Tag Archives: lean startup

5 Steps to Get & Keep Your Startup on Track

If you plan your startup’s growth appropriately, you can use the identical process to keep your startup on track after you launch.

The ‘Get on Track’ Process:

1. During planning, select values for 7 key drivers of your company’s growth.

Tracka. Customer Acquisition Cost (CAC): For those new customers that you attract as the result of your marketing activities, how much does it cost you per customer?

b. Sales Cycle (SC): How many months transpire between your expenditure of marketing dollars and the acquisition of new customers?

c.  Average Order Size (AOS): How much revenue do you expect to generate each time a customer makes a purchase?

d. Periodicity (P): How often will each customer make a purchase?

e. Retention Rate (RR): What percent of existing customers will remain customers at the end of each year?

f.  Viral Coefficient (VC): How many people will each existing customer attract and successfully convert into new customers? This is a one-time conversion; once a customer refers this many new customers, we assume they no longer refer more new customers.

g. Viral Cycle Length (VCL): How many days will transpire between customers becoming new customers and their referrals becoming new customers?

Note that when planning your company, some of the above (e.g. VC and VCL) will have to be just guesstimates . . . and that’s okay.

However, you should be able to make somewhat more intelligent guesses on CAC and SC based on the type of business and the kind of marketing and sales you expect to conduct. And P and RR values should be much easier to estimate from the beginning based on your business.

2. Before you launch your company, verify that the estimates you’ve selected for the 7 key growth drivers will result in a successful company.  That is, there must be significant revenues and profit, and solid returns for all shareholders to be considered successful. If not, adjust the values until the company becomes successful.

3. Launch your company.

The ‘Stay on Track’ Process:

  1. Every month, compare your actuals to your planned values for the 7 key growth drivers. Enter actual values for CAC, SC, AOS, P, RR, VC, and VCL into your plan.
  2. Verify that the actual values for these 7 key growth drivers still result in a successful company – i.e., significant revenues and profits, and solid returns for all shareholders. If so, you are on track! If not, you must change your strategy.

Change Your Strategy

Based on which key growth driver you want to affect, different strategic changes are in order. Many options exist in every case, but here are just a few ideas:

  • To decrease CAC and SC:  Improve your understanding of the target market. Hone your advertisements to the specific pains of your target markets. Focus on the benefits rather than features of your products.  Offer better pricing or better promotions to increase close rates.
  • To increase AOS:  Offer quantity discounts. Improve your product.
  • To increase P:  Offer frequent buyer programs. Improve your product.
  • To increase RR:  Improve your product’s stickiness.
  • To increase VC and decrease VCL:  Offer referral programs, especially ones that incent both the referrer and the new customer. Make products so exciting that they create a buzz. Add features that increase your product’s value to customers.

As you can see, these seven key growth drivers are not only fundamental to planning your startup, they are also fundamental to keeping your startup on track. Not all are easy to estimate, but you can at least determine in the planning stage what values you must achieve to be a viable company.

Once you launch your company, not all seven are easy to measure, but as you progress, they will become easier. Drive your engine towards success!

Alan DavisDavis is a serial entrepreneur currently in his fifth startup. He is also an angel investor and the author of six books.

“On Track” Photo courtesy of Clare Wilkinson (Creative Commons)

Why Every Startup Needs a Financial Plan

Assumptions are Important

money-down-the-drainHaving a financial plan for your startup is based on a simple concept. It says “If these assumptions prove true, then these financial results will occur.”

In other words, a financial plan is the place where you determine whether or not your business idea could possibly result in financial success.

To start a business without a financial plan would be like sailing out of port in a sailboat with no navigational tools and no idea where you are going. In the case of the sailboat, your life would be at risk. In the case of a startup company, any money or time you are about to invest is likely to go down the drain.

Notice that I am not saying you need to have all the facts before you launch your company. But you need to at least document the assumptions you are making about the business and verify that if those assumptions end up being valid you have a viable business.

In The Lean Startup, Eric Ries provides us with sound advice for starting a company: State your assumptions and then make many small iterations. For each iteration,

  • Invest as little as possible
  • Build a minimally viable product (MVP), i.e., build something you can show your customers
  • Learn which assumptions are valid
  • Pivot and repeat

Innovation Accounting

As a metric for determining that you are making progress, Ries recommends using innovation accounting (IA). IA is basically checking that assumptions are being verified, the product is progressing toward viability, and the startup is learning – all good things.

Traditional Accounting

I would add just two steps to his advice:

  1. Before you launch, build a financial plan based on your assumptions to verify that financial success is at least possible.
  2. At the end of each iteration, repeat the financial plan to verify that the revised assumptions are still sufficient to support financial success.
 Iteration Ia

A company following the traditional lean startup approach is iterating and “making progress” but it is unclear if it is heading in a financially viable direction.

No Financial Plan;
No Knowledge

 Iteration II

By creating a financial plan, you can learn that the path you are considering cannot result in a great financial result.

