April 1st,2019 - Forbes
What builds value in a startup? If net income was the main valuation variable, many billion dollar companies like Uber and Lyft would have been considered worthless. Similarly, most well funded early stage startups would have not been able to raise millions of dollars at valuations worth tens of millions of dollars. The question is, what should entrepreneurs do in the early stages to build startup value even without a product that generates millions of dollars? Conditioning the success of the startup on the perfection of the product is, in most cases, not the way to go.
A startup is created to search for a repeatable and scalable business model. Entrepreneurs that focus exclusively on building “the perfect” product since day one are working under the hypothesis that their upcoming solution not only found a repeatable and scalable model but also an ideal customer, a viable market segment, the right pricing and functionality that address buyers’ needs and meet their expectations. Many entrepreneurs invest significant resources, in some cases, for over a year to eventually realize that they built a product no one needs.
Bootstrapped or funded, here are three ways to build startup value and standout before you build a product.
Become The Product
A startup is scalable when it creates a product many people can benefit from without necessarily needing the help of company representatives. To reach scalability, a startup typically goes through several loops of hypotheses testing, iterations and in some cases, complete pivots. Shortening the learn-build-measure loop is how entrepreneurs can alleviate risk, make progress without burning stages and avoid premature growth which is one of the main reasons behind startup failure. At the end of the day, business success is the sum of small wins.
There are many levels of growth entrepreneurs can reach by doing things that don’t scale which entails solving the identified problem under the condition of the unavailability of the product. For many first-time entrepreneurs, a startup is synonymous with mobile or web applications. The truth is, a startup can exist without an app, at the end of the day, it is a business and as long as a problem is being solved, it is a startup. The only difference between small businesses like restaurants and startups like food on-demand is scalability. Software enables scalability but it is not mandatory in the early stages of a startup.
Whether or not you have the funding you believe you need to start, before you build the product (app), find a way to solve the problem, gather user feedback and generate revenue without it. Groupon had a bumpy road before the team found the right idea. Despite having the funds, Andrew Mason’s first ideas failed. When he found what ticked, Groupon, he didn’t need a complex algorithm to launch the product. He created a WordPress blog that featured deals from different vendors and announced the offers to his network. In fact, he sold the first deal to employees that worked in the same office building. Buyers didn’t even know there was a blog for the deals.
Andrew and his teammates became the product and focused on connecting two key stakeholders, buyers and sellers. They didn’t need an advanced product or a product at all to make this connection and get the job done.
Using this mindset, think how you can start solving the problem quickly without a product. And keep in mind that one day, it will be a good story to tell the media and future investors.
Presell The Product
It’s fair to say that if strangers are willing to prepay for an upcoming solution, you are likely onto something. This changes everything. Imagine shifting your focus from trying to create “the perfect” product, which I am sure you would agree with me is costly and risky, to finding a burning need and selling a solution before you even create it. In other words, you could be investing your time in identifying a need and conveying its value proposition instead of money in building a product that may or may not solve the problem.
However, by combining the “become the product” approach with presales, you can not only sell a promise but also deliver the solution to ten, twenty or even one hundred customers even if you are doing things that don’t scale. Groupon would have not been able to reach a billion dollar valuation in less than a year and a half using the nonscalable approach they started with but it was thanks to that low cost, short feedback loop that they were able to design and execute on a scalable plan on strong foundations and with higher success predictability.
Build A Tribe
The trading app Robinhood had over 350,000 people on the waitlist before its release. While this number is impressive, co-founder of Y-Combinator Paul Graham argues that you would rather have one hundred people that love you than a thousand that kind of like you. This is to say that you don’t necessarily need a tribe of hundreds of thousands of people as long as you can have enough that love your product and trust you to deliver the solution. This group of early customers will not mind you “becoming the product” and will take the time to provide you with feedback and refer you to others.
Many entrepreneurs exclude the power of in-person interactions using the argument that they are building an internet startup. Groupon, Airbnb, Uber, Facebook and numerous global companies started with a network of people they got to build a relationship with in person. A small group of big fans can help you build a network effect.
Take the role of an investor presented with two startup investment deals one with an advanced product and no traction, the other has released several basic versions of the solution and gathered feedback from hundreds of users while generating revenue. The latter is significantly more compelling.
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