a startup?

“A startup is a human institutiondesigned to deliver a new product or service

under conditions of extreme uncertainty.”

— Eric Ries, author of The Lean Startup

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What is a startup?

“A startup is an organization formed to searchfor a repeatable and scalable business model.”

— Steve Blank,

author of The Four Steps to the Epiphany,co-author of The Startup Owner’s Manual

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What is a startup?

“Startup = Growth”

— Paul Graham (PG),co-founder of Y Combinator,co-founder of Viaweb

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Starting a startup

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5 steps to start a startup

1 Identify a real problem (an opportunity)

2 Create a quick solution

then quickly go out and talk to customersget feedbackchange your idea to meet the customer’s needexperiment, “fail fast”, iterate

3 Now figure out how to make money

a scalable business model

4 Then put it on steroids & grow

5 Execute better than anyone else

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Opportunity

A problem to be solved (that you can solve)with a market need.

Ideally, a LARGE market needYou should understand the size of the opportunity

A startup builds a business by addressingan opportunity.

How will you address the opportunity?(i.e., What’s your solution?)

How are people currently solving that problem?

Is your solution 10x better?

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Business model

How will your startup (business) make money?

Some potential business models:

product saleper-seat software license“(Whatever) as a Service” subscriptiontransactionadvertisingadd-on services (e.g., customer support)

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Scalable business model

A means of making money that can scale easilyfrom the first few customers to many customers.

“Can scale easily” means the scale of executioncan be increased significantly with only a little(incremental) extra effort

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Paul Graham: How to Start a Startup (2005)

You need three things to create a successful startup:

1 Start with good people

2 Make something customers actually want

3 Spend as little money as possible

http://www.paulgraham.com/start.html

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Product / Market / Team

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Which would you sacrifice?

Great product, large market, great founding team:

If you had to sacrifice one, which would it be?

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Product, market, team

Probably Product.

Without a market, the product won’t sell.In a large (hungry) market,you can iteratively improve the productwhile the market accepts the current product.

Team is crucial for execution.

Investors prefer an A team with a B ideaover a B team with an A idea

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Marc Andreessen: Product-market fit (PMF)

Asserts Market is most important, followed by Product.

A market with a need will accept the firstviable product that meets that need

The market doesn’t care how good the team is

Without a market, there will be no demand

Most important for a startup: Find Product/Market Fit

A startup is either Before Product/Market Fit (“BPMF”)or After Product/Market Fit (“APMF”)

In BPMF phase, do whatever is required to find PMF

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Before PMF

Until you reach PMF...

1 Keep your cash burn low

2 Focus all resources on increasing the percentageof users that strongly want your product.

How many users would say they would be“very disappointed” without your product?

3 Avoid bringing in VPs of Marketing and Sales

Instead, founders must target, talk to, and engagepotential users directly

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Gabriel Weinberg: Traction trumps everything

What angel investors say they look for:huge marketgreat teamsustainable competitive advantage, etc.

There is a shortcut: tractionIf you demonstrate traction, investors will overlookmany other problems.

Traction is real customers.If you charge for your product, it’s paying customersIf your product is free, it’s active user base

Once you have traction, you may not needinvestors at all...

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Questions to ask yourselfto validate your startup idea

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Paras Chopra: Validate your startup idea

1 Is what you are providing creating significant valuefor anyone?

People should rely on your product so much thatthey’d curse you if you took it away from them.Do you think this would happen for your product?

2 Is there is big enough market for the service?

Is the market easy to reach (without spendingboatloads of money)?

3 Are you enjoying doing this?

Do you see yourself doing this for several next years?

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Matt Barrie: Validate your sales assumptions

1 Can you actually make any money from this?Who will pay for this? Will they really pay?...

2 Who specifically will be your first sale?

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Matt Barrie: Validate your sales assumptions

3 How much revenue do you make from each sale?How much does it cost to make that sale?

4 Is revenue > cost? (i.e., what’s your profit per sale?)

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Matt Barrie: Validate your sales assumptions

5 How will you get to a million dollars in profit?How many sales do you need to make?Actually do the maths: $1M / $X per sale = N sales.

