Secrets to STARTUP SUCCESS

CYCLES OF ITERATION OCCUR AT MULTIPLE LEVELS

An important principle of healthy startup iteration is that it occurs at many levels, beyond simply cranking out new features or products. By “levels,” I’m referring to the relative scope and scale of a potential change. At the fast-cycle, narrow end of the spectrum are feature-level iterations, adding wrinkles to existing offerings. These can include changes in functionality, size, color, and many other aspects of a prod-

FEATURES - This includes any attempt to enhance or otherwise re­shape an existing product or service. Eric Ries and other developers often refer to making feature-level changes as “shipping code.” He notes that, in the early days of IMVU, the virtual chat and social net­working site, he and his team would ship new code many times a day, putting new features in the hands of users and instantly tracking the response.9 This kind of continual interaction with early adopters cre­ates a learning and development cycle that can dramatically reduce early-stage venture risk. It allows the product or service to be shaped by real user feedback and data, rather than by laboratory speculation or wishful thinking.

PRODUCTS AND SERVICES - In 2007, as Modality began building pro­totypes of its first products, Mark Williams and co-founder Nate O’Keefe began locking up rights to publisher-owned educational content. At the time, they had opinions but no hard facts about what kinds of content iPod owners would covet in digital form, so they hedged their bets by securing rights along a wide spectrum. These included Netters Anatomy for medical students, BrainQuest for grade school kids, Princeton Review SAT test prep for high schoolers, Cliffs Notes for college students, Law in a Flash for law school students, and Frommer’s Guides for travelers. Over time, as certain products caught fire and others struggled, it became clear that Modality’s early “sweet spot” would be in the health sciences education market, primarily medical and nursing education, the source of more than 80 percent of revenues by the end of 2009. Modality’s ability to iterate rapidly at the product level, resulting in a portfolio of more than 140 titles for sale by the spring of 2010, allowed the company to find, cultivate, and better understand its growing core customer base of healthcare students and professionals.

As Eric Ries emphasizes, an early key to venture success is to avoid the tendency to overdesign your first product—avoiding the mistake of assuming you know what the customer wants—and, in­stead, get early prototypes in the hands of customers who can use, enjoy, kick, or otherwise tear them apart. His phrase for this early of­fering is the “minimum viable product.” A minimum viable product is that version of a new product that allows you to learn as much as possible about the customer with the least amount of effort and re­sources. This approach is not about pulling a few prospective users into a focus group. It requires that you put something up for sale, find out who will buy it, and then rapidly iterate from that starting point.10

In contrast to this notion of rapidly iterating a minimally designed product, Lynn Ivey’s commitment to the creation of a custom-built adult daycare facility can be understood as a single, expensive, and very long product iteration. Validated learning about customers would have to wait for more than a year as the product was carefully built. The building was an indispensable centerpiece of the business model, but Lynn’s resources were dwindling by the time The Ivey finally opened for business.

In the case of The Ivey and other ventures that require a large upfront commitment of time, energy, and capital before a product can be tested in real terms, a key issue is how to test the business hypoth­esis early, with minimal investment. If, through early testing, a concept proves viable, then more substantial investment can be made with greater confidence. If the original concept does not pan out, alterna­tive concepts can be developed. In The Ivey’s case, this might have in­volved piloting the adult daycare service from a leased space, acquiring early customers and learning about the market until the size of the opportunity clearly merited investment in a new facility. With her chosen approach, Lynn was taking on much more risk, although she and her enthusiastic investors did not necessarily view it as such in the booming Charlotte of 2006. Looking back, Lynn wishes she had mitigated the risk by raising significantly more capital (at least $1 mil­lion more) to allow for a slower, steadier customer acquisition and learning process after the facility was in place.

SYSTEMS AND PROCESSES - Every time a product or service is deliv­ered, the venture team has an opportunity improve its operational approach and methodology. Core work processes often come to­gether in ad hoc fashion as specific opportunities are chased and cap­tured. This is healthy, in that it connects your operational design to the marketplace and (hopefully) generates cash, but it can also lead to a patchwork of practices that won’t scale beyond the first year or two of venture growth.

