Let’s talk about risk

December 18, 2020 by Luke Szyrmer Leave a Comment

Earlier this week, I was on the Yeukai Business Show talking about risk management in the context of startups. Yeukai was a great discussion partner, and pulled a lot of stories out of me. This is probably the more “storified” version of my work on risk management and experiments. As someone who spent 15+ years in financial markets and now almost 10 on innovation, I wanted to share the key learnings.

So if you want to learn how the foundations of identifying your biggest risks and being able to predict profitability and increase your confidence levels, pop over there and have a listen.

You'll discover:

The process of mitigating risk and cutting losses
The common reasons for loss and bankruptcy among tech startups
The impact of proper risk management, as well as 3 different ways to mitigate risk

If you want to find out more, check out Your First Startup Experiment to get even more tools and techniques on this topic.

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Your new product’s key milestones

December 15, 2020 by Luke Szyrmer Leave a Comment

While it would be presumptuous of me to say that all startups have exactly the same milestones, there are certain key moments in the life of every high growth tech startup.

made first sale to someone you didn’t know beforehand
make sales repeatedly
enter high growth phase, where sales grow exponentially

The first sale

The first key moment in the life of a startup is the first sale, because you’ve solved all of the above problems. If you’ve successfully done that, you’ve essentially proven you have an attractive offer. You’ve proven you’re serving a niche willing to pay for your product or service. You’ve proven that your product description and positioning are effective enough to start building a business. For startups focussed on high adoption and user growth initially in order to become more valuable, this means you delay this first sale significantly (for example to advertisers). While it does work, it’s a much riskier strategy because you can’t answer the above questions. You need to think through how you can mitigate that risk initially as much as you can. For example, you can speak with potential advertisers to learn how big of a user base they want before being willing to purchase ads. Alternatively, you can try introducing a different payment scheme, such as a transaction-based cost, where you make a few pennines on each transaction so that users barely notice they’re paying you. These details are very much dependent on the type of business you want to run. If you are starting a multi-sided market, such as an exchange, you need to address the needs and concerns of each group, i.e. both buyers and sellers, which will typically be very different, in order to get that first sale.

Repeated sales

After you celebrate the first sale, your next major milestone would be to make sales repeatedly. At this stage you will need some kind of product or solution which you offer, at least a minimum viable product which focuses on the biggest pain point your users have. While it may be of prototype quality, you have enough to continue talking with customers about their problem in much greater depth, as they gain experience with your product. The time frame depends significantly on the size of transaction. The larger the transaction size, the more objections you need to overcome. So for example, for a low priced product like an iPhone app, a startup should be aiming to sell multiple times per day. This is pretty much an impulse buy. For a much higher priced product, such as a B2B software solution, you’d want to see a few sales per quarter. Convincing a number of people across a business, each with their own agendas and needs, to buy a $70,000 software package requires you to overcome a lot of objections. Total revenue should be financially significant, where you are able to cover your operating costs for example or quit your day job if you’re a solo founder.

Hockey stick

Phase 3 means that you’ve hit message-market fit within a particular niche. At that point you need to scale. Your biggest bottleneck stops being marketing, and starts to be fulfillment. You make promises in your marketing which were easy to fulfill at the first stages, but become difficult to fulfill at this stage. Often this will mean major changes are required. For example, you may need to perform a complete rewrite of your technology to be able handle the growth. While a prototype-quality product was ok to prove the business concept, you need to ensure that you keep a high standard of performance as new customers are pouring in. For example Facebook needed to rewrite a significant part of their original PHP code into highly optimized C++ code for the key components of their architecture, such as the social graph construction so that their newsfeed could keep up.

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How to budget for innovation

October 16, 2020 by Luke Szyrmer Leave a Comment

This week I just wanted to draw your attention to an old article on Harvard Business Review about budgeting in established companies for innovation.

Here, on average, is what they estimated they were currently spending: 85% of their resources on day-to-day operations 5% on incremental improvements that produced faster, cheaper, better sameness 5% on small sustaining innovations 5% on big, disruptive innovations When we asked the managers what a better proportion might be, their answers were: 75% on day-to-day operations 5% on incremental improvements 10% on sustaining innovations 10% on big, disruptive innovations.

