14 March

Two And A Half Startup Lies And How To Navigate Them

I've been thinking about a post on how to focus your early stage startup, and some Twitter conversations of-late have pushed me into writing mode. Too often I hear a wide range of entrepreneurs and advisors spewing falsehoods, which not coincidentally end up to be the same potholes many early-stage founders fall into. I also see a lot of ideas that have been ‘on paper’ for more than six months – read: not built. So here goes the first post exclusively for my all-new personal blog. I won't promise more frequency, but look for a bit less varnish on things now...

Business Plans Rock

The first fallacy is that you need a traditional business plan. If you have 40-50 hours over a two-week period to dedicate to writing a business plan, you should be a market analyst at a big company -- not an entrepreneur. The idea should be burning a hole in you and your co-founder(s) so badly that riding a word processor for that long would feel like Chinese water torture. That time should be dedicated to one of two things depending on the DNA of your startup: either coding a prototype or writing one hell of a set of business requirements. That's it.

That being said, you can't shortcut the information you'd gather and assimilate during a traditional business plan process. You're going nowhere unless you understand your business inside-out, know your competitors cold, understand how principles from other industries could help you disrupt your industry, have a loose set of monetization strategies (more on this later), etc.

My point is gather the data and thrash the snot out of it with your co-founders. Argue about it for hours on-end, change your mind three times, continually add more relevant data points -- just beat it down and turn it into something actionable. And get square with the fact the strategy is never "locked-down." Stay loose and be ready to move toward the opportunity. By nature, this should mean don't waste 20 hours writing it down -- get it in Keynote or PowerPoint and continue debating it vigorously.

Your Idea Will Change The World

The second big lie is your idea alone is enough to make it. Let me be really candid here: ideas are commodities. Execution is what matters. Think about the best bullshitters you've ever known; didn't they always some crazy plan to make millions? The difference between *that* guy and a successful entrepreneur is a marginally better idea PLUS it gets done. Now clearly you're going to have to build a company that's crazy relevant to 5-10 million people, and hope you can reach a rabid group of early influencers inside that market. But don’t ever kid yourself that your idea isn’t being thought about RIGHT NOW by someone with a more advanced market position, more engineers, better funding, more whatever. That’s why it’s an absolute firefight to get something to market FAST. There’s no substitution for getting code in front of users.

And in case you’re worried everything’s been thought of already, look at companies like Hipmunk and Room77 as great examples of nimble, design-focused tech startups who are taking on really big markets like travel. Anyone who travels significantly understands the pain of the process, which Hipmunk has codified and labeled the “agony” factor. Fundamental improvement of an everyday task is almost always a better innovation strategy than trying to convince users there’s a brand new task they need to jump right on.

Revenue Doesn’t Matter

This is where the half-a-lie comes into play. If you want to save yourself a lot pain later, define a monetization strategy for the early users you’re targeting. Depending on whether (and from whom) you raise outside money, this plan will have to be different levels of baked. If you’re targeting the West Coast super-angel type, then spend more time on your prototype and user experience while constructing 2-4 revenue streams that mature strongly with your second 50,000 users. If you’re raising local money in a town like Atlanta or Austin be ready with your monetization strategy first and your sexy prototype second. To our ultimate detriment, there are no points awarded in our region for great design or UI.

While you’ll never hear me fall into the revenue-from-day-one camp, it’s not realistic to think you can ignore the topic for long. At the same time, very few of our most important tech companies could have succeeded without outside funding. A natural early trade-off is profitability for number of users.

While every startup views monetization differently, you can look across the tech landscape and see the have and have-nots of successful strategies. Facebook, Groupon and Zynga are scaling strongly based on quarter-over-quarter revenue driven by advertising and micro transactions, while Twitter is clearly struggling and Foursquare rolls out self-service Groupon-like offers and co-branded marketing deals with AMEX. Hell, even Kayak is aimed at a 2011 IPO based on their revenue fundamentals. The lesson here is those who crack monetization early win.

On the other hand, you could play it like the AboutMe guys did and bite on an early exit to a big, rich uncle. Or continue to raise money around massive inside-the-fishbowl hype like Quora did. Unfortunately, that program most often applies to a small fraternity of entrepreneurs, and really only kicks the can down the road a bit. At some point, every platform will have to figure out how it makes money.

And speaking of Twitter, they’ve proven to be among the best use cases on how to get to 200M users while employing a series of flailing monetization strategies. And the latest chapter has management 2.0 locking down the very openness that enabled Twitter’s meteoric rise in the first place. But more on that topic in my next post…

Cheers

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