Table of Contents
- No.1: Purpose – Forget brand, create something useful
- No.2: Self-sustainable – Forget investors, build business
- No.3: Scale – Start with small market you can dominate
- No.4: Survival – Avoid competition in early stage
- No.5: Foundation – Build on secret sauce
- Closing thoughts on how to build a startup
Have you ever wanted to build a startup? Building a startup is incredibly hard and requires a lot of effort. There are many things that have to be done right. Every startup contains many wheels that have to be set and maintained properly to keep the company alive. If you have no experience, your chances to succeed are quite low. In this and the next article we will discuss 10 fundamental principles you have to get right to build a startup and succeed. I hope these 10 fundamental principles will help you avoid unnecessary failures and get it right on the first attempt.
Secrets no.6-10 are in part 2.
No.1: Purpose – Forget brand, create something useful
We hear constantly about how everyone should be building a brand. Today, it doesn’t matter whether you run well-established business, want to build a startup or work as freelancer. You can even work as plumber or accountant and there will still be people suggesting that you should build a brand. In a fact, this “brand rush” is probably the most visible among freelancers. Anyway, I think that this brand-oriented approach is completely wrong.
When you decide to build a startup, brand of your startup should be secondary. Your first and highest priority should be creating and building something people will want to use. In other words, the first couple years of your startup journey should be narrowly focused on building incredible product. That world “incredible” is important and we should emphasize it, at least once. The problem is there is already ton of companies build around average products.
Nowadays, it is quite popular to take a look at the app store, find two or three best selling apps. Next, you simply copy them and release under some cool name. If the name of your app ends on “gram” or “io”, you can give yourself some bonus points and congratulate yourself for doing great job. Sure, you will have to add one or two new features and maybe do some small “redesign”. Otherwise, it would be too obvious. Unfortunately, this is what some (many) people think about when they decide to build a startup. There is one problem. It doesn’t solve any pain.
It is probably no secret that great companies are built on great products and purpose. What’s more, all these products are also trying to solve some significant problems or pains. Let me give you a few examples. First is Tesla Motors. Its mission is to “accelerate the advent of sustainable transport by bringing compelling mass market electric cars to market as soon as possible.” The pain Tesla is solving is our dependency on fossil fuels and our current unsustainable model of transportation.
The second example is SpaceX. Its purpose or mission? To Revolutionize space technology, with the ultimate goal of enabling people to live on other planets. What problem are we solving here? There are two problems SpaceX is working on. The first one is the high cost of access to space. The second is extinction of human kind if we stay only on planet Earth. The third example is IBM and its Watson. The mission is to help us use advanced technology to improve various areas of our lives.
For example, doctors can use artificial intelligence to make faster and more precise diagnoses. Two companies built on services are Airbnb and Palantir. What problem is Airbnb solving. It helps people who are looking for some place to stay over couple days. It also helps people who have room they don’t use to make some money from it by renting it. Palantir may be seen as a little bit controversial company. It uses technology as way to improve human intelligence to solve various security-related problems such as frauds, defense issues or even diseases.
Along with IBM, I forgot to mention Apple and Microsoft. Both of these companies were built with specific mission in mind. For Microsoft, it was computer on every desk and in every home. For Apple, it was to make a contribution to the world by making tools for the mind that advance humankind. In other words, both companies were focused on using technology to solve everyday problems of regular people. As a side-effect, both these companies were able to build strong brands and create incredible wealth. Still, it was only side-effect of creating something useful.
We can argue that all these examples I described above are featuring only companies that result of last couple years or decades (IBM). Are there any examples of companies built on the same principles from the more distant past? Yes. For example, we can think about Cornelius Vanderbilt and his Steamboat business. Another example is, Andrew Carnegie and U.S. Steel Corporation, company that used steel in ways that were unthinkable back then.
The greatest companies in the history were never built with the focus on building strong brand. Strong brand always come later often as a side-effect. There is great quote by Peter Diamandis: “If you want to be a billionaire, help a billion people.” This is what, I think, we should aim for and constantly remind ourselves. If you want to build a startup with impact, you should stop striving to build brand. Instead, you should focus on finding ways that will allow you to help as many people as possible. When you achieve this, amazing brand will appear as a side-effect.
No.2: Self-sustainable – Forget investors, build business
In the world of startups is another quite popular thing, aside from building a brand, founders like to do when building a startup. Startup founders are often rushing to the race of raising money from venture capitalists and other investors. This is a big mistake. I see here two big problems. First, when you build a startup that is backed by venture capital, you may not know whether it can survive on its own. You may not know whether your startup is self-sustainable.