Personally, I find this intuitive, because of asset allocation is part of my background in finance. In situations of partial randomness, like in the financial markets, the amount you allocate defines your expose to particular risks and profit drivers.

relative and absolute allocation matters when deciding a budget

You can’t control in advance whether an investment will go up, down, or sideways in value. But you can choose how much you allocate, both in relative and in absolute terms:

Relative: Relative to the budget as a whole, what % is allocated to each innovation initiative? Also, what is the relative pool of money allocated to each type of innovation?
Absolute: How much money are you putting in? In other words, are you ok if you lose 100% of it?

The big challenge really, with budgeting for innovation in established companies, is that it’s typically done on an annual basis. Whereas new product development occurs on a much shorter cycle time. That way you are making big decisions about funding without the benefit of market feedback and other considerations which are critical tactically.

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Why the Launch Tomorrow process actually works

September 11, 2020 by Luke Szyrmer Leave a Comment

Recently I showed up on the Predictable B2B Success podcast. Vinay interviewed me. He originally worked with Dan Norris as his content guy, and is now running a content repurposing agency.

To be honest, Vinay did a great job pushing me for details with a healthy skepticism to what I was saying. This dynamic turned or conversation into a good interview, highlighting on the ins and outs of the Launch Tomorrow method as it now stands. And also how it's different from both Lean Startup and online direct marketing, when looking at growth.

We cover a lot of ground including:

Why the Hero Canvas exists
Why there is so much focus on the customer segment at the super early stage in the Launch Tomorrow method
Why you can't separate the product from marketing, especially when first starting out, and what connects them
How to prioritize in the super early stage when you are probably feeling most overwhelmed
Why founder-market fit seems implicitly obvious, yet often overlooked (including a case study of what that means)

Worth a listen regardless of whether you’ve just found Launch Tomorrow, or following it for a while. This podcast episode is good listen, as are many of the other episodes on Vinay’s podcast.

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Why Founder Market Fit Matters…A Lot

September 3, 2020 by Luke Szyrmer 1 Comment

Back in the day, I was looking into entering the weight loss market with a SaaS solution or coaching services. In theory, it sounded like a great idea. I based it on a “signature success” story of my own. Based on that success, I thought I could provide value, help others achieve the same. But I overlooked the importance of founder market fit.

What I didn’t consciously realize was that most of that actual market was very different from me. I was a young, somewhat nerdy guy, the type of guy who got excited about techie stuff and spreadsheets. And that’s how I achieved what I did in the context of weight loss.

At the time, you could easily buy paid Google advertising. It was a learning environment where I tried a lot of the techniques that are now part of the Launch Tomorrow method: driving traffic to landing pages, getting sign ups, interviewing customers and gathering surveys, and using it all to pre-test and build up a marketing message. Use spreadsheets and numbers to figure it out. After some desk research, I put up a survey and bought google ads on keywords related to weight loss.

But the weight loss market, the people who were actively spending money and trying to change the fact they were overweight, were women roughly twice my age. Even though being overweight equally affected both men and women across the age ranges, the _market_ was very different. The ones willing to spend money. After doing all this market research, I realized my survey responses mirrored market research reports. Roughly 90% of the market was female. Not 50-50, as I implicitly expected at first. Then I connected the dots that 89% of the survey responses were from women twice my age living in small towns.

Given that was true, I was at a natural marketing disadvantage right from the beginning because I was harder to relate to:

Your riskiest assumptions are probably related to your prospects and customers. Establish empathy quickly with your target prospect, figure out what's valuable, and get your innovation into the market.

I’m not a doctor and I’m not planning on going to medical school just to look credible
I’m not a woman and I’m not planning on becoming one for the purposes of this startup idea
my approach of apps and spreadsheets wouldn’t have naturally appealed to this market anyway, so they were likely to struggle with my process and not have it solve the problem.

