Entrepreneurs Blend Passion and Prudent Risk Taking

Written by Sean Murphy. Posted in 1 Idea Stage, 2 Open for Business Stage, Design of Experiments, skmurphy

Successful entrepreneurs are fueled by a passion to change the world tempered by prudent risk taking. Many risks have to be managed on an ongoing basis cannot be eliminated once and for by careful planning or the achievement of a particular milestone:

  • managing cash flow and the risk of a downturn,
  • meeting your obligations to your family as well as your business,
  • continually developing new skills and connections to cope with evolving customer needs and new competitive threats.

Noam Wasserman had an article yesterday’s Wall Street Journal on “How an Entrepreneur’s Passion Can Destroy a Startup” that focused on entrepreneurial passion and prudent risk taking. He has some excellent advice with regards to a shared risk analysis with your spouse (and a plan how to decided when to quit before you are in the middle of the roller coaster ride) and identifying potential risks and problems with you plan (what Gary Klein has called a “pre-mortem” in other contexts is incredibly useful for a startup team to do periodically, not as a way of hanging crepe but of anticipating and preventing or mitigating foreseeable problems).

Here is a list of risks he identified

Wasserman Tests: Excess Entrepreneurial Passion

Wasserman Test: Do You … SKMurphy Commentary
Feel like you are on mission to change the world? This is a good thing.
I think this is probably a good thing. Doesn’t mean you should prepare to run your business. But if align your business with a higher purpose I think you are more likely to persevere.
Get insulted when someone points out legitimate flaws in your idea or product? This is a red flag, but it  may be as much about personal maturity as anything else.
Find it hard to come up with pitfalls you might face or to detail a worst case scenario for your venture? This is a red flag, but it may be less about passion and more a lack of knowledge about business or your industry. You need to do premortem’s periodically to prepare for problems and mitigate those you can.
Raise money from professional investors when your #1 goal is to “work for myself” or “to control my own destiny”? I think this is a low probability situation.
This can happen but normally entrepreneurs motivated by a desire for autonomy don’t seek professional investment and those that do are typically screened out as part of due diligence.
Hire friends and family whom you may not be able to fire if they underperform or circumstances change, because you are confident you won’t face those issues? I think this is a low probability situation.
If the business is not doing well typically friends and family want out, if it’s doing well you can often find people role that fits their talents if they worked with you in the beginning.
Neglect to run careful tests to assess consumer demand? This is an ongoing challenge not something you can ever fix or satisfy.
Large business fail at new product launches quite frequently as well, I think this is less a passion problem and more something that is very hard to do.
Assume you won’t need a financial cushion in case the venture takes longer than anticipated to generate income? This is an ongoing challenge not something you can ever fix or satisfy.
Sometimes it’s the fact that a team is almost broke that forces them to make the necessary changes to succeed.
Resist talking honestly with your significant other about the money and the time you expect to commit to your venture, and about the potential pitfalls you face? This is a real risk. This is a hard conversation but one that has to happen frequently. You have to treat you spouse or significant other as a member of the board of directors. I don’t think this is a passion problem per se, but failure to make a joint decision and keep them informed is a real risk.
Figure you don’t need to address the holes in your skills or networks in advance of founding? This is an ongoing challenge not something you can ever fix or satisfy.
There are always holes in your skills, consumer demand changes require new skills, competitors attack you in unanticipated ways that require new expertise, your network is never broad enough. I don’t think you are ever prepared enough and you have to be learning and connecting on an ongoing basis

I was struck by one paragraph:

For instance, almost 800 founders took a predictive test that evaluated their startup ideas, and then received recommendations about the next steps they ought to take. Thomas Astebro and his colleagues found that a sizable percentage of founders who received a recommendation to halt progress on their startups because the idea wasn’t commercially viable kept going anyway—29% of this group kept spending money, and 51% kept spending time, developing their idea. On average, they doubled their losses before giving up on pursuing their idea.

It Does Not Help To Tell An Entrepreneur Their Idea is Not Viable

It’s not helpful to tell entrepreneurs that their idea is not commercially viable. All new ideas are not commercially viable when judged by “conventional wisdom” until conventional wisdom changes.  Entrepreneurs are probably even less inclined to take advice from college professors who have never started a company. If you could reliably predict the economic viability of new idea you would not be selling analytics you would be making  investments.  Here is Thomas Asterbo’s bio from Genesis Analytics

Tom Astebro is currently Associate Professor in Management Sciences at the University of Waterloo. He has seven years of experience in scorecard development. Tom developed the Genesis algorithms and technology as part of research at the University of Waterloo that was sponsored by CIBC and Nortel and earned the distinction as the creator of one of the three “Most Promising Technologies” in a recent Canadian competition.