The thing is that you may spend year or to building a startup and covering daily expenses from venture capital. Then, when one day you run out of money, you will realize that your startup is not able to make enough money to keep itself going. Imagine that everything you though about the profitability of your startup was just one big bubble. This bubble just burst. Now, you have couple employees and stack of bills you have to pay soon. What will you do?
Now, let’s imagine different scenario. You borrowed a little bit of money from your family. It was enough just to start, but that’s all. You had to work your butt off for months to make sure your company will make enough profit to keep itself alive. As the time went, you improved your profitability and soon also hired your first employees. This allowed you to build a startup that is self-sustainable. Then, you may decide to speed up your growth by taking some investors on board.
When this happens, your hard work will bring you another benefit. The truth is that the majority of investors are more willing to invest in startup that is already making enough money to cover all its expenses. You may read or hear about tons of venture money invested into startups that are not profitable yet. The problem with all these news is that we often don’t see the other side. How often do you hear about startups that failed? The reality is that relatively high number of people are trying to build a startup every day. And, many of these startups fail miserably.
No matter how much time we waste reading the latest news, we don’t hear about these people. On the other hand, we hear about some “successful” seed round almost every day. When you think about it, it is nothing new. When something bad happens and plane full of people crashes, we hear about it for next couple of weeks. On the other hand, how often do we hear about all those planes that successfully arrived at the final destination? Unless it is some type of new and experimental model of plane, we hear nothing about it. Do you same the same imbalance?
Anyway, I suggested that there are two problems with venture-backed startups. Let’s talk about the problem number two. When we build a startup and has almost abundance of cash, the probability that we start to make mistakes will increase. Let me couple of examples that happen most often. First, we may start to hire more people than we really need. Second, we may start to spend money on things that will not improve cash flow of our startup, such new furniture, headquarters on better address, hi-tech stuff, etc. Third may start to spend money on parties.
On the other hand, let’s say that we give it a shot and build a startup without any outside money. It this situation, we often have to watch every penny. Buying something just to make our office more cool and Google-like is no longer valid argument. The same thing applies to hiring. Instead of looking for new employees every moment we are reaching our working capacity, we have to either push more and work harder or look for new and innovative ways to use our resources smarter.
One great example of a startup build in this frugal way is Basecamp. Jason Fried and David Heinemeier Hansson, built this startup approximately seventeen years ago. From its humble beginnings to today, these guys never wen to venture capitalists to raise some money. Instead, they decided to build a startup, and great product, that will take care about itself. In other words, they focused their efforts on company, product and community of users. I think that we all should take companies such as this one and learn from them.
Instead of rushing to investors after writing our business plan on a napkin, we should focus our effort on building a startup that will be self-sustainable. Before we go out and try to raise some capital we should ensure that these money are not necessary or critical for survival of our company. Our company has to be able to survive without these money. Otherwise, we may be building something nobody actually wants. Also, building a startup in frugal way will teach us how to responsibly manage money and come up with innovative ways to use the resources we have.
No.3: Scale – Start with small market you can dominate
What are you working on? I’m building the greatest company in the world. In the next seven years, we are going to dominate the market. How often do we hear statements such as this one? Don’t get me wrong. There is nothing bad with setting big hairy audacious goals. In a fact, I use this statement when people ask me about my plans for future. However, we have to remember two things. First, even Rome was not built in one day. Second, when we try to chase two rabbits at the same time, we may end up not catching any. Well, I like to break the second rule.
The fact is that building a startup is not an easy job. It requires a lot of resources, energy and time. And, every time we enter new market, we have to start the whole process of building strong customer base all over again. This may not be true for companies with established brand, but even these companies still have to make an effort to convince customers from this market segment to buy their products. We also need to keep in mind when we decide to build a startup is that the larger the market the more competition we will probably have to deal with.
Let’s also not forget that trying to satisfy large market can lead us to focusing on building something that looks like a Swiss army knife. Don’t get me wrong here. It is not some rule that products that do everything have to suck. Unfortunately, it is often true. When company tries to satisfy every possible desire of its customers with one product, company will often end up with product that’s hard to use for almost anything. This is another reason why I like previously mentioned Basecamp created by Jason Fried and David Heinemeier Hansson.
This project management app offers basically all you need to get the job done and nothing more. Is there any interesting feature that can be added? Sure, there are dozens, if not hundreds of nice-to-have features. However, these features are no must-have. We can think about these features as sweet cherry on the top. They are not necessary for the majority of user Basecamp’s user base. And, since many of these features might require a lot of time and resources, they are not included.
The downside of going for smaller market is that you will have to “sacrifice” part of potential customer base. This is probably the main reason why they decide to build a startup many entrepreneurs don’t want to focus too narrowly. The logic they are using says that smaller pool of customers will lead to lower profits. What’s more, when you have relatively small customer base, there is higher probability that your product may fail because you will not be able to convince sufficient percentage of potential customers to pay for your product or service.
