How to go through the Valley of Death

While I was writing my blog post on the 10+1 books an entrepreneur should (have) read, I realized how difficult it is for someone who wants to start with her business immediately to go through this reading list. But even after reading all these books, it takes some time to put all these theories in order and use them in practice.

Thankfully, the last semester I was called in the University – where I do my PhD  – to prepare two lectures on entrepreneurship. I wanted to create a meaningful step-by-step guide on how you start a startup, and how you may increase the chances of success. Thus, I chose to follow the concept of a (successful) startup financing cycle and emphasize on how you may work to overcome the “Valley of Death” phase.

In general, before going deeper on this “manual”, you should be aware of two very influential and useful concepts: the lean startup methodology and the design thinking product development approach. The mindset of these methodologies will help you make sense of what is presented here, while you may apply them on multiple stages and phases of any organization.  The roadmap I came up with is consisted of the following 5 steps and 3 phases (the incorporation may happen till the step of prototyping):

startup

Step 1: Choosing and Building your Idea

Generally, you should choose a topic you are good at, which has a market and of course you want to work on for the upcoming at least 5-10 years.

Your idea may (a) create a new market, (b) provide a new solution on a problem, (c) improve an existing solution, (d) use new channels for reaching customers or (e) improve costs. Typical, you should not bet on creating a new market, unless you have a great innovation.

Your idea will possibly change, the co-founders should be between 2 and 3 people, and the most important success factor is your timing on dynamics you cannot control; the PEST (i.e. Political, Economical, Social, Technological) environment, as well as existing competition, will affect your chances of success. The culture of your social network on accepting success and risk, is also something you cannot change and definitely affects your choices, especially on difficult situations.

Typically, your idea may be (a) problem-driven or (b) solution driven. On the first case, it is easier to find a market and make your customers understand you; you know that your customers have a problem or would like a better solution, and you look on business models and technologies that solve this problem (e.g. Services on Demand, Bait and Hook, Multi-sides platforms etc., you may read this). On the latter case, you are aware, you have a patent or you expect a revolutionary technology to rise, and you look for the market to disrupt (e.g. 3D printing, drones, BlockChain, Big Data, AR/VR etc.). In that case, you may look occasionally on the Gartner hype cycle.

The idea is suggested to be simple, and it may do over the Internet what is done already in real life (of course this approach created the .com bubble, because few took into consideration the PEST environment).

After you find your idea, you may map it to competition with the Idea Maze.

Step 2: Testing your Idea Fast(er)

Don’t forget that your idea is useless without implementation, and your implementation is useless without customers. Don’t also forget to search on well-known tech-blogs on similar startups/companies, but also to search for related patents.

On this step you have to do two things: (a) estimate the size and characteristics of the market, to see if it worths to cope with, and (b) try (smart) to understand your customers.

On the first part, you may use the top-down analysis to estimate the market. Initially you can refer to consultants’ reports on the size of the market, the trends of the market, and the tendency on increase/decrease of the size; a saturated, shrinking market is never ideal case to enter (you may run a Porter’s 5 forces analysis here too). You may use Google Adwords Keyword Planner to see how many people in the countries you target have a similar problem, thus they search with specific terms. Taking into consideration the market pie, and the competition, you may define the part of the market you should capture the first 3-5 years. Then you can end up with a target market. Don’t forget to take into consideration the geo-political environment from the PEST(EL) analysis.

On the latter part,you will use the bottom-up approach to estimate the market. You either know the customer (and you are lucky), or you have to run questionnaires and face-to-face interviews to learn your customer. You should read this book, and don’t forget to ask them for the price they are willing to pay; then you can start segment your market. You may also try to build a landing page to start communicating your message. At the end, if you know what features your customers want and what price they are willing to pay, with the proper segmentation, you can calculate the size of the market you can capture. Then put the market growth aspect and you know where you can be in 3-5 years. If you are uncertain on your estimations, you may run three different scenarios (pessimistic, optimistic, probable).