Tom has published 29 articles, made 49 presentations at conferences, obtained research funding from NSERC, SSHRC, MMO, Carnegie Mellon, Telia, Volvo, Handelsbanken, and the Sweden-America Foundation and won ten international/national research awards. His research has been mentioned in Business Week, the Financial Post, the Globe and Mail and the Ottawa Citizen. He has worked as a management consultant for banks, insurance and manufacturing companies in Canada, Sweden and the Netherlands and has taught at Universities in Canada, the U.S., Sweden and Australia. Tom holds a Ph.D. in Engineering from Carnegie Mellon University and an M.B.A and a M.Sc. from Chalmers University of Technology, Sweden.

Encourage Prudent Risk Taking But Don’t Try and Blunt Passion

What is very helpful is to get entrepreneurs to test their key assumptions–”what else would have to be true for your business to work”–and get them to start testing critical aspects of a plan. When a peer entrepreneur is working on a idea that you don’t think is viable, it doesn’t help to tell them “I don’t think it will work” or even “Here is why I don’t think it would work.”

Instead,  think about framing it as

  • What risks are you worried about?
  • Here are three challenges I think you business has to overcome to be viable. Do you have evidence or results that indicate that this won’t be a problem?
  • What could you do to test or explore how to work around these problems before investing time and money in other activities that don’t attack the riskiest areas first.”

What Would Have To Be True For For Startup to Thrive?

This approach to helping an entrepreneur think  through their risks and challenges is something we try and do at a Bootstrapper Breakfast when someone says what they are working on and another attendees says something like “that’s a crappy idea or that will never work.”

We try and get them to think through “what would have to be true for it to work? What are the key challenges they have to manage to make it work?” Because entrepreneurs can always tell their friends with “real jobs” about what they are working on and either be told, “that’s not viable” or “that’s great” (meaning please stop talking about this) and not get useful feedback or critique.

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Customer Interviews: Spend an Hour to Save a Minute

Written by Sean Murphy. Posted in 1 Idea Stage, 2 Open for Business Stage, 3 Early Customer Stage, Customer Development, Lean Startup, Rules of Thumb

For customer interviews we have a rule of thumb that if an hour or research saves a minute early in the conversation it’s a good investment.  When you look at the list of questions you have prepared to learn about the prospect’s business and their needs, it’s easy to say to yourself, “I am really busy I can just ask these at the start to ‘set the table.’” But there are significant risks with this approach.

Preparations Cuts Risk Of Customer Interviews Ending Prematurely

While the interview may be nominally scheduled for 15 minutes or a half-hour and may run an hour if it goes well the first six minute or so  are critical to communicating that you have done your homework on their situation and their needs. If you start to ask questions that are already published on-line you can appear lazy or unprepared. If you can do research on a prospect in advance, it’s worth spending an hour to save a minute in the conversation. You can even start the conversation by saying “when I prepared for this conversation here is what I learned about your firm” and give a brief summary of what you know about their situation.

It’s OK to say “I see on your website that you have hired four people in the last three months, how has that impacted …” or “I read a profile of your firm in the San Jose Business Journal Book of Lists, have you grown beyond the 12 people listed in February?” This shows that you have done your homework and don’t want to waste their time but need to confirm some of the key facts that may bear on their needs.

Information Sources To Consult Prior To Customer Interviews

  • Do a thorough review of the prospect’s website.
  • Search for any articles in the last two years at least to see what kind of press coverage they have received.
  • Review the Linkedin profiles for the firm, the person you are talking to, and anyone with similar titles or in the same department.
  • Review on-line postings in relevant forums for the industry.
  • See if they have a blog, a twitter account, a YouTube account, and similar social media sits that are often used for business purposes.

Six Questions That You Normally Have to Ask In The Conversation

  1. Prospect’s description of the problem in their own words. This is rarely more than a sentence or two and capturing the essence in their own words is key.
  2. High level description of current work process or work flow in their own words. This forms the basis for any delta comparison or differentiation of your solution.
  3. Any constraints they mention: if you hear the same ones multiple times you will more than likely have to satisfy them.
  4. How they will tell that a new solution will leave them better off: this is different from asking them to specify the solution, it’s asking for “future state” or the end result they would like to achieve.
  5. What else they have tried to do to solve the problem: probe for why they were not satisfactory.
  6. Key metrics or figures of merit they would use to evaluate a new outcome.

