DEVELOP YOUR CORE CONCEPT
Good startup math rests on a business concept that makes sense for you and for the marketplace. Keeping it simple, you can think of your core concept as having three parts:
1. Your definition of success
2. Your strategy and business model
3. Your required capabilities and resources
These elements will be driven by, and grounded in, who you are as a founder (covered in Chapter Three) and the nature of your market opportunity (addressed in Chapter Four).
DEFINING SUCCESS - What’s the point in knowing your numbers if they don’t help you reach a compelling destination? Mountain climbers are fueled by an image of themselves on the summit, and successful founders are pulled toward an envisioned future that outperforms their current circumstances. What future state would prompt you to give up what you have now and take on the risk and challenge of starting a business?
An example of a fundamental choice you will face in defining success is how large a business you want to build and how you want to spend your time building it. J. C. Faulkner faced an early decision about D1’s size that was driven mostly by his personal needs and goals. He launched the company with a five-person management team, incurring a significant expense that meant the new business would have to generate $8 million per month in loan volume to break even and would require $700,000 in upfront capital to become profitable. Alternatively, he estimated that he could start with a two-person management team, break even at $3 million in monthly volume, and spend only $300,000 to get there. “The reason I didn’t choose that route,” he said, “is because I didn’t want to be on a two-person management team and have to live that way. I would have been doing twice as much work once we were up and running. I knew I would enjoy working with a bigger team a lot more, and I would be able to spend a lot more time with my family.” What many would see as a greater risk, spending $700,000 in upfront capital instead of $300,000, J. C. actually saw as lower risk, because it better aligned with his personal goals and allowed him to tap into a wider base of management talent. The larger team would have the capacity to create a much larger company, which also aligned with his longer-term definition of success.
CONCEIVING YOUR STRATEGY AND BUSINESS MODEL - Your strategy defines what business you are in: what you provide, for whom, and why. Your business model dictates how you will configure the pieces of your business system together as a profitable whole. Hundreds of books have been written on the topic of business models and strategy, and experts will forever quibble and wordsmith around the edges of these concepts. But the core of your business blueprint will most often be driven by the following questions:
■ What products or services will you offer? To what customers or markets?
■ What is your value premise and how will you deliver it?
■ How will you acquire customers and distribute your product or service to them?
■ What price will the market bear? Will this generate a healthy profit for you?
■ What will set your business apart from the rest? How will you overtake and defend against competitive forces?
■ What factors will make or break your model? In what areas must you excel in order for your model to succeed?
■ How will you experiment, learn, and continually reformulate your model as you go forward?
Many of the answers to these questions will reveal themselves over time as you execute on your game plan, but it’s vital to think about them early and deeply. One of the refreshing advantages of being a startup, relative to established competitors, is that you possess the power of a blank sheet of paper, the ability to shape your path forward without being shackled by existing commitments, partnerships, infrastructure, or inventory. Big companies are battleships; you are the speedboat, still at dock. Spend time clarifying your intentions. Lay down a rough outline of your future business. What will your business look like after it is up and running? Will it be large or small? Selling products or services? Mass market or niche player? Consumer - focused or B2B? Known for blazing speed, high quality, or low price?
Mark Kahn’s idea for his second startup, TRAFFIQ, was to create a platform directly connecting buyers and sellers of online ads—to become the eBay of Web advertising. The value proposition was clear—he was not the first or the last to envision an online advertising marketplace. He believed two factors would make or break his venture. The first was building a high-performance, high-capacity technology platform. The second would be his ability to scale: to attract and serve a large number of buyers and sellers in an ever-increasing, self-reinforcing loop of success. The value of the marketplace would be directly proportional to the number and quality of its users. Using the eBay example, Mark explains, “On eBay, if a buyer is looking for children’s toys and I’ve got a lot of sellers who are selling presidential pins, that’s no good. The market is not providing value. So it’s about making matches. And if TRAFFIQmakes matches, then it provides liquidity, and if it provides liquidity, it builds scale; and if you can build scale, you make it defensible.”
Similar to TRAFFIQ, Mark Williams positioned Modality as a conduit between buyers and sellers. On one side were the traditional print publishers, who owned large vaults of branded educational content. On the other were iPod-toting students, who wanted digital versions of educational titles on their mobile devices. Modality’s approach was to lock up rights to publisher content in the form of licensing agreements and move as quickly as possible to convert and sell this content to iPod users. Because of the free-wheeling, Wild West nature of the AppStore distribution channel, a make-or-break factor for Modality would be its ability to transition from a wide array of early products—in effect, a kind of experimental spaghetti-against - the-wall approach—to more focused investment in bestselling product categories. In the market fog of nearly 100,000 competitive titles being sold in the same channel, gaining and analyzing relevant sales data would prove as difficult as it was vital.
Although every venture will face its own unique set of challenges and opportunities, strong strategies tend to have a few common threads. First, a good strategy meets the challenge of customer acquisition head on. How are you going to find customers, and how will you guarantee sales success? I can’t think of anything more vital to a young business. Second, strategy is about focus, which means saying “no.” Don’t fall into the habit of picking up every shiny object that appears along your path. Third, strategy drives, and is driven by, your core identity. What is unique, unchangeable, non-negotiable, or indestructible about your business? What makes you you, and how does this translate into a competitive advantage?
ESTIMATING CAPABILITIES AND RESOURCES - Once you have envisioned how you will create and deliver your offering, you can broadly estimate what capabilities, tools, systems, and other resources will be required to set up and run the business. What will it take to launch your business model? What basic building blocks will form the foundation of your overall cost structure? This step is partly creative, like crafting and assembling the pieces of a puzzle, and partly analytic, starting with broad categories like talent, technology, or capital equipment, then breaking those down into component parts. Your ability to accurately estimate these requirements will depend on your business stage, the maturity of your concept, your understanding of the market, and so on. But be sure to sketch out, as clearly as you can, what will be needed along what timelines to put your business model in place and get your venture up and running.
As you think about how to bring your business model to life, push yourself to understand and utilize the more innovative options available to you. Today’s entrepreneur can benefit from a mind-boggling array of tools and systems to get things done, access customers, and deliver offerings. You can build a global brand from your basement and distribute new products across the world with the click of a mouse. An example is the game-changing practice of crowdsourcing, popularized by Jeff Howe’s book of the same name, allowing you to build and test sophisticated products at unprecedented speed and minimal cost.4