Now you can put the numbers from both analyses together, and see if you have overestimated or underestimated something. If you have failed to identify your market, do it again or specify better your market related to your idea. This is the market you could reach if everything was perfect (you won’t soon). At the end you will feel some uncertainty, it’s an exciting factor of building a startup.

Step 3: Developing an early Prototype

If you really find a market that worths it, you now have to prove that you can execute what you promised; first of all to yourself and then to possible investors and customers. Many KickStarter campaigns use a prototype to raise funds.

A prototype is an early sample, model, or release of a product built to test a concept or process or to act as a thing to be replicated or learned from. It is  the Apple I, it is the Wii-U Gamepad prototype, it is the iPad prototype, it is the Microsoft Courier. It can even be a scenario concept, or for software it may be a script or a mockup design; as long as it is used to learn faster and make early decisions on the product design, anything can be a prototype.

A prototypes proves:

  • The feasibility of idea/concept
  • The capability of team to deliver
  • Popularity/acceptance from users

A prototype doesn’t prove:

  • Customers’ willingness to pay
  • The business model
  • The viability of an idea
  • The cost structure of the operations

To run a prototype you need typically at least a product manager, a designer and an engineer (or a ninja person with diverse background). Read Sprint book to see how to enable prototyping in your organization.

Step 4: Testing the market with an MVP

At this stage, this prototype has to take the form that will interact with the initial customers (the early adopters). So,you have to start working on various parts of the business model that you have ideated initially, mark the hypotheses that increase the risk and create a plan on exiting to the market. This is where the MVP applies.

Accordingly to Eric Ries, MVP is the product with the minimum set of features, and no more, required to make early adopters start paying and giving feedback. Thus the MVP is a version of the product that tries to maximize the process of learning, with the least possible effort.

Before you move forward, you need to clarify the difference between an MVP and a prototype.

An MVP:

  • Tests business model hypotheses
  • Tries to reach the customer, even if it is not profound to them
  • It’s a Lean Startup tool

A Prototype:

  • Tests design hypotheses
  • Applies on a controlled environment, on focus groups
  • It’s a Design Thinking tool

But both of them focus on fast feedback and fast learning.

An MVP considers that the product is the business model, and may require “hacking” or “mockuping” typical business processes. For example, many MVPs hack others’ business processes (e.g. Zappos, Amazon), others mock smart algorithm or AI with human power (e.g. Food on the Table), others launch a storyboard or video (e.g. Machete the movie, or Dropbox), many others use crowdfunding as validation (e.g. Pebble, Oculus VR), and many books started as blogs (e.g. Running Lean, The art of the start). Many consider also a landing page with subscription property as an MVP, personally I believe it is a prototype of an early idea.

Don’t forget that price is a vital part of the MVP, and should apply on day one to validate the business model. The price is a part of the product (the 4 Ps of marketing), the price defines the customer segment you target, while a paying customer is one of the best metrics of the business model.

Then, iterations start. Till this step nothing is linear, while you may need to run multiple cycles before validating an MVP. Many startups had to restart from step 1, and even change completely the market they addressed. There is even a handy list of available pivot types.

Phase 1: Polishing the Product

Now it’s the time to start polish our product. Brand, price, channels, packaging, company identity is good to be aligned and be addressed by professional designers. The question is if you can charge the customers enough to fuel the scale of the business on the next steps, or external funds will be needed.

Step 5: Improving your proven Business Model

If you have reached this step, you have a first finalized version (v.1.0) of your business model. Now it’s time to start improving it and make it scale. To achieve this, first you have to see the broader picture, and identify the general category where your business model belongs to. Thus it will be easier to identify the workflow of your customers through your company. The most common (digital) business models accordingly to Lean Analytics are:

  1. E-commerce: one sells to many, e.g. Amazon.
  2. SaaS: a solution as a platform for many, e.g. Dropbox or Gmail.
  3. “Free” Application/Hardware: A free or cheap initial purchase, with later purchases for usage, e.g. Candy Crush, Printers, Gillette.
  4. Content Producer: Selling high quality content, e.g. news sites, even Netflix and Amazon productions.
  5. User Generated Content: Users are the producers and the consumers, while you make profit from ads, e.g. Google Search, Facebook.
  6. Two-sided markets: Facilitate the transactions between two market segments, e.g. eBay.