Closing Thoughts

“A month in the laboratory can often save an hour in the library.”
F. H. Westheimer

Entrepreneurs seem to divide into two camps:

  • those who want to have a conversation immediately, and
  • those who are quite content to research for months as long as they don’t have to talk to strangers.

Striking a balance is the key to maximizing your learning from a customer interview. Effective research prior to the customer interview allows you to

  • Ask better questions
  • Provide evidence of your commitment to developing a mutually satisfactory business relationship
  • Detect when your prospect is leaving something out or perhaps coloring the situation too much. You are not a stenographer there to capture whatever they say without reflection, but if your only source of information is what they tell you then you risk “garbage in, garbage out” in your product plans and MVP.

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Q: How Do I Calculate Business Model Parameters For A Novel Product

Written by Sean Murphy. Posted in 1 Idea Stage, 2 Open for Business Stage, 3 Early Customer Stage, skmurphy

Q: How can I go about calculating  Customer Acquisition Cost (CAC),  Customer Lifetime Value (LTV), and other business model parameters for a technology that I will use to attack an entirely new market with no historical data?

While there may be “new markets with no historical data” there are no new markets that cannot be benchmarked against existing markets by asking these two questions:

  • What do people stop paying for to pay for you offering?
  • What do people stop spending time on to spend time on your offering?

What do the Customer Acquisition Cost (CAC) Customer Lifetime Value (LTV) look like for these substitutes?

Elicit Symptoms From Prospects

Alternatively what symptoms will prospects admit to having? They won’t read articles or click on adwords or watch videos about problems that they don’t know they have or believe they may be affected by.  An effective approach in the early market  is to interview prospects to find unmet needs, persistent problems, and goals at risk.

We Measure the New By the Familiar

The reason why light bulbs were measured in candlepower and steam engines (and later internal combustion engines and then electric motors) were expressed as horsepower. Henry Ford observed in “My Life and Work“ that, “A horseless carriage was a common idea…ever since the steam engine was invented…” We call a horseless carriage a car.

Things that are genuinely new are mysteries and don’t become news until they can be expressed as part of a familiar context or by analogy to a familiar example. Alan Kay gave a great talk on this last point that was recently highlighted by Jim McGee, “Alan Kay on Invention vs. Innovation.

What Job Will Your Prospect Hire Your Product For?

What is the job that prospects will hire your app to do? The phonograph was probably one of the most discontinuous innovations of the last few centuries. Here are some examples that Thomas Edison offered for the phonograph to North American Review in June 1878:
  1. Letter writing and all kinds of dictation without the aid of a stenographer.
  2. Phonographic books, which will speak to blind people without effort on their part.
  3. The teaching of elocution.
  4. Reproduction of music.
  5. The “Family Record”–a registry of sayings, reminiscences, etc., by members of a family in their own voices, and of the last words of dying persons.
  6. Music-boxes and toys.
  7. Clocks that should announce in articulate speech the time for going home, going to meals, etc.
  8. The preservation of languages by exact reproduction of the manner of pronouncing.
  9. Educational purposes; such as preserving the explanations made by a teacher, so that the pupil can refer to them at any moment, and spelling or other lessons placed upon the phonograph for convenience in committing to memory.
  10. Connection with the telephone, so as to make that instrument an auxiliary in the transmission of permanent and invaluable records, instead of being the recipient of momentary and fleeting communication.

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An Entrepreneur Is A Change Agent

Written by Sean Murphy. Posted in 1 Idea Stage, 2 Open for Business Stage, skmurphy, Video

I like this 2009 video by Grasshopper “Entrepreneurs Can Change The World” that portrays the entrepreneur as a change agent and celebrates the freedom and economic opportunities that America has traditionally offered immigrants.

Here is the transcript from the Grasshopper site with some observations interspersed

Do you remember when you were a kid and you thought you could do anything? You still can. Because a lot of what we consider impossible is easy to overcome. Because in case you haven’t noticed, we live in a place where one individual can make a difference.

Want proof? Just look at the people who built our country: our parents, grandparents, our aunts, uncles. They were immigrants, newcomers ready to make their mark. Maybe they came with very little, or perhaps they didn’t own anything except for a single brilliant idea.

These people were thinkers, doers, innovators until they came up with the name entrepreneurs. They change the way we think about what is possible. They have a clear vision of how life can be better for all of us, even when times are tough.

The ability to look at a situation with “newcomer’s eyes” is a key element to unlocking creativity. So is time pressure and limited resources.