It would have been a hard sell, and also likely to be less effective than it was for me. I’d lost faith that I’d be able to achieve results sustainably for this market once I realized the nature of the market. These natural disadvantages I had in this market were ones that I couldn’t easily change about myself. Best to cut my losses and get out. Founder-market fit wasn’t there. In this case, it had marketing implications for me as a as a founder and being perceived as a relatable expert entering a market, even though I knew my process/product was effective. It was a great market, just not a great market for me to enter, at least as a solo founder.

Hence the importance of “founder-market fit”

Josh Kopelman, co-founder of First Round Capital, posits that:

6/ Most founders spend <5% of their time on idea [market] selection, yet I believe that “the pick” accounts for >50% of startup success/failure 7/ Observation #1) Many founders rush “the pick”. If you’re spending the next 5-10 yrs of your life doing something, pick your idea wisely.

Choosing the right market to pursue is one of the key decisions an early stage founding team makes. Even though there are a lot of considerations, fortunately you can iterate to the right combination for you and your team with systematic testing. And the founders themselves are an important part of that decision, which they often miss (as I did above).

The startup world bandies around the term “founder/market fit” (FMF). Founder/market fit: the founders have a deep understanding of the market they are entering. They have relevant knowledge, skills, and experience. Besides that, they have strengths or characteristics. Ultimately, these founder factors help them gain a natural competitive advantage. Build a moat. Theoretically, anyone can test a market test in the abstract or hire an agency to do it for them. But there are markets which a specific founding team will be more likely to succeed in, based on founder/market fit.

And as venture capitalist Chris Dixon says, founder/market fit can serve as a leading indicator “of whether a startup will achieve product/market fit”. Successful founders use their experience to prevent premature scaling. They find it easier to test a value hypothesis using customer discovery, because they have ready access to customers.

There’s three major reasons why getting founder-market fit right makes a difference:

Strongly tied to how founders expect to acquire customers
Choosing a high growth market
Getting the right founding team composition for your business model

Strongly tied to how the founders expect to acquire customers

Here’s why: founders often default to what they know. They expect to acquire customers from market segments they can reach easily, especially if short on time. And if a segment fits well, growth is easier to execute. If founders can build on pre-existing contacts and specialized knowledge, for example enterprise purchasing processes, this can be a major feather in their caps. At least compared to founders who are green. The marketing and sales knowledge in particular is important, particularly in relatively established markets:

Often new ventures can operate in the same domain as previous experience (i.e. founder-market fit), but the way customers are acquired is different. For example, elephant-hunting enterprise software sales leaders aren’t really a good fit as self-service hosted software founders, even if the core business software vertical is right in their wheelhouse. A killer paid online acquisition guru isn’t a good fit for a venture which requires fostering an open source community for adoption. And sometimes domain expertise can’t be relied on at all when markets are entirely new it’s much more challenging to have founder-market fit for a VR startup when the category didn’t meaningfully exist a few years ago. However, you can still have founder-go-to-market fit in an emerging or entirely new market because the methodology for customer engagement can rhyme with what founders have done in the past. (genuinevc.com)

Ditto on the consumer side. Someone with experience in a particular industry will sense patterns, how marketing works in that space. And also will have industry friends who can help, if needed.

You need not commit up front. Before you know anything. Which is also why it’s best not to obsess over the choice. There are techniques like Justin Wilcox’s now classic SPA scorecard to help you get out of the building and to start speaking with prospects. The customer discovery process will not only tell you a lot about the prospects but also about your own ability to acquire them. If you can’t acquire customers for interviews, how are you going to build a high growth business in that market segment?

High growth markets will buoy up the business

If you are entering a new business, there are several potential approaches. The most “long-term” approach to starting a business is to enter a market hockey-sticking into a high growth phase:

You usually sell based on the merits of your offering, not being forced to steal customers away from the competition.
A significant portion of your sales will happen due to market growth, i.e. new people or companies actively looking for a product like yours.
A good heuristic for market entry is the Star Principle from BCG’s matrix, as described in Richard Koch’s book of the same name: aim for a market leadership in a high growth market with new products
From a practical perspective, Steve Jobs used the term “markets in ascendancy” to prioritize product ideas for launch, for his approach of introducing a well-designed alternative to other products in the category

If you take this criterion of growing markets to heart, you significantly increase your overall chances for success. Many of your potential product ideas won’t pass this criterion. Filter them out at the beginning. You’re left the ideas which have better shot at high growth. You buy market share at a discount.

