The first concern that affects those who want to create innovative startups is that of failure.
I’ll be honest, it’s a well-founded fear!
A study by GEM (Global Entrepreneurship Monitor) shows that around 50 million Startups are born every year and 90% of these fails.
How can business ideas fail so often?
To answer this question, we must start from the meaning of the word Startup: it is a new company that, by proposing an innovation, can create a new and profitable market.
At the basis of this definition there is a hypothesis: a new product, thanks to its innovative approach, can solve specific problems, and therefore there will be someone who will want to buy it.
Although there are many reasons why these new businesses fail, the number one is to bring a product to the market that nobody wants.
Why is this happening? The truth behind the failure of these companies is that they are often managed as already started companies: Startups, however, have their own rules of life, very different from those of already consolidated companies.
An already started business thrives on incremental innovations or small continuous improvements and with the certain outcome that gradually increases revenues or decrease costs.
Their management method is based on objectives/strategies/sales forecasts/marketing plans / financial projections (business plans) to which specific budgets are dedicated and whose success is due to two factors: planning of activities and their execution.
A Startup, on the other hand, is creating something that was not there before and proposes radical innovations, or intuitions whose commercial success has high uncertainty. For this reason, its market adoptability and sustainability must be verified. Besides, a Startup has a limited budget. The funds available define its survival time before bankruptcy and there is no margin for any waste.
The difficulty in understanding the concept of destructive innovation leads many startuppers to manage their intuitions as normal incremental innovations, accurately executing business plans created in a workmanlike manner and finding themselves at the end of the race without residual funds and with a product that nobody wants.
Destructive innovations require management methods aimed at validating hypotheses. This implies the use of a system that facilitates the execution of tests and their measurements.
The secret to creating a successful startup is the application of the Scientific Method.
THE SCIENTIFIC METHOD IN STARTUP MANAGEMENT
The Scientific Method is based on five moments:
- Observing Facts
- Formulating Hypotheses
- Developing Predictions based on Hypotheses
- Testing the Predictions
- Using test results to generate new Hypotheses and Predictions
Translating it into business terms, the five moments become:
- Creating Representations of Potential Customers (Buyer Person)
- Hypothesizing Solutions to their Problems
- Creating a Business Plan
- Testing the Hypotheses behind the Business Plane
- Using the test results to adjust the previous points
These 5 moments can be grouped into three phases which are representative of the life cycle of each successful Startup / Innovation:
- Creating representations of potential customers and hypothesize solutions to their problems (Searching for Problem/Solution Fit)
- Creating a Business Plan and Test the Hypotheses ( Searching for Product/Market Fit)
- Using lessons learned in the previous phases to make the company grow and structure it (Searching for Channel/Product Fit)
For each of these phases, the Startup will have dedicated Processes, Organizations, Systems and Performance Indicators.
CREATING REPRESENTATIONS OF POTENTIAL CUSTOMERS AND HYPOTHIZING SOLUTIONS TO THEIR PROBLEMS (SEARCHING FOR PROBLEM/SOLUTION FIT) – The iPod Case
The Research of the Problem/Solution Fit is a phase in which a Startup plumbers the market to understand what are the problems of its potential customers to hypothesize solutions.
During this phase, the objectives are:
- Defining Potential Customers (i.e. representations of their profiles and the problems they face)
- Validating the representations of Potential Customers and their Problems (e.g. through interviews/surveys with some of them)
- Formulating hypotheses for the Solution to the Problems of Potential Customers
In this phase, the company will be configured as follows:
- Processes: they will be deconstructed and defined according to specific needs
- Organization: there will not be a real organization but a team with the necessary skills needed to
- Elaborate/Test Potential Customers and their Problems
- Develop Technical Solutions to the Problems of Potential Customers
- Systems: there is no need to structure systems, personal productivity software will suffice at this stage
- Key Performance Indicators: the only time is necessary to carry out the activities which must be minimized in order not to waste funds
To do this it is good to keep in mind that in this phase we are looking for tracks to follow. These will then be validated and corrected in later stages. Therefore, drafts of potential customers and technical solutions to their problems will suffice
The Output of this phase is a set of product concepts for solving potential customer problems.