In the heat of customer demand, healthy iteration and improve­ment of processes can be challenging. Even though you are painfully aware that you need to improve your delivery system, fifteen more customer orders just came through the door, so you sprint down the existing operational pathway, improvising here and there, vowing to take time later to make necessary fixes and improvements. Of course “later” never comes, and the longer you wait, the more difficult and complex the necessary fixes or improvements become.

As I’ll outline in the next section, the key is to establish a regular post-mortem practice, early in your startup trajectory, to look back at each production or delivery cycle, harvest lessons learned, and im­plement improvements where necessary. In this way, you instill the ethic of continuous improvement into your firm as it grows—the spe­cific learning practices will change, but the will to improve is sewn into your venture’s DNA.

STRATEGY - Writing about predominantly large corporate organiza­tions, Donald Sull notes the competitive importance of what he calls strategic agility, defined as “spotting and seizing game-changing op­portunities.”11 This notion of iterating at the strategic level is even more crucial for fledgling ventures that are just beginning to cast in­novative products into new or emerging markets. New venture teams can significantly elevate their odds of success by continually assessing broader market opportunities and competitive threats and adapting their strategy where conditions call for change.

In launching D1, J. C. Faulkner and his team planned to open ten lending branches and grow them to the point where each would av­erage $2 million a month in loan volume. After that, the business plan called for expanding the number to twenty branches across the United States, with each branch averaging $2.5 million per month. “When we first got out there,” J. C. says, “our branches grew with a lot more focus and a lot faster than we thought they would.” As the original branches neared an average of $5 million a month, the D1 team questioned its expansion plan. Why open more lending centers, dilute management focus, and take on more complexity and more leases? “We decided we would try to get our existing ten branches up to $50 million a month,” J. C. says. “As it turns out, we got those branches up to $100 million a month, 50 percent faster than we thought we could get the twenty branches up to $2.5 million a month.” The result was a more focused and easily coordinated growth strategy, one that wouldn’t have been chosen without real-time market feedback.

BUSINESS MODEL - During 2009, even as Modality continued to de­velop and release exciting new titles for the iPhone, Mark and his team grew increasingly frustrated with the product clutter and noise in the booming AppStore sales channel. Home to more than 100,000 applications and counting, many of them free or very cheap, with names like “Angry Kittens Attack,” “Flick-a-Booger,” and “Cow Toss,” the AppStore had mostly become a distributor of novelties and games rather than a place for serious learners to find educational products. As a result of this low-end chaos in its primary channel, Modality’s total sales were climbing more slowly than before, and sales per title were slumping.

While redoubling efforts to improve unit product sales through marketing strategies and a revamped website, Mark and his team de­cided to quietly launch a complementary “publishing services” model, in which they would sell their production capacity to publishers or other businesses, building new apps in exchange for a negotiated fee. Unlike selling licensed products under the Modality name, this wholesale model was non-speculative, generating cash for every title produced and shifting the market risk and marketing burden to the purchasing client. Early opportunities had already made their way to Modality’s doorstep with no marketing, as media companies were looking for ways to compete in the digital space. Mark and his team hoped that they could “turn the knob” and grow this business through more concerted business development efforts. By the spring of 2010, they were enjoying roughly equivalent revenue in each of their two major business lines: the original direct-to-consumer line and newly hatched publishing services.

CORE IDENTITY - The most radical iteration a business can make is to shift its very identity and purpose. Nokia, the communications and mobile phone maker, began as a pulp paper mill in Finland. Texas Instruments started out as an oil exploration service. DuPont, backed by French venture capital, started as a producer of gunpowder. The driving force behind such a change is almost always the discovery of an unanticipated market opportunity that aligns with existing capa­bilities of the founding team. Returning to the example of Stacy’s Pita Chips introduced in Chapter Four, founders Stacy Madison and Mark Andrus abandoned their plans to start a health food restaurant to pursue an unexpected retail opportunity, because customers wait­ing in line for a sandwich just couldn’t keep their hands off of pita chips that had been created as an afterthought. The founders were able to quickly direct their talents and resources to begin capitalizing on the pita chip opportunity and eventually decided to close the orig­inal sandwich cart business.

Secrets to STARTUP SUCCESS

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