Right now, it’s hard to see when our view is cluttered with obstacles, but turbulence creates opportunities for success, achievement and pushes us to discover new ways of doing things.

So what opportunities will you go after and why?

If you’re an entrepreneur, you know that risk isn’t the reward. No. The rewards are driving innovation, changing people’s lives, creating jobs, fueling growth, and making a better world.

Entrepreneurs are everywhere. They run small businesses that support our economy, design tools to help you stay connected with friends, family, and colleagues around the world, and they’re finding new ways of helping to solve society’s oldest problems.

Successful innovation results when entrepreneurs manage their own shortcomings,  find a  problem they care about, and approach it from different angles with small safe-to-fail experiments.

Do you know an entrepreneur?

Entrepreneurs can be anyone, even you. So seize the opportunity to create the job you always wanted. Help heal the economy. Make a difference. Take your business to new heights.

But most importantly, remember when you were a kid, when everything was within your reach, and then say to yourself quietly, but with determination: It still is.

I have come to the conclusion that most entrepreneurial careers are involuntary, undertaken by “mavericks, iconoclasts, dropouts, and misfits” to quote Sramana Mitra. The trick is to minimize the amount of wasted effort by doing less with less in a way that builds on existing relationships, knowledge, and successes.

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The soundtrack to the video is “Chain Reaction” by Carly Comando; she also composed  “Everyday” for Noah Kalina’s “Noah takes a photo of himself every day for 6 years.

 

Few Against Many Requires Focus and Perseverance

Written by Sean Murphy. Posted in 1 Idea Stage, 2 Open for Business Stage, skmurphy

We Happy Few

The fewer men, the greater share of honour. [...]
We few, we happy few, we band of brothers;
Henry V in Act IV Scene iii 18–67. “St. Crispin’s Day speech”

A college kid in a dorm room starts assembling and selling person computers.. Two college dropouts–or recent graduates–start building hardware in a garage. A woman starts a software consulting business in her second bedroom, then creates a software product. Four men in a pie shop sketch a design for a personal computer. All startups by definition start small and attract founders who welcome the independence. Perhaps they have failed in a larger  firm or they have become disillusioned working in one, perhaps they have never worked a large company and have no idea what’s really involved.

These startups often face competition from established incumbents who have more people, better financial resources, and relationships with customers. Their success in a niche can attract the attention of larger players either intentionally through their messaging or when prospects they have approached turn to existing vendors to provide similar functionality.

Marathon Not a Sprint

First time entrepreneurs often romanticize the speed and power of working in a small team, but experienced entrepreneurs understand that established firms often fight back very effectively: no market of with any value is uncontested and it’s going to be a marathon not a sprint.

“History seems to indicate that breakthroughs are usually the result of a small group of capable people fending off a larger group of equally capable people with a stake in the status quo.”
George Heilmeier in “A Moveable Feast” [PDF] 2005 Kyoto Prize Lecture

The team has to set a sustainable pace from the beginning. This often means not only work/life balance–keeping all of the critical commitments you have made to friends and family in addition to your co-founders–but work/work balance: finding a way to generate revenue, to bootstrap, while you are exploring the market and building the first and sometimes subsequent version of your product. Not every new product is an immediate success.

Startups are incredibly hard work. They require that you maintain good relationships with your family and friends and continue to participate in the communities you are a member of so that you can get support and useful perspective when you need it. Very few real products are built in a (long) weekend or a week or even a month or two. Plan for at least nine to 18 months of hard work where there are a number of “sprints” that are a few days to a week of concentrated work. But the team has to be able to sustain creative problem solving for a period of probably two years before it’s clear you have traction, at which point the game gets much harder as your competitors start to go to school on your success.

Cameron Moll explores the challenges of a team of two or three competing with a team of twenty in “Things Take Time

The team of twenty has quantity on its side — more hands and specialists to execute the work. With that, of course, comes all the red tape, political baggage, and countless meetings that accompany such teams and the organizations that employ them. Quantity suffers at the hand of seemingly endless structure.

The team of two or three has independence on its side — they call the shots, whenever and however they choose. With that, of course, comes all the requisite components for supporting and maintaining the thing they’re creating. Customer support, billing, advertising, blogging, tweeting, client and customer acquisition, and the like. Time suffers at the hand of a seemingly endless to-do list.

The independent team soon realizes that speed isn’t a luxury; its currency is late nights and long weekends. For those who prefer to keep a semi-regular schedule and who have other things to care for outside of work, we eventually learn to accept that things just take longer than we hope they’d take. Problem solving takes time. Details take time. [...]

