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Startups differ from established companies in that they don’t know exactly how to do things. They need to be flexible and make quick adjustments. Traditional management sets goals and oversees the execution of it, something which in Startups won’t work, a startup has insufficient experience to predefine a path.
Being in a startup is more like driving a jeep across a difficult terrain constantly avoiding obstacles. Being flexible and working without a predefined plan does not mean to just do things in a chaotic manner, however. A startup needs to make smart decisions about where to focus and how to deal best with constant challenges.
Finding a sustainable business model must be priority
The primary thing a startup must do is find a sustainable business model. Without a way to sell the output of the startup, there will be no long-term success for the startup. If no money is to be made from the current model the entire focus should be on creating value in such a way that clients are willing to pay money for the output.
The startup has to find out what customers want and how to offer it so that money can be made from it. This process requires constant learning, better even, validated learning, which means using a scientific approach. Validated learning works like this.
First, come up with a hypothesis about whether certain products will be successful in a given market. Then test that hypothesis, by validating it with customers the startup can find out if it will enable a sustainable business model.
A perfect example represents the success story of Zappos. Zappos formed the hypothesis that people would be willing to buy shoes online. To test that idea, the startup put photographs of shoes in shoe stores and put them up in a fake web shop. Once people actually tried to buy the shoes online, Zappos had confirmed its hypothesis. This simple approach laid the foundation for one of the most successful business models of the last decade.
In a founder needs a leap of faith, she needs to believe that the startup will be successful and act accordingly. To succeed, the gap between believing and knowing has to be overcome, and that can be done by making sure the product will deliver value and that there will be a bigger market later so that the startup has room for growth.
The minimal viable product has to be launched ASAP to get feedback
A startup can only get feedback if a product is launched. The product should be built fast and with minimal cost, such a product is called a minimal viable product (MVP).
The MVP should be as simple as possible and contain only the necessary to give the customer a realistic experience of how your product would work.
The example of uploading fake shoes is a prime example of an MVP. Dropbox, instead of creating an MVP in software, as they knew that would take a long time, tested their idea by producing a video. The video got overnight attention, 75.000 people signed up for the waiting list.
Every startup should first check whether there is an actual demand for the product.
Build, measure, learn
The prototype or MVP is the building part in the Build, measure, learn (BML) cycle. First, the product has to be built, then measured (presenting it to clients, getting feedback) then learning takes place, and adjustments are made.
Each BML loop will help you getting closer to where the real success is. The process has to be continued until a sustainable business model is found.
Use split-testing to separate value from waste
Sometimes a startup falsely assumes that a feature is useful when in reality the customer doesn’t want or need it. Such a feature is wasteful because it eats resources which could be employed to build value which the customer actually wants.
To sort out the value from the waste, split-testing can be used. Split-testing is the process in which two different versions of a product are made, one with the new feature and one without. By testing both versions, you’ll learn which one is more appealing to customers.
When no business model is found, apply pivoting
Pivoting is a term describing the process of making adjustments in the company if necessary so that a market can be found. An iron will and perseverance will not work if there is simply no market for your product, so pivoting is a much more sensible thing to do.
A pivot can take many shapes such as focusing on another market segment or changing sales channels.
The best thing to do is to check every month the data of your startup and see if some pivoting is necessary. Many startups had to pivot several times before becoming successful businesses.
Three strategies for growth
A startup should focus on one of several growth engines. The first strategy is called the sticky engine. It works by retaining existing customers and offer them new features and a greater service.
The second engine is the viral engine. It works by making customers take care of the company’s marketing. They spread awareness of the product among your target customers by word of mouth or by seeing the product in the hands of other people (think about the glowing Apple logo on Apple products).
The third engine consists of paid marketing and is only sustainable if enough revenues are made.
Don’t get fooled by vanity metrics
It is tempting to look at different growth metrics which actually don’t mean much. The number of followers on social media doesn’t mean they will pay for your product. Try not to get fooled by vanity metrics and instead look for valuable data.
Core metrics offer valuable data
Core metrics offer valuable data like increases in the number of paying customers or numbers of recommendations, reviews, etc.
Each startup has to find it’s own metrics as they differ in each startup. It is helpful to compare how new customers behave compared to old ones. This process is called cohort analysis.
Only if you are doing better than the previous months are you growing. Learn from the data and make the necessary adjustments.
Summary: Startups should employ the scientific method to find a sustainable business model and assure growth. A minimum viable product enables such an experiment by launching a demo, putting it to the test, and then learning from the feedback.
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Also published on Medium.