To better understand the importance of the Search for the Problem/Solution Fit phase, we can make a parallel with a real case, that is the conception and launch of the iPod by Apple.
In the late 1990s, the world of music discovered the digital MP3 format which became popular thanks to an illegal file-sharing platform called Napster.
At the same time, the first portable MP3 players were born, with a memory capacity equal to a CD (10-14 songs), a user interface difficult to navigate and a data transfer system from a PC based on USB 1.1 technology, with the capacity of a CD in 5 minutes.
In the phase of creating representations of potential customers and hypotheses of solutions to their problems, Apple perceived that a large portion of the market wanted to have a larger library (of about 1,000 songs) available to be able to navigate easily. The technical problem related to data transfer from PC (such a mass of data would have taken a few hours), would have been effectively overcome thanks to the FireWire technology, with which all iMacs were already equipped.
Based on this information, the concept that Apple proposed in response to these problems later led to the creation of the iPod (launch October 23, 2001, 100 million pieces sold on April 1, 2007).
Before proceeding, a clarification is necessary: it would be a mistake to think that the case of a company belonging to the hi-tech world of Silicon Valley with a billionaire turnover like Apple is out of context when it comes to Startup.
Being a very famous brand, the use of this case as of those that will follow in the course of the article is linked to a more immediate understanding of the topics covered since they allow you to enter the dynamics of these companies being able to take for granted their model of business.
These cases add value to the contents and demonstrate that the methodologies illustrated in this article can be applied to any product, service, industry, company or innovation.
Creating representations of potential customers and hypothesising solutions to their problems, creating a business plan and testing their hypotheses and using what has been learned in the previous stages to make the company grow are key activities that can be adapted to each business/innovation.
TESTING THE HYPOTHESIS CONTAINED IN A BUSINESS PLAN (SEARCHING FOR PRODUCT/MARKET FIT) – The Facebook and Instagram cases
The Research of the Product / Market Fit is a phase in which a Startup, benefiting from the work done in the phase of creating representations of Potential Customers and hypotheses of solutions to their problems, tests its product concepts to understand if they can have a market that can give rise to a sustainable business.
During the Research of the Product / Market Fit, the objectives are:
- Create a Business Plan to define the Hypotheses of
- Value (someone wants the Product)
- Growth (how many people want the Product)
- Test the Hypotheses behind the Business Plan
For brevity, in this document, we will not focus on how to create a Business Plan but on how to test the hypotheses.
To do this, the use of Minimum Viable Products (MVP) is used.
An MVP is the smallest unit of a product that is immutable on a market. This can be made by:
- Smoke Test or little more than a product description (e.g. a video)
- Prototypes and Trial Versions that allow you to test one or more hypotheses at a time
- Sellable products that can be launched within a market or a portion of it
By putting a Minimum Viable Product on the market, this will be used by those who hear the Problem more, the Early Adopters.
Early Adopters are the first to want a product and are the luck of a Startup as they allow you to collect two types of feedback:
- Quantities (i.e. numerical performance indicators)
- Qualitative (or suggestions that allow you to interpret the numerical performance indicators)
The importance of this feedback is to allow the Startup to recognize whether the hypotheses on which it is based are correct or not.
When the data collected are in line with the assumptions made in the Business Plan, the strategy is to continue on the path taken by optimizing the MVP.
When the assumptions made in the Business Plan are not confirmed, the strategy is to change course based on the qualitative data collected.