6 Is that number (N) of sales realistic?Are there that many customers available?Will you be able to sell to that many customers?

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Customer Development(Steve Blank)

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The Four Steps to the Epiphany (2005)

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The Startup Owner’s Manual (2012)

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Product-centric ignores the customer

Product-centric development never leavesthe company’s own building.

Customer input is merely a checkpoint,not a constant compass.

After Requirements, the customer is ignoreduntil Release.

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The Product Development model

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The Product Development model

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Product-centric doesn’t fit startups

Product Development is a good fit for:

an existing class of productin an established, well-defined market

Unfortunately, few startups fit these criteria.

Greatest risk in a startup is not in product creation,but in creation of customers & markets.

Startups don’t fail because they lack a product,they fail because the product doesn’t sell.

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Questions to answer about your customers

Before we can sell a product, we need to understand

the customers & market:

1 What are the problems our product solves?2 Do customers perceive these problems as

“MUST solve” or just “would be nice to solve”?(Are we selling a painkiller or a vitamin?)

3 Do our product features solve these problems?

4 Who would we make the first sales call to?

You can’t answer these questions inside your building!

Inside, there are no facts about your customers, only opinions.

“Get out of the building!”

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Early startups need to focus on learning

Focusing on “execution” will put an early startupout of business.

You need a “learning and discovery” processto find and learn about your initial customers.

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The Customer Development model

Note the circles around each of the stages

Also, the loop back from Validation to Discovery

Keep your cash “burn rate” low until you reach the third stage

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Customer Discovery

Find out:

who the customers for your product arewhether the problem is important to themwhether your product will solve their problem

Leave your guesswork behind and “get out of the building”

Note: This is not about running focus groups:The initial product specification must come from the founders.

Product Feature Set Hypothesis:The smallest set of features that customers will pay for(in the first release).

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Customer Validation

The most reliable method of validating thatyour customers are serious: Get them to buy.

more concrete than polite wordstests the “perceived value” of the productestablishes your pricing

Only advance beyond this stage when you have found:

a group of repeatable customerswith a repeatable sales process

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Customer Creation & Company Building

Customer creation:Begin marketing, to scale demand in the validated market

Company building:Create and scale the company (hiring, etc.)

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The Lean Startup methodology(Eric Ries)

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The Lean Startup (2011)

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The Lean Startup idea

Apply experiment-driven hypothesis testingand data-driven decision-making to theCustomer Development model.

Verify, modify & evolve your customer assumptions

(i.e., your Customer Discovery and Validation) in terms of

Validated Learning:

quantifiable resultsyielded by experimentsthat are measured in terms of quantitative metrics

Any development (whether Customer or Product) that is notdirectly for Validated Learning is WASTE — a waste of time,money and runway.

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It’s NOT about being frugal

The Lean Startup method is NOT about buildingas cheaply (or frugally) as possible.

It is about minimising waste.

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Lean Startup principles

Minimise the amount of wasted effort:

1 Launch / get to market as quickly as possible,so you can start getting customer feedback

2 Measure your Customer Discovery and Validation progress

against a set of quantitative metrics

You want to improve over time, thereby demonstrating

that you’re getting closer to what your customers want.

3 All customer hypotheses and new product features should:

be implemented as scientific experimentsbe measured in terms of these quantitative metricsattempt to improve your performance against these metrics

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Lean Startup principles

4 Do not build anything unless it helps you learn...

So you only ever build:

experiments

analytics infrastructure to measure those experiments

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An equation

Lean Startup = Customer Development +Agile Development +Experimental Hypothesis Testing +Analytics To Measure +Continuous Iteration +

Zero Unnecessary Work

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Minimum Viable Product (MVP)

The Lean Startup definition of MVP:

“the smallest amount of work you can possibly doin order to get sufficient data about whethercustomers will buy it”Note: Not a minimal product, but rathera minimal amount of work per learning iteration

Entrepreneurship in a Lean Startup is a series of MVPs,each designed to answer a specific question.