I’m learning, rather forcibly I suppose, to be okay with things taking time. I’m also learning that often you end up with a better product when you take your time to get all the big and small details just right. It’s time well-spent.

It’s OK to take this time if you are in direct communication with customers who are willing to pay for the product. It’s a mistake to spend all of your time in the workshop if you have not had a number of conversations with prospects and closed some opportunities.

Avoid The Strong Points Of Established Firms

A larger company can work a startup into the ground unless you are careful in your choice of product and niche market: a frontal assault is typically beaten back. Startups have to choose how they will compete very carefully. In the “Bootstraper Manifesto” Seth Godin lists five key leverage points that many established companies enjoy: distribution, access to capital, brand equity, customer relationships, and great employees. Here is a brief explanation of each and some approaches that a startup can use to counter these advantages.

  1. Distribution: they are able to get the product in front of the customer.
    Counter: Sell directly, or find partners unwilling to work with larger firms
  2. Access to Capital: they can borrow a lot of money.
    Counter: Frugality, be smart about which problems you tackle, leverage existing team expertise.
  3. Brand Equity: if the prospect already knows about the company and the product it substantially reduces their perception of risk in making a purchase.
    Counter: go to firms who are unattractive to larger firms or not well served by them.
  4. Customer Relationships: especially in B2B with approved vendor lists and existing contracts.
    Counter: chase smaller deals, chase deals where you bring enough advantage someone will fight to put you on the list.
  5. Great Employees: talented people with low tolerance for risk are delighted to work in established firms. Entrepreneurs greatly overestimate most people’s appetite for risk, especially as passengers in their race car.
    Counter: provide opportunities for folks with appropriate experience who may be less desirable to larger firms. Examples of this might be older engineers, women who want to work part time because they have small children, people with less experience but more enthusiasm for learning.

More generally you need to configure your business model so that you are either pursuing opportunities that are less attractive to larger firms or your product violates one or more key requirements for their business. This may mean:

  • Chasing smaller deals to get traction and establish your brand.
  • Not implementing some functionality that your competitors have that your prospect don’t find valuable, enabling you to get to market faster and at a lower price.
  • Providing additional services that a larger firm either doe not have the expertise for.
  • Providing additional services that won’t necessarily work at scale but allows you to further differentiate your offering for your target nice.
  • Configuring or customizing a version of your product more rapidly or more completely than your competition.

Focus and Perseverance Means Saying No

Fast Company called work/life balance “bunk” a decade ago because “hungry” labor was going to work us into the ground. If you are able to substitute working smarter or working more intimately with customers for working more cheaply you can likely avoid this fate. Successful bootstrappers remain open to possibilities–especially the possibility that they are mistaken in one or more of their business hypotheses–but maintain focus: they explore many options but say yes to only a few.

One of the reasons I am excited about Discovery Kanban as a model for not only larger firms but startups is that entrepreneurs, especially bootstrapping entrepreneurs, have to husband their resources but find a way to explore the market. This means being explicit about the amount of effort that will be invested in developing and exploring options, and being very crisp on commitments. Discovery Kanban offers a framework for managing risks, options, probes, and committed projects from a consistent  perspective: we can only focus on a few things at a time, what are they?

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Michael Ellsberg: Four Reasons Why Passive Income Is a Destructive Fantasy

Written by Sean Murphy. Posted in 1 Idea Stage, 2 Open for Business Stage, skmurphy

I make a distinction between wanting to move beyond running a services business where you bill by the hour to either selling results or selling a product and entrepreneurs attracted to the passive income fantasies of the “Four Hour Work Week.” When an entrepreneur tells me that the “Four Hour Work Week” has been a strong influence on their thinking I worry that they are unfamiliar with what’s required to build a successful business.

You Can’t Stay Ahead of Competition Passively

I found Michael Ellsberg‘s critique “Four Reasons Why Passive Income is a Dangerous Fantasy” to be on point.

1. You Can’t Stay Ahead of Competition Passively: If your research really does determine that there is some amazing market niche that until now has miraculously gone unnoticed and unserved—dog owners who wish to help their dogs lose weight naturally, for example—sooner or later, word is going to get out that there’s money to be made there, and someone is going to create a better ebook or info course or product that serves that market’s needs better than yours does, and who markets it better to them than you do. You can’t manage this competition while sipping margaritas all day from your paradise restaurant on Fiji. You’ll soon see your market share go down the drain—just like all those Açai cleanses…

I had a conversation with an entrepreneur who had been bootstrapping for three years successfully who said, “I keep waiting for it to get easier. When in your experience does it get easier?” I said that I don’t think it ever does. We brainstormed two lists:

  • Why it stays hard
  • Why it gets easier  (at least in some ways)

Why It Stays Hard

  • Established technical expertise has to be renewed, this takes time away from sales/marketing, product development,
  • Competitors react to your success, either copying it or acting to nullify it if you have been winning business from them.
  • Customer needs change over time, in response to changes in environment and earlier success in satisfying them.
  • Growth requires you to place larger bets; not growing or staying small for the sake of staying small risks stagnation in other ways.
  • The business environment can change rapidly and unpredictably
    • New technologies can obsolete existing products and services, and put categories of expertise at risk
    • New competitors and new business models emerge
    • Markets you operate in become commoditized, sometimes without warning.

Why It Gets Easier (At Least In Some Ways)

  • Soft skills accumulate
  • Paying customers come back and buy again — assuming you have happy customers
    • There is also an opportunity or referrals from happy customers.
  • Partner relationships that are well established allow you take action more quickly
  • Reputation accumulates (this can also work against you).

You Cannot Maintain Customer Relationships Passively

2. You Can’t Maintain a Loyal Tribe of Customers Passively: As soon as your customers realize that you don’t care about them (which you don’t, if you’re trying to get away from them as fast as possible), they will eventually go elsewhere, to someone else who actually does care about them and their needs.

If you don’t engage with your customers, if you want to little to no contact with them, then it’s unlikely you are gong to be able to detect and anticipate emerging requirements, rectify shortcomings with your current offering, or respond to what competitors are telling them.

You Cannot Lead a Great Team Passively

3. You Can’t Lead Great Teams Passively: If you’re going to be building a large, scalable business, sooner or later you’re going to need employees and/or freelancers. You’re not going to attract great talent for the long run by indicating to them that you have no interest in being involved in the business whatsoever. Some people obsessed with “passive income” say, in response, “No problem, I’ll just hire a leader to do all that managing, motivating, and creating stuff!” What you’re essentially saying, then, is that you’re adding zero value to the equation. You’re not coming up with the ideas, you’re not implementing/executing the ideas, and your not leading anyone to implement or execute them.

Buying stock in a company is a great way to create passive income, but that cannot be confused with entrepreneurship.  If you are not going to be able to contribute to one or more of technical insights, product leadership, customer intimacy, operational excellence,  or revenue generation then you are not really adding value to the business. You should be a passive investor.

You Cannot Discover or Pursue Your Life Purpose  Purpose Passively

4. You Can’t Create Meaning, Passion, or Purpose in Your Life Passively: I’ve had several conversations recently with people in their twenties who have built up some semblance of moderate passive income.  These people are (for now) living the dream–they get to travel to Fiji or some other exotic location on a shoestring and hang out on the beach, funded by their little niche ebook or whatever.  Yet none of these people I’ve talked to who have this temporarily successful lifestyle seem very happy. They actually seem kind of restless and lost. I’ve had conversations with several of them to help them determine “what the purpose of their life is” now that they have some amount of money coming in from some little passive venture they don’t even care about that much. It all feels empty to them.

This lines up with Arthur Brooks’ “A Formula for Happiness” where he recounts research that identifies the key drivers for happiness

  1. Genetics
  2. Big life events
  3. Choices

The bad news is that first two account for about 88% of baseline happiness and are not under your control. So, what choices can you make that influence the remaining 12%? Brooks suggests:

  • Faith: thinking about the transcendental, the things that are not of this world, and incorporating them into your life.
  • Family: having solid family relationships; the things that cannot and should not go away.
  • Community: cultivating important friendships and being charitable toward others in your community.
  • Work: marrying our passions to our skills, empowering us to create value in our lives and in the lives of others.

Rewarding Work is Essential

Brooks’ key take-away is that rewarding work is essential:

“I learned that rewarding work is unbelievably important, and this is emphatically not about money. That’s what research suggests as well. Economists find that money makes truly poor people happier insofar as it relieves pressure from everyday life — getting enough to eat, having a place to live, taking your kid to the doctor. But scholars like the Nobel Prize winner Daniel Kahneman have found that once people reach a little beyond the average middle-class income level, even big financial gains don’t yield much, if any, increases in happiness.

So relieving poverty brings big happiness, but income, per se, does not. Even after accounting for government transfers that support personal finances, unemployment proves catastrophic for happiness. Abstracted from money, joblessness seems to increase the rates of divorce and suicide, and the severity of disease.”
Arthur Brooks in  “A Formula for Happiness

Ellsberg concludes with an interview with Bryan Franklin who recommends a focus on leverage in a business you care about:

“Every time I’ve seen someone create a business, with the ultimate intention of getting away from that business and its customers as quickly as possible, instead of moving towards that business and its customers, it fails.”

