The tech industry has been a stock market juggernaut over the last decade. It has created enormous wealth for shareholders while leading a transformation of society that is unprecedented in scale and depth. Yet, the success of certain tech firms should not hide the difficulties of starting a tech company. Just 10% of startups survive. Failure is the state of play for the majority of founders. As much as this shows how extraordinary those businesses which survive are, we should be alive to the challenges of starting a tech company. Doing it right is essential to stacking the odds in your favour. Research shows that failure can be attributed to several key errors. Avoiding those errors and making the right moves, will tilt the odds in your favour.
Create a Lean Business
Founders are always caught up in the impulse to create what David Graeber calls “bullshit jobs”. These are jobs that are meaningless and often serve to do nothing more than to highlight the importance of the leader. Unwieldy organizations may serve a psychological importance in giving the leader a sense of importance, but they make the business ungovernable and add layers of costs that place the business even further away from profitability.
Hopefully, rather than stripping away complexity from an unwieldy company, you are building a lean company from the ground up. It’s hard to unwind original sins within a business, whereas starting a business the right way is much easier. Your goal is to have a lean startup.
A lean startup does not only bring your costs down, it is more agile and adaptable than its more complex analogue.
Develop a Minimum Viable Product
Paul Graham is famous for observing that the great tech founders “notice” pain points, rather than think them up. Discovery from real-world experience is the essential ingredient to great startups. Organic ideas are the heart of the product.
From your personal pain emerges the basis of a minimum viable product. Your pain will tell you what the essential, non-negotiable features of a minimum viable product are. Assuming others share your pain, you will be able to find early adopters who will be willing to use your minimum viable product to ease their pain. Early adopters are more important than marketing efforts. These are the true fans who will embark on a journey with you, helping you as you go through various iterations of your minimum viable product and build it into a full-fledged product. How enthusiastically your early adopters take up your product will tell you what kind of “product-market fit” you are looking at. As Marc Andreessen said, in discussing the basis of tech startup success, product-market fit is, “the only thing that matters”.
Pre-Sell Your Minimum Viable Product
Running out of cash is one of the top reasons that companies fail. There is no point in having a great minimum viable product if the business dies. Pre-selling the minimum viable product gives your business a source of capital that it can use to keep going.
Pre-selling also acts as a way of asking fans of your product to become real stakeholders in the development of the product. They understand that the product is new, and its success is not assured. By making a financial commitment, their sense of ownership increases and along with it, their passion for the product and their willingness to spread your gospel. Pre-selling carries not just financial but marketing advantages.
Build a Team Using Equity
As a founder, you may feel that you need to know everything and do everything. This is wrong. You need a team that compliments your talents and fills the gaps in your organization. The barrier that startups often face is that they cannot compete financially with bigger organizations who can offer high wages to talent.
If your vision is strong enough, you will be able to bring talent to the table and you can clinch the deal by asking them to work for you in exchange for equity in the company. One advantage of this is that by making talent co-owners in the business, their interests will be aligned with those of the founders and major owners.
Once you have developed your minimum viable product, its time to release your product to the broader market. This is the growth phase of the business and your aim is to grow as fast as possible in order to kill your rivals in the market and ensure that you are the first to reach minimum viable market share and hence, profitability. With minimum viable market share, you will be able to create barriers to entry and grow your competitive advantages. The most important metrics here are revenue growth, retention rates, promoter rates, recurring revenue and other such revenue and customer growth centric measures.
Bill Gates, the Microsoft founder, has often stressed the importance of measuring the important things. He believes, as we do, that if you do not measure things, assuming those things are measurable (some things are not), then you cannot improve them. You will need to have a laser-like focus on your financial, operational and technical numbers.
The broader the numbers you look at, the fuller a picture you build. You are not just looking at the good numbers, perhaps more important is the search for the bad numbers. If you can find ways to stop doing stupid things, to eliminate waste, to become less bad, you will do better than firms who are focused on seemingly more progressive attempts at doing great things. Your first goal is survival, and that is largely a function of eliminating error, rather than doing brilliant things.
Fund and Scale
At this point, you need external funding in order to take your business to the next level. In the race to achieve minimum viable market share, funding is important because often a business will not be able to operate profitably while growing at sufficient speed to be the first to reach minimum viable market share. A tech business will often arrive at public markets without having made a profit. This can only be sustained if you have the funding to scale your business. Without it, your business cannot hope to reach minimum viable market share.
Get more details here on how you can build America’s next great tech company.