Monday, 20 May 2013

Start-ups & Growth

I've been spending a lot of time exploring the start-up scene here in NYC. I've got my own, GoFest, that I'm nurturing. I've also been looking to get involved in another. Finding a team with the right mix of people and doing something that fits for you is difficult. As I've been exploring and searching for a start-up to join, I've been learning more about evaluating their business models for risk and potential success. There are lots of angles to come from in doing this, but I've found the easiest is to root everything from the most important central point. Growth.

It seems unanimous that what makes a start-up a start-up is growth. It must attain and maintain (while it's market/infrastructure allows) rapid growth. In this post (whose primary sources are The Lean Startup and Paul Graham) I will examine the definition of a start-up from the view point of Growth. In doing so, I'll cover a number of topics that I've found foundational.

  1. The types of business models capable of rapid growth.
  2. What does this growth look like? How long must it be maintained?
  3. How is it defined? Revenue vs user-base.
  4. Targeting and strategizing to reach rapid growth.

Let's look at these one by one!

Business Models Capable of Rapid Growth

Lots of businesses are started each year.. only a fraction can achieve the rapid growth start-ups aim for. What sets them apart? There's a definitive difference in the business model. For a business to achieve the rapid growth of a startup, it must do, at least, these two things.
  1. It must make something many people want.
  2. It must be able to reach and provide that something to almost all of the people wanting it.
How do startups achieve both of these? Frozen yogurt has recently exploded in popularity. Does selling frozen yogurt equate to a start-up? People everywhere are demanding more frozen yogurt. That satisfies #1. Opening a frozen yogurt shop around the corner from your house doesn't mean you can reach and serve everyone who wants to buy frozen yogurt, however. You will be limited to those who can and are willing to come into your frozen yogurt store. So, businesses like these do not satisfy #2 of the above criteria.

This is why businesses like Etsy, Pinterest and many more have been tagged as super successful startups. They are able to reach anyone who wants to use their service (and has access to the technology that enables them to do so - PC, mobile phones, etc..).

One further thing to note here is that rapid growth is enabled because each new customer who receives service should be, relatively, cheaply acquired. Your infrastructure must support each new user. But, as with Etsy and Pinterest, this can be done in an automated fashion where each new user takes minimal if not zero human interaction. There are still start-ups where this price is not as cheap. If you're selling tangible products you must have the inventory and the workforce to stock, package and ship the items you sell. Allowing for rapid growth with these businesses can be a bit more tricky, to scale things efficiently, but these are still start-ups if they can manage it. (Examples of this are Amazon or many of their acquisitions. Zappos, Endless, etc..)

What is Rapid Growth?

Understanding the business models capable of becoming startups helps to define what this rapid growth looks like. It seems that start-ups go through some pretty standard stages.

  1. Initialization. This is the declaration of intent to start a company and the initial work to lay some framework in place and get the right team of people together. There's probably not yet a customer-base at this point, so growth is typically zero.
  2. Product development. This is where growth is important. If you follow the Lean Startup methodology (the bible for startups) you should be getting an MVP in front of customers as early as possible and begin getting feedback. If you use this feedback to drive your product development, you'll hopefully see customer growth during this phase.
  3. If product development goes well, and something is built that customers love, a business can grow into a large company. It's when a business/business model reaches the limits of it's market or infrastructure capability that growth could start to slow. 
Reaching the final stage doesn't mean the end of growth. It may for a particular product or business model. But, this could be the point when more innovation happens and new markets/products/services are developed. The cycle can happen all over again!

Revenue versus User-base

This question would not have come up 10 or 20 years ago. Previously, a business MUST define their growth by revenue. If it wasn't making money, it wasn't growing. Today, there are more options.

Again, growth rules out. Because rapid growth is only possible by expanding your user-base, it is debatable about whether this should be prioritized over revenue or not. It seems that today, loyal non-paying users are valuable. Facebook has 80 million users. These users are extremely accessible for any contact Facebook wishes to make. This is valuable. Facebook was valued at $104 billion during it's IPO. While Facebook has yet to capitalize on it's user-base, there is trust that there is money in this model.

Still, a strong revenue model should be at the foundation of your business model if possible. The short customer feedback loop returns here. Testing out how to charge for you product or service as it's developed is the path to success. You can determine which features customers are willing to pay for and which one they're not.

Targets and Strategizing

These feedback loops with your customers are what should drive product development and inevitable drive your growth. This is how waste is reduced. If you're building something that customers love it is a success! If you're building something they don't want, it's best to find out as soon as possible. Get it or at least a minimum version of it in front of them as soon as possible. And find out if they think it's valuable or if your assumptions about how they'll receive it are correct.

If you can fake a feature to get customer feedback sooner, do it! I particularly liked the Zappos case study used in the Lean Startup around this topic. Instead of building a complete online shoe store, together with inventory, the founder of Zappos got permission from local shoe stores to photograph their stock. He put the photos online to find out if people were willing to buy shoes over the internet. (A core assumption in his business model.) For each purchase he would go to the store and buy the shoes, mailing them to the customer. This is not a sustainable model.. but it proved that people would buy shoes online. Valuable customer feedback. He could them move on to the next assumption that he needed feedback on, learning from the interaction with his customers as he went.

The take away is to, again, let growth drive your progress. Target the growth of your customer-base and the revenue it generates in the decisions driving your product development. If you take things in one direction and see no growth, it may be time to try something else. (The pivot! - as stated in the Lean Startup.)

In conclusion

This is all really just scratching the surface on this topic. After reading the Lean Startup and several of Paul Graham's posts on the topic, I really liked the idea of basing all thing on Growth. It's easy to ask at each decision-making point. Will this lead to growth? How can we test that quickly?

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