“What makes business work is creating value. If you’re going into the business with the intention of not creating value, but of having it magically provide money for you, then you often make really bad choices. The business that you’re investing in or creating doesn’t tend to be creating value for its customers or for anyone. So it doesn’t tend to spit off the cash you’re hoping it will.

“If you make your choices based on, not ‘how can I get money for free?’ but on, ‘What challenge can I put in front of my face that’s going to have me step up to be the kind of person I’d rather be?’ you’re going to start to forget about wanting passive income, and you’re going to start to focus on what purpose you truly want to create the world.”
Bryan Franklin

See also


Update Aug 2-2-14: When I selected my “Ten Quotes for Bootstrappers from July 2014” I added this postscript to the Bryan Franklin quote that I thought I would append here as well:

I think the Four Hour Work Week has offered a mirage that has lured more bootstrappers onto the rocks than “build a better mousetrap and the world will beat a path to your door.” The belief that you don’t need to care about your customers and manage your business to succeed is at least as productive as “my product is so good I don’t need to learn how to market and sell it.”

Ten Mistakes Early Stage Bootstrappers Often Make

Written by Sean Murphy. Posted in 2 Open for Business Stage, 3 Early Customer Stage, Rules of Thumb, Silicon Valley, skmurphy

Over the years I have moderated several hundred Bootstrapper Breakfasts (since starting them in Silicon Valley in 2006). After doing a hundred or so and working with many clients who were bootstrapping I came up with a checklist for common mistakes bootstrappers and bootstrapping teams make in their first year or so.

  1. Leaving Your Assumptions Implicit: Not Writing a Customer Development Plan
  2. Believing that Anyone Will Want Your Product: Not Targeting a Specific Buyer
  3. Confusing the User (or the Audience) with the Buyer/Customer
  4. Believing Your Product Will Sell Itself (Looking for Smarter Prospects)
  5. Developing the Full Product: Not Selling the Smallest Piece Possible at First
  6. Not Focusing on Break-even and Profit
  7. Expecting Too Much Too Soon: Not Planning for “Target Practice”, Iteration, and Improvement
  8. Confusing VC with Customer: Going for (2% of) a Really Big Market
  9. Expecting the Same Control Over Prospects and Team Members as Your Code Base (Single Founder “No Compromise” Mindset)
  10. Treating the Business Like a Hobby (Thank God for Significant Others, Recently Deceased Relatives, and Crappy Day Jobs)

Five additional challenges that also need to be navigated

  1. Managing different aspects of your identity at personal, family, and business level.
  2. Understanding the emotional connection required for a successful business transaction: mission, brand promise, and  logo.
  3. The networking etiquette in Silicon Valley: cards, introductions, how to get acquainted.
  4. Making the transition from selling to friends to selling to a strange
  5. Making the commitment to a business footing: licenses, structure, tracking expenses (and acknowledging that now you can fail).

Adapted from a talk I gave in August 2009 at the San Francisco Bootstrapper Breakfast.

A Simple Checklist for Introducing a Collaboration Application

Written by Sean Murphy. Posted in 2 Open for Business Stage, 3 Early Customer Stage

We work with several teams who have launched or are launching an application that makes a team or group more productive.  Here are a couple of suggestions for things to consider.

Be compatible with the status quo if at all possible

  • Collaboration or workflow applications that require at least two people to adopt in order to realize productivity benefits are very challenging to introduce.
  • It’s certainly been done: fax, email, CRM systems. But the list of failures is much longer.
  • Find a way to provide a single individual with a productivity bonus that is backward compatible with existing workflow (e.g. email, CRM, wiki, website, …).

Use your team as a case study

  • Is your startup using the tool for collaboration? If not, why not?
  • What no longer happens that used to happen before you started relying on the application?
  • What can you now do using your application that you could not do (or only do with great difficulty) before?

Have conversations before putting up a landing page

  • What have you learned from your conversations with prospects?
  • What problems or needs do you probe for?

Use your team as an earlyvangelist

  • What problems or need or recurring situation led your team to develop your application?
  • What alternatives did you try to do before you developed your application?
  • Why were they unsatisfactory? What was missing or still too difficult?

Listen carefully to your early adopters

  • What do your early adopters tell you that they like about using the service?
  • What benefits does it provide them?
  • What do they still see as missing?
  • Ask what three features they would demo either to other similar teams or to others in their company.