Contrary to what we may often think, this may not be necessarily true. There is considerably high amount of companies selling product or services to quite narrow market segment. For example, there are startups with products focused on teaching English to people in specific industry. I should mention that these companies are mostly based in China where market for learning English is quite large. There are more than four hundred million people who either want to learn English or are already learning it. Another example of company focused on niche market is Apple.
Apple is actually pretty good example for this article, if not one of the best. It started in garage in Silicon Valley with single product and two people with vision and passion. Jobs and Wozniak didn’t build a startup that would try to get as many customers in as many segments as possible. Instead, they decided to focus on smaller and much more specific group of customers. This strategy was, then, “balanced” with higher margins for their products. Let’s also not forget that quality of these products is adequate to higher price. Therefore, smaller market doesn’t mean less money made.
The last benefit of going for smaller market segment is that you will have to deal will smaller amount of competition. Therefore, your chance of getting on the top of the food chain are higher. Although competition may not be inherently bad, there are some downsides of trying to swim with sharks. We will discuss these main downsides in the next section. For now, let me just say that smaller amount of competition will allow you build a startup in less hectic environment. In the beginning, you will quickly find out that no two days are the same and certainty is not in dictionary.
Let me give you one personal example. One of my startups was focused on optimizing social media for both, individuals and companies. The network we started with was Twitter. I have to admit that Twitter was and still is my preferred social network. There are couple reasons why I prefer this network over others such as Facebook or LinkedIn, or Google+. However, we chose Twitter mainly because it was easy to use it to reach higher number of potential customers without spending a dime on paid advertising. Also, the majority of companies we approached were already using it.
Our biggest advantage was hashtag analysis. Simply said, we were able to take the hashtags you used in your tweet and show what was the potential reach of your tweet. We were also able to tell you how many tweets with this or that hashtag used images, links or mentions. That way, you would have some picture about the environment and “competing” hashtags. This strategy worked quite well and we followed it for a while. After a period of time, a decision was made and we added Facebook and Google+. Soon, we were considering other, less known, networks as well.
This was the first time we started to digress from “start small and dominate” strategy. Very soon, another decision was made and we started to implement new features such as image search and sharing, post scheduling and influencers search. The problem was that many of these features were quite buggy. And, instead of trying to fix these bugs and polish our product, my co-founders decided to add even more feature. This is when I started to have doubts and ask co-founders to schedule meeting to discuss our vision for the future.
It was clear that we, my co-founders and I, no longer shared the same vision. We had also different idea about the strategy for our small startup. Anyway, to make the long story shorter, I decided to leave. That company was also no longer place where I wanted to work. I’m telling you all this for couple reasons. First, before you decide to build a startup with someone, think twice about whether you need a co-founder and who should it be. Keep in mind that you and your co-founder will work together for next couple years. Don’t choose someone with whom you can’t find be in one room.
Second, you have to talk with your co-founder about everything. When you or your co-founder has doubts, schedule a meeting as soon as possible and solve it. When you are building a startup, clear communication is crucial, it keeps all the wheels going. Third, make sure you and your co-founder have the same vision for your startup. When you and your co-founder have different visions or goals, the chances that you will succeed are significantly lower.
Don’t try to build a startup that will conquer the whole world in the day one (or year one). This is something that is pretty difficult to achieve (I’m talking about one year option). In the beginning there will be hundreds if not thousands of things you will have to deal with on a daily basis. Trying to get everything done and have the best product for everyone will only cost you your sanity. Pick one significant pain that enough people have and do you best to solve it. Then, work your butt off to perfect your solution so much that your customers will want to tell everyone about it.
Lastly, just remember that it is much easier to start with small pond and dominate and then slowly (or quickly) grow. Then, when you get on the top of the market, you can start to consider expanding to adjacent markets or growing your product series.
No.4: Survival – Avoid competition in early stage
When you read couple articles or books about entrepreneurship, chances are that you will find at least a few words about competition. Some people will tell you to avoid competition while others will tell you to look for it. One potential “upside” of seeing competition somewhere, some people like to talk about, is that it means that there is some already existing demand we can satisfy. Whether we should believe this theory or not is not important for now. What’s more, I think that this is up to everyone to decide what’s his opinion on competition.
When it comes to competition in early stages of startup life cycle, I would suggest that you try to avoid potential competition for one simple reason. Competition is expensive. When you build a startup, you have to spend money on many things that are necessary to keep the company alive. When you also have to compete with other companies, your amount of your resources may soon start to decrease significantly.