It also means the product is likely to be around for longer. Demand for a new product tends to be highest at the beginning of its life-cycle. If the demand is growing, it’s still early days for the product category.

Founder core competencies are surprisingly a strategic decision

In a small business single-owner scenario like my weight loss one, the founder’s strengths and weaknesses matter disproportionately for a given market. Yet tech startup investors like Paul Graham (@paulg) advise having multiple founders. Each with different relative strength. That strength can come from experience, background, personality, or some other source. This co-founder owns a function in that startup, where they are naturally strong. In addition to playing to cofounder strengths, this approach divides up the seemingly endless workload with accountability, both among themselves and also to the external world. Each relative strength maps to a “key activity”. The key activities box (on a @strategyzer business model canvas) defines how you deliver the value proposition:

The key activities box on your business model canvas

The basic principles is: one founder per key activity. Depending on exactly who you have in your founding team, you’re much better equipped to go after different markets.

For example, you’ve invented an IoT device for agriculture. It gathers data about weather and soil conditions. The obvious starting point is manufacturing and selling devices. But is that your best option? For example, you can give the device away, yet sell services and data. Use machine learning or statistics based on the data that the devices gather. If that’s the case, then you need data expertise in your founding team. The main technical person is ideally a machine learning and software specialist, as opposed to a hardware manufacturing expert.

In these scenarios, a market opportunity exists. You just need appropriate people, each with a different strength. One in each part of the business. To deliver. And ideally each expert trusts the decisions made in other areas. To move fast as a company. Your competitors operating in the same market will also be trying to achieve the same. Your ability to deliver is often a differentiator.

What about industry outsiders as successful founders?

For every founding team who bring a wealth of experience to a successful startup, there is a story of a founding team industry outsiders. They go on to raging success. They bring a new perspective, and as a result, they notice opportunities that incumbents take for granted. The sacred cows aren’t sacred to them. Often, they don’t know any better. Or they deliberately go contrarian.

For example, Laura Behrens Wu is the founder and CEO of Shippo, a logistics and shipping software platform for e-commerce merchants. Laura had:

no technical background so little intuitive understanding of her technical audience.
never worked for an e-commerce company so did not have the domain knowledge to understand their needs which would come naturally after years of living in their shoes.
In short, she was an outsider.

Yet according to @bussgang, Wu has navigated Shippo to becoming one of the leading online shipping platforms in the world, with 80 employees and $30 million raised from top investors such as USV and Bessemer.

These startups are often the outliers in terms of growth, as they are systematic with testing and discover opportunities that everyone else misses. They don’t know industry best practices, so they set out to discover and form their own.

Or like the case of AirBnB. First they ignore you. Then they ridicule you. And then they attack you and want to burn you. And then they build monuments to you. This is a much harder and more expensive path, but also significantly more lucrative when you create a new product category—and proceed to lead it.

Summary

In short, pay close attention to the market you choose. This one decision can significantly affect the outcome of your startup journey. Fortunately, you can iterate and learn; however, many founders miss the strategic importance of this choice, particularly with respect to the composition of their founding team. It’s also a decision you need to need to commit to early on, so dithering too long can also have unsavory consequences for your business.

Essentially, either your founders need to be capable of generating rapid growth within a well established vertical, or be willing to create a new vertical. This is true from a marketing perspective, but also from an operational perspective. Both require specialized knowledge in many industries. Founder-market fit ultimately ensures you can deliver a meaningful experience for that chosen market.

Key Takeaways

Being similar to your market is a marketing asset, particularly in consumer markets
Experience selling to your initial market segment can help, depending on how appropriate that sales experience is to the new product
Founder strengths map to key activities in your business model, thus an important link in founder-market fit
When creating a new market or market category, previous knowledge of industry “best practices” can become a blind spot instead of helping

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