We believe that building great companies lies somewhere at the intersection of luck and being well prepared. It is also always about delivering true value to the customers based on contrarian insights about the state of the world. As venture capital investors at Data Ventures we have met tens of successful entrepreneurs who have built their companies from scratch and achieved global traction. Over the last 18 months we’ve also analysed over 300 seed stage projects and observed their further progress. Consequently, we have started to notice the multiple patterns which make great companies truly great.
What is a great company?
- Size does not matter as it says nothing about value creation, remember: Instagram was sold to Facebook for 1 billion USD while being a 13-person startup
- Ability to scale does matter, truly great companies create value in a very scalable way
What’s the most important is truly excellent value proposition for the Customers
- In order to build a great business you need to make the right decisions in the right time, we call that situation a “crucial moment”.
Three crucial moments – how do we define them?
In our view there are three crucial moments at the seed stage of your company: ideation, discovery and scaling. We want to share with you 3 fundamental steps you can take at every decisive phase in your company life to dramatically increase your odds of success.
IDEATION – the stage of your company development when you think about the value you can bring to the world, identify your competitors, choose co-founders and analyse the outside environment to determine how big the opportunity you want to pursue is.
DISCOVERY – the moment you have started to work on your MVP, talked to customers to validate it, subsequently noted down your theses about the business and sequentially validate it, the stage ends when you know the micro segment you want to target and most probable follow-on segments to be targeted later on, you know what the CAC is, what the LTV is, see a high amount of engagement of your users and know the right marketing/leadgen/distribution channels.
SCALING – the moment when you don’t experiment with product and value proposition anymore and just fine-tune processes as well as repeat the most efficient sequences of activities, it is usually coupled with rapid expansion of revenues and organisation structure.
Ideation – what can we do before we even start our business?
1. Target small segments
No business has ever succeeded with targeting huge markets at the very beginning. Facebook served Harvard students, Apple computer geeks and designers, the pattern repeats itself all over and over again. Consider small segments with large follow on segments and as a result large target addressable markets. It’s better to have ten Clients who truly love you than a hundred who don’t care at all. Search for a strongly interconnected group of users with powerful word-of-mouth effects. But remember, think about global markets from day 1, it will be more difficult later on!
2. It is YOUR problem
The best Founders solve their problems and soon realise that there are a lot of potential clients with similar difficulties. There’s nothing better than knowing the problems of your clients like the back of your hand. More often than not we see an anti-pattern – a lot of startups try to solve non-existent problems of people they don’t really know. Don’t be afraid to be contrarian / unconventional, the obvious good ideas are usually bad ideas, the best projects are usually rejected by most people. What is more, markets which don’t exist are risky. If you already have competitors, that’s great – your job is just to differentiate your product, not to create a new category.
3. Stress test your team
Try to choose co-founders you’ve worked with before at a previous workplace, in projects, at university, etc. Sign an investment agreement and make it formal (never forget about this!) Very important: be aware of free riders. Don’t hire advisors for free shares!
Discovery – how to reach the product-market fit?
4. Validate your value proposition
First of all, take your time. Validating a value proposition is not scalable and it doesn’t matter how much capital, resources and time you have. It will definitely take a while. Secondly, before you start talking to customers, note down your theses about the clients, value proposition and market. Revise it every week, be always sure what your thesis is, what has undergone validation and what has not. After that build your MVP, remember about the word “VIABLE”. MVP is not a simplified backend without proper user interface. It should be a product with just enough functionality to validate your thesis, not less, not more.
You will know if your job is done when most of your clients use your product in their day-to-day activities. Engagement of users is the KPI at the very beginning, not the number of users or “traction”.
5. Don’t screw up on the culture
One of the biggest mistakes of startups at this stage is the culture issue, which means team communication, hiring, people development. Remember that the culture can be affected by:
- Management Actions – setting goals, focusing people’s attention and helping them interpret events.
- Participation – encouraging people to make choices and get involved.
- Information From Others – especially those who matter to us and tell us what’s really important.
- Rewards – What is really rewarded within your organisation?
6. Finding your leverage
Starting-up is a sequence of actions constrained by time, money and focus which is designed to build a scalable business model. Search for leverage in product development, sales, marketing, IT, operations. Leverage is the most important word for the Discovery Phase = maximum impact + minimum effort. You can start scaling only if you know what your leverage is.
Scaling – it is boring!
7. Choose the right moment
90% of startups scale too fast and they get their asses kicked later on. It is a very common case in startups backed by investors without experience – they inject millions in your company and require growth, even if the customer development job is not finished yet, the churn is high and not all users actively engage with your product. It may lead to a lot of frustration on both sides (Investors and Founders).
You need to know you have your fit before you scale. How do you know? You feel that it is easy to sell in your target group, low CAC, low churn, high engagement, it’s just a gut feeling still. What is more important: you should have all the leverage generating activities noted down.
8. Management systems
Measure everything (this sets apart great teams from good or average teams). You cannot manage things you cannot measure! Putting top-down OKR and reporting systems in place are necessary to manage your growing team and user base. If you don’t prepare your organisation for dynamic growth you will end up with complete chaos, huge turnover within the team and churn of users.
9. It’s the Focus, stupid!
In practice scaling is a simple and boring activity – you need to be like a Ninja – repeat & repeat the optimal sequence of moves. Just like in popular karate movies. And yes: you’ve got to really say no 99% of time.
What got you here, won’t get you there – somewhere in the future you will have to go back to the discovery phase (most probably when you will enter new markets and segments or introduce new products) but at that time you will have some parts of your organisation doing only the boring things and some parts doing the experiments.
Putting it all together
If you are a Founder please use this post as a reference point and inspiration on your journey to build a unicorn or at least a zebra. In the meantime please print the checklist you will find below and think if your business is on the right track.
We will appreciate your feedback and the sharing of this post with other Entrepreneurs.