Having identified your business model, you have to describe your customer lifecycle based on Lean Analytics and then track the one metric that matters in each phase; by putting realistic goals (i.e. lines in the sand), you can improve progressively your business while you also learn what works and what doesn’t work on your business.

If you still feel your business model is quite flat, you may adjust some Business Model Innovations, meaning you may apply business models from other industries in your own in order to develop a competitive advantage. If you need a practical guide go for 10 types of innovation, or go to FutureEnterprise blog for some recent examples.

Phase 2: Building a strategy for Growth

Without an unfair advantage it’s difficult to move forward; this is an international game. So check if you have any of the following unique advantages:

  • Inside info of your market
  • An expert in your team
  • A dream team
  • The proper network of people around
  • A community (for me this is a winning point)
  • Existing customers
  • Good SEO ranking
  • Intellectual property/patents

Then, based on your competences you should choose the proper strategy. You may have heard of many strategies, like the Blue Ocean strategy, but at the end everything is summarized in the three main strategies based on Porter’s generic strategies:

  • Cost Leadership (broad market, low cost)
  • Differentiation (broad market, differentiated characteristics)
  • Niche (narrow market)

porter3.png

Don’t try to mix any strategies (you may see IKEA or Zara who became hybrid in time), don’t try to cover everything, don’t try to build a clever strategy. At this step you need to clarify and focus on one strategy.

In execution level, try to start local, think global. Step by step you have to grow.

Phase 3: Preparing to Scale

Now you are ready to grow. Before entering a growth organization lifecycle, with your stricter management structure and your expected crises, you need to deal with two more things: your culture and funds that will grow your organization.

For your culture you need a vision, a mission, strong objectives and a passionate team. You may choose among this styles of culture.

For fundraising, the best quick guide to understand funding is this fantastic infographic. But when you look for fundraising, do not forget the pecking order theory ; the order you look for funds should be the following:

  1. Your own funds (e.g. from revenues)
  2. Debt without risk
  3. Debt with risk
  4. Convertible loan
  5. Giving equity away

The principle where this theory stands is that if you are a good manager, you know what you do, and you do the best you can. Thus you wouldn’t like to sell much part of your business. In practice that also is signaling to your investors, the fact that you share the risk and you believe on what you are doing. Additionally, think how much time it needs to pitch your idea around investors, and how much time it needs to close an investing deal compared to a using your own funds or getting a loan (in a proper economy, not Greece of course 🙂 ).


 

FAQ

Q: How much time each step should take?

A: A rough estimation is available in this course, but as long as you may enter in multiple iterations this can only be estimated on money you have to burn in each pivot you make.

Q: Is that all? Is this methodology complete?

A: No, in practice there are many issues, like building your brand day by day, building the right corporate entity, choosing the proper team, choosing the type of customer support, and many more. What I learned from my experience is that there is always a book, a blog post or a Quora reply that replies your specific pain.

Q: Is success guaranteed? 

A: No. If your idea sucks, if you don’t execute, if the team doesn’t collaborate or/and you learn nothing from feedback collected, (you may be a revolutionary but most possibly) you will fail miserably. It’s not the problem of any methodology or guide; Stats are still heartbreaking (90% of tech startups fail, 75% of VC-backed startups fail), and you play againts the odds to get through the Valley of Death. If you want to know the chances and understand the landscape, read Zero to One.

Q: Did it work for you? Why do you share it?

A: Not yet. I have read a lot of books, news and blog posts. I have practiced many more methodologies and tools, I have been wondering a lot how a step-by-step guide would be. But as long as I spent some of my time on filtering information out and put everything in order, I considered it nice to share it with you; I would love to have a roadmap when I started my journey back in 2012.

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