In this phase, the company will be configured as follows:
- Processes: will be structured and defined, to minimize the time necessary to create an MVP, release it for Early Adopters, collect their feedback and process them
- Organization: to gain efficiency, it will be necessary to create two working groups
- Business Leadership with the aim of interfacing with Early Adopters and processing the feedback received
- Product Development to develop MVPs and translate test results into new Product Features
- Systems: depending on the budget, it may be useful to replace personal productivity software with standard systems for collecting feedback from customers
- Key Performance Indicators: must be measured
- How many people discover the existence of MVP (Awareness)
- How many people give their contact to the company (Acquisition)
- How many people experience MVP (Activation)
- How many people repeatedly use the MVP (Retention)
- How much income from a possible sale of the MVP (Revenue)
- How many times the MVP has been recommended to others by those who have used it (Referral)
The first measure of these indicators forms the basis which must then be improved by exploiting the feedback of the Early Adopters.
The Output of this phase is the validation of the hypotheses on which the company’s business plan is based.
To better understand the concept of Product / Market Fit Research we can consider the case of Facebook.
When Mark Zuckerberg, Dustin Moskovitz and Chris Hughes moved to Silicon Valley in June 2004, their social network had 150,000 registered users on some American university campuses but near-zero Revenue.
However, the data available to them validated two fundamental hypotheses:
- Value: users spent a substantial portion of their day on Facebook and, on average, they accessed the site twice a day
- Growth: about 75% of the students on the campuses where they were available had registered without a dollar being spent on Marketing
The promise contained in the Startup Business Plan was to be able to create a solid and low-cost network with which to earn from the sale of advertising, and the measured Performance Indicators supported this thesis.
It was mainly thanks to what Peter Thiel, co-founder of PayPal, was convinced in the same year to finance Facebook for $ 50,000, which was followed in April 2005 by a second round of funding of $ 12,700,000, from this time by Accel Partners.
But what happens if the Business Plan Hypotheses are proved wrong?
This case is fundamental in the life of a Startup and can be an opportunity.
We must never forget that failure is the prerequisite for learning.
The budget available to a Startup is usually very limited and cannot be wasted, making sudden changes, of course, necessary and formulating new Business Plan Hypotheses. In doing so, it is an advantage to be able to rely on tests carried out previously, having already available all the feedback from the Early Adopters who will describe what worked and what did not.
To better understand how fundamental this concept is, we can consider the case of Instagram.
The original version of the Social Network of the moment was called Burbn in honour of the passion of its founder, Kevin Systrom, for Kentucky whiskey.
The original format included an app based on geolocation that allowed you to register your entrance to the places visited and plan future entrances. In the app, there were two accessory features or the ability to apply colour filters to your profile photos and to publish photos of the outputs with friends.
Looking at the Performance Indicators, Systrom realized that the geolocation aspect was largely ignored by users while the Early Adopters went crazy about filters and photo sharing.
For this reason, Systrom changed the concept and the name of the app by creating Instagram.
USING LESSONS LEARNED IN THE PREVIOUS STEPS TO GROW THE COMPANY AND STRUCTURE IT (SEARCHING FOR CHANNEL / PRODUCT FIT) – THE DUCKDUCKGO CASE
The Research for Channel/Product Fit is a phase in which a Startup, benefiting from the knowledge of the Early Adopters made in the testing phase of the hypotheses contained in a business plan, focuses on the Acquisition of new customers and Growth.
During the Research of the Channel/Product Fit, the objectives are:
- Acquire a customer base
- Grow the revenues
To do this, Growth Hacking (GH) techniques are very useful.
GH is based on a very specific concept: successful Marketing campaigns usually use known and effective channels, but for this very expensive (for example television campaigns and Google Ads).
A Startup, for obvious budgetary reasons, cannot compete at these levels.
Growth Hacking is based on a process of tests conducted on 20 different Marketing Channels to maximize the Performance Indicators built and measured in the validation phase of the hypotheses contained in a business plan (i.e. Awareness, Acquisition, Activation, Retention, Revenue and Referral) and the profitability of each campaign while minimizing the necessary investments.