The problem with this is that you will probably never see any returns from all the resources you spent on fighting your competition. All these money are basically wasted. What’s more, you could otherwise use these money to improve your products, get more customers, gain more momentum and improve your position on the market. What if you want to enter market segment with established competition? My first suggestion is to try to stay under the radar as long as you can. Work in the shadow on your product and customer base.
My second suggestion is more Machiavellian and some people will probably not like it. I suggest that you create temporary partnership with your competitor that will be beneficial for both of you. You will have to offer something valuable, but it will give you some time to work on your product, create solid customer base and strengthen your position on the market. And, when you will be confident that your position is strong and product great, you can terminate the partnership and attack your competition head on.
In the early stage of startup life cycle focus on building great product and strong community of users and customers around. Avoid unnecessary and expensive battles with competition. If you have to deal with competitors, considering staying under radar or creating temporary partnership. In both cases, you’ll get some time to build a startup with solid foundation and get traction in the beginning. Then, when your position is strong enough you feel confident about it, you can decide to terminate the partnership or get of shadow and get ready for battle you can actually win.
No.5: Foundation – Build on secret sauce
The main goal of everyone who wants to build a startup should be building something unique. World doesn’t need another copy of this or that company or app. As Peter Thiel says in Zero to One, great companies are built on secrets. When you take a look at the greatest companies that existed through the history, all of them were one of the kind. All these companies were unique. It were also these secrets what gave these companies the advantage to lead. Since no one else knew these secrets, these companies were able to build something that was simply uncopiable.
This is exactly what I want to suggest that you do. Instead of looking for a business you can copy, you should strive build a business that is hard to copy. When you decide to build something unique, you will get couple benefits. Since no one else knows how to imitate or copy your business, there is no competition so far. You don’t have to constantly look over your shoulder and watch what are competitors are doing. Instead, you can focus your attention and energy on building great product people will want to buy and love to use.
One considerable downside of building something unique is that it can backfire. Meaning, you may end up being the one who will spend the most money on creating something new, even new market or industry. Then, others will only have to enter the door and build on what you have created without spending a dime. Facebook and Myspace are great example. Myspace came first and failed miserably. Then, Facebook entered the scene, learned from the mistakes of Myspace and succeeded. This is something called the second-mover advantage. In a short, pioneer may not be the winner.
The question is, how we can avoid being the one who will open and the doors for others? There are two possible solution. First, don’t try to be a pioneer build a startup that’s unique. Instead, go ahead and copy other business. You may succeed, but you will probably not be remembered for doing anything helpful for human kind. Second, get used to the idea that you will have to constantly innovate. This is the only way how you can sustain first-mover advantage. You have to do your best to stay ahead of your competition. Rest is not an option.
If you decide to build a startup that just copies another one, you are shooting yourself in the foot. There are two reasons why we should avoid going this road. First, when you copy what someone else is doing, you will only get what they have at best, but not more. Well, this may not be true because the other company may have an advantage of being on the market for much longer. Second, if you decide to build a startup by copying some other business, someone else can do the same thing and copy your business. Meaning, before you realize it, you will have to deal with another competitor.
On the other hand, if you build a startup on some secret sauce or recipe no one else knows, you will automatically get huge advantage. You will build something that’s hard to copy and compete with. As a result, instead of constantly looking over your shoulder and keeping eye on your competition, you can focus your attention on working on your product, building solid customer base and increasing your market share. However, don’t rest on your laurels. Otherwise, first-mover advantage will soon become second-mover advantage and you will be defeated by someone else.
Closing thoughts on how to build a startup
Let me quickly recap what we discussed today. First, when you decide to build a startup you should focus on your purpose, mission and the problem you are solving. Brand is something that comes automatically when you get these things right and create something people want to use. Second, focus your efforts and energy on building business that’s self-sustainable. You should reach to investors only when you want to get some money to accelerate your growth, not because your startup can’t survive without venture capital.
Third, focus on small market you can dominate, at least in the beginning. Really, start with smallest pool possible and work your way to the top of the food chain. Only then you should think about expanding to adjacent markets or expanding your product range. Fourth, avoid competition in the early stage of startup life cycle. You will already have a lot of work with building great product and increasing your customer base. Don’t try to fight with other companies. Otherwise, your company may bleed to death.
The fifth and last principle is to build on secret sauce. If you decide to build a startup, resist the desire to copy someone else. Instead, look for something nobody else knows and build your company on that. Create company that’s innovative at its core and don’t rest on your laurels. Once you start to innovate, you have to stick to it. You have to constantly push the limits. Otherwise, you will lose your lead and soon also your business. Again, don’t copy, go 10x and innovate.
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