Financial Plan Shows Poor Results

 Iteration III

By recreating the financial plan with different assumptions, you can determine that charting an alternative path could result in a far better financial outcome.

Change Path & Financial Plan
Shows Good Results

My advice makes sense only if creating a financial plan is not overly time consuming. The secret is to use a tool that supports automatic generation of financial statements directly from your business assumptions. By doing so, financial planning costs you little but saves you a lot.

???????????????????????????????Davis is a serial entrepreneur currently in his fifth startup. He is also an angel investor and author of six books.

Pivoting Without Blinders: Advice for Startups

HorseBy their very nature, startups are full of unknowns. These unknowns are not the blinders in your startup.  Failing to acknowledge these unknowns and give them a value are the blinders.  It is this that hampers success and slows down your horse.

Entrepreneurs have an obligation to their stakeholders to ensure that assumptions they are making about these unknowns could possibly lead to financial success.

For example, a classic unknown for most startups is the price that customers would be willing to pay for your product.  Your startup needs to document some believable price and then demonstrate that if sufficient customers purchase the product at that price, then your company would be viable.

After you’ve launched your company, many of the assumptions you used will be proven false. You have three choices.  Here are those choices with their advantages and drawbacks:

Stick to your original plan   If the assumption proven incorrect was relatively minor, this is a valid alternative. Otherwise, it is somewhat foolish.

If customers aren’t buying at the assumed price, change the price or change the sales method or change the product.  Do something!  Don’t just decide that persistence is always a virtue.

The advantage of sticking to your original plan is that it is what your original investors expected you to do. The drawback is they would much rather have you pivot than lose their money.

Pivot   In my startup #3, we had always envisioned ourselves to be a product company (and gave many of our services free to our paying customers).

After two years without success, we pivoted to become a services company (and gave our products free to our paying customers). That move made us profitable.

The advantage of pivoting is you explore all viable options for your company. The drawback is that, without discipline, you could explore options forever. One secret is to spend as few resources as possible between iterations.

Learn quickly.  Pivot intelligently.  Determine that each pivot has at least the possibility of a sound financial outcome.

Abandon your startup   This is the most extreme case of a pivot. It comes in two flavors: personal and company.  I did a personal abandonment in one of my startups because I had assumed my business partner was ethical; he wasn’t, and I was out of there!

Company closure is the right move when you have seriously considered every possible direction and each one is either impossible to execute or leads to an outcome without financial success.

The advantage of abandoning your startup is it makes no sense to throw good money (or time) after bad. The drawback however is with a bit of tweaking you might have a perfectly viable company.

Wise entrepreneurs pivot. They modify disproven assumptions, once again assess whether the plan could possibly lead to financial success for all stakeholders, and if not, adjust other assumptions until they are once again headed in a direction toward a lucrative financial state.

As you assess your startup, consider how to pivot your business intelligently:

  • Spend as few resources as possible between pivots
  • Compare alternative directions for your next pivot and select the most viable
  • Do a financial analysis to ensure the new direction could result in financial success

Also consider the benefits:

  • Lowers the risk to you
  • Lowers the risk to investors
  • Raises the likelihood that your company will be successful

Assessing the terrain and making adjustments is the essence of pivoting and of responsible entrepreneurship.

???????????????????????????????Al Davis is a serial entrepreneur currently in his fifth startup. He is also an angel investor and author of six books.

‘Running beauty’ photo courtesy of Tambako the Jaguar (Creative Commons)

 

Feature-Rich or Feature-Poor: Entrepreneur Strategies

Once entrepreneurs figure out what products they are going to sell, they still need to select approaches on how they will deliver its features to customers. These are called feature selection strategies.

  • Feature-rich. Start-ups that engineer products have an option to introduce to the market products that are feature-rich. The advantage of this strategy is that customers who are comparing your product against entrenched pro­ducts on a feature-by-feature basis are more likely to select your product. If you are targeting a fairly general market and/or products are in a fairly mature stage of their life cycles [MOO95], you may have no choice. In such cases, order qualifiers (order qualifiers are those features, which if absent, will mean customers are unlikely to purchase) include a long list of features.
  • Feature-poor and build capability slowly. For products early in their product life cycles [MOO95], or when you are targeting a newly recognized segment of a broader market, building a feature-rich product could be dangerous (you may build the wrong product) and expensive. Instead, a better strategy could be to build a smaller, simpler, feature-poor product, sometimes called a minimally viable product (MVP). Then you carefully select representatives from your target market to serve as beta customers who can experiment with the product, provide feedback, and you slowly migrate the product toward a richer and richer set of features based on customer feedback and customer demand. In The Lean Startup, Ries recommends offering the MVP to an even broader market to fully validate not only your features but also your assum­ptions concerning market penetration, price tolerance, sales model, etc.

The above extracted from my latest book, Will Your New Start Up Make Money? Buy your copy at http://www.amazon.com/Will-Your-Start-Make-Money-ebook/dp/B00JOOZQNE.