In this phase, the company will be configured as follows:
- Processes: will be structured and defined, to minimize the iterations necessary to test the Marketing Channels
- Organization: it will evolve as the company grows towards a more classic organization
- Business Leadership to guarantee business strategies and objectives
- Marketing, Sales and After Sales to attract and retain new customers but also of interfacing with Product Development
- Product Development to develop and test new features based on market feedback
- Operations with the aim of engineering, manufacturing and distributing products in an increasingly efficient way thanks to incremental innovations
- Staff functions such as Human Resources, Finance and Administration
- Systems: the company will begin to structure itself according to traditional methods, maintaining and engineering in parallel the systems used for the Problem/Solution and Product/Market Fit phases
- Key Performance Indicators: Awareness, Acquisition, Activation, Retention, Revenue and Referral will continue to be measured adding the profitability of each marketing campaign. These Performance Indicators will be accompanied by the classic sizes for the management of a company (Gross Sales, Net Sales, Days Sales Outstanding, Days Payable Outstanding, Operative Income, Days Sales of Inventory and CAPEX)
The Output of this phase is validated sales channels because they have the best profitability than the alternatives tested and a higher turnover by the Startup.
In the most successful cases, the Growth Hacking methodology can lead to triggering a system that feeds itself thanks to the word of mouth of those who purchased the product (Viral Loop).
To better understand how Growth Hacking can help in the search for new Marketing Channels, we can consider the case of DuckDuckGo.
DuckDuckGo is a search engine that aims to replace Google for all people who fear that their privacy is violated by the algorithms of the number one system in the world.
After its foundation, the problem of the Startup was to find a low-cost Marketing Channel that would allow the Startup to be visible to as many people as possible without having to compete with actors who had much more funds available.
Scrolling through all the possible options, the idea of using billboards was proposed. The idea appeared poor on paper, as it can certainly be achieved at low costs but, most likely, with equally modest effectiveness.
The proposal gave rise to the idea of taking a test: put an advertising billboard in front of Google’s headquarters with the writing
“Google tracks you. We don’t. “
As a result, the initiative went viral, DuckDuckGo ended up in all the newspapers and sites in the sector, gaining immense popularity compared to the budget invested.
In the world of innovative startups, the concern for failure is well-founded. For those who start a new company, there is nothing more precious than knowing in advance the pitfalls that they will face.
Among these, the most frequent is to define business plans based on intuitions, to execute them with precision and then find themselves without residual funds after having brought a product on the market that nobody wants.
The most important lesson to learn from the failures of other startups is the need for different management than that which is used for companies that have already started a business. This must be based on the Scientific Method to validate the intuitions on which the new businesses are based, checking their market adoptability and sustainability.
To do this you need three moments that are typical of the life cycle of every successful Startup / Innovation
- Create representations of potential customers and hypothesize solutions to their problems
- Create a Business Plan and Test its Hypotheses
- Grow through the acquisition of new customers and structure the company
Proper management of these moments allows you to minimize the waste of funds available, maximizing the chances of success, as demonstrated by the cases discussed during the article.
As noted in the iPod case, those who can confront potential customers and understand their needs maximize the chances of their intuitions being successful.
The example of Facebook shows that those who use an MVP to test their intuitions can obtain very positive results, giving the green light to the execution of effective Business Plans.
In the case of Instagram, even the negative results obtained from the tests prove to be a valuable tool, as they allow the Startup to stop before wasting funds and have all the information to understand what worked and what didn’t, allowing the company to change strategy before it’s too late.
Looking at DuckDuckGo, it is clear how those who use Growth Hacking techniques to find the Communication Channels with higher profitability can achieve visibility and a customer base that normally can be obtained only by investing significant sums in Marketing campaigns.
All the techniques contained in this article are part of a methodology called Lean Startup through which it is possible to maximize the chances of falling back into that 10% of new businesses that are successful every year.
You cannot eliminate entrepreneurial risk and there will always be challenges to overcome, but having a game strategy gives a competitive advantage and makes success much more likely!