Customer Development & Product Development processescycle continuously, in parallel, performing the smallestpossible amount of work in each iteration.

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Problem SolutionCustomer Product

Feedback

Problem/SolutionValidation

CustomerDevelopment

ProductDevelopment

Definition Starting P / M / T Think Customer Development Lean Startup Focus Growth Summary

In combination with Product Development

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Pivot

Based upon some result just learned,change one element of your startup approach(problem, customer, solution, product, business model, etc.)

to correct the startup into a more favourable direction.

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Updated Customer Development model

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“Focus, focus, focus”(Mick Liubinskas)

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Key principles

Customer Development with smallest (Leanest)learning cycles

Focus users/market (deep, narrow niches)

Focus product features (as few as possible)

Always “test” customers before building

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Focus user/market

Find a niche.

Don’t try to compete head-to-head with the big guys.

Instead, focus on a niche, and be the fastest in that niche.

... a deep niche.

Go for “depth” of market (deep penetration of anarrow vertical niche) rather than “breadth” of market.

Mick recommends targetting markets in which you canrealistically get at least 20% depth.

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Focus product features

Determine the fewest possible product features.

Focus on the one key feature that will makeyour business succeed.

A lot of startup success is saying “No”to the appropriate feature requests.

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Find the shortest path

Follow the shortest, cheapest, quickest pathto a paying customer (or at least,to putting a product in front of a customer).

Spend at most 5% of your total budgeton each iteration.

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“Test” customers before building

Always test customer interest before building

What’s the shortest path (the cheapest/quickest test)?

When you test customers, test:

value creation (Is it useful to them?)value strength (would they pay a certain price for it?)

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“Startup = Growth”(Paul Graham, 2012)

http://www.paulgraham.com/growth.html

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A startup is a company that grows fast

This is the only criterion.

Criteria that are not necessary to be a startup:

being newly-foundedwork on technologytake VC fundinghave an “exit”

To be able to grow fast, a startup needs:

the ability to grow fast (scalability)a large market to grow into

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Scalability

You need scalability:

of ability to reach your market with your productof ability to execute/deliver to meet market demand

scalable productionscalable business model

Example of non-scalability: a barbershop

Everyone needs haircutsbut a single barbershop can’t reach everyone whoneeds haircutsnor service all those people

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Wider access means more competitors

Downside: Ability to reach a large market means thatyou probably have more competitors(competitors can access the market just like you can)

Local barbershop: only competitors are other barbershopsin the same local area.

You can’t access customers in other areas⇒ Barbershops in other areas can’t access your customers⇒ This limitation is also protection

But if you can access the whole world (e.g. via the web),so can all your competitors.

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How will you compete?

So, how will you compete (or escape competition)?

Startups need a few of these key differentiators:

you’re working on something novelyou have some competitive “secret sauce”you target an overlooked nichethere’s some other barrier to competitor entry

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Measuring growth

Measuring the growth rate of a startup:

Best: growth rate of revenueNext best: growth rate of active users

This is NOT a rate:“Our number of customers goes up by a hundred per month.”

You need to know the ratio of new customersto existing customers.

Recommends week-on-week growth rate of 5–7%during the YC incubation phase.

You hit 10% per week ⇒ You’re doing great.

You only manage 1% per week⇒ You haven’t found Product-Market Fit yet.

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In summary

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Paul Graham: Startups in 13 Sentences (2009)

1. Pick good cofounders.2. Launch fast.3. Let your idea evolve.4. Understand your users.5. Better to make a few users love you than a lot ambivalent.6. Offer surprisingly good customer service.7. You make what you measure.8. Spend little.9. Get ramen profitable.10. Avoid distractions.11. Don’t get demoralized.12. Don’t give up.13. Deals fall through.

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