Understand why some teams failed to adopt your application

  • Teams that don’t try it may give you reasons, and these are worth listening to.
  • Pay close attention to teams that gave it a fair trial and decided not to go forward. Their rationale is absolutely worth addressing.

If you are working on a collaboration application for business and are having difficulty getting traction, please free to schedule office hours and we can design some experiments to explore your situation, see “We help you design experiments that move your business forward.

 

Successful Bootstrappers Are Trustworthy Salespeople Committed to Customer Satisfaction

Written by Sean Murphy. Posted in 1 Idea Stage, 2 Open for Business Stage, Funding, Sales

If you want to be a succeed as a bootstrapper, start with what you’ve got: you have an insight into an opportunity, a marketing edge, a particular problem where you’re going to bring distinctive value.

Don’t wait to get started until an investor tells you there is a market and they will invest. An investor cannot validate whether there’s a market or not. Worse, the process of seeking investment rarely teaches you more about customer needs.

The converse is even more important: don’t be dissuaded if an investor does not believe that there is a market.

It’s OK to ask your friends if it’s a good idea. But sometimes they will tell you they like the idea just so that you will stop talking about it and get out of their living room or office.

And again, if they don’t think it’s a good idea you should weight their perspective by whether they are a prospect or not.

Which ultimately means that you have to build a minimum viable product and start selling.

When a prospect tells you that they have problem that you want to solve for them, that’s good. When they write a check or give you their credit card, that’s validation. Now you are a bootstrapper.

But just because they have quantified their love for your idea it doesn’t mean that you are done. You need to follow through and see that you delivered the benefits that you promised to them.

More bootstrappers go wrong by not conserving trust than not conserving cash. Cash is important, but if you don’t keep your promises you cannot bootstrap successfully.

It’s primarily about selling and customer satisfaction. There may be challenges in building the product or getting it to work reliably when it leaves your hands. But the primary challenge is building something that people will pay for and order again (or extend their subscription) because it delivered the value that you promised.

Many of the people who are attracted to startups are drawn to a technology or a craft or the idea of being their own boss. Those are great reasons to become a bootsrapper.  But success requires developing an empathy and rapport for your customers and delivering value.

The key differentiators are your ability to sell and ensure customer satisfaction.


Conor Neil has a great quote in “If You Can’t Explain what You do in a Paragraph, You’ve Got a Problem” (great title but he admits he cribbed it from Brad Feld)

“I believe the major risk of early stage startups is getting customers to buy, and showing that you can sell.”
Conor Neil

Ten Principles for Trust and Integrity from Adventures in Missions

Written by Sean Murphy. Posted in 1 Idea Stage, 2 Open for Business Stage, 3 Early Customer Stage, Rules of Thumb, skmurphy

I have come to believe that morale or esprit de corps is the critical resource for a bootstrapping team. With it they can persist, blending freelancing, consulting work, customer discovery, product development, sales, and customer support.

The simple view is that you can just focus on one thing at a time–develop a product, market it, refine it, scale up–and that a few iterations will get you there. The reality for most is that it’s much harder and requires perseverance as a team.

The teams that persevere bring complementary skills and shared values to a common effort sustained by trust, shared vision and joint accountability. The first ten principles from  Adventures in Missions focus on trust and integrity,  offering some useful guidelines for building and maintaining trust:

  1. Integrity in an organization is built by developing trust.
  2. Trust is the glue that enables a team to function well.
  3. Trust is built over time through competence, commitment, and care.
  4. Trust is built as we preserve and build the significance of others.
  5. Trust is built through bearing each others’ burdens.
  6. Trust is built through a rapid response to communication.
  7. Trust is built through humility.
  8. Trust is built through personal contact.
  9. Trust is diminished by sarcasm and criticism.
  10. Integrity means making and living up to commitments.

See also “Entrepreneurship is the Launching of Surprises” which explores George Gilder’s essay “Unleash the Mind” and contains this insight that I think I am building on in my focus on morale as the key resource in a startup:

“America’s wealth is not an inventory of goods; it is an organic entity, a fragile pulsing fabric of ideas, expectations, loyalties, moral commitments, visions.”
George Gilder

Q: Can We Launch First and Ask Customer Discovery Questions Later?

Written by Sean Murphy. Posted in 2 Open for Business Stage, skmurphy

Q: We have built an application that lets small businesses employees easily manage vacation days. Here is our game plan

Objectives
  • $2,000 a month (in revenue) in 6 months.
  • Written up in 2 major publications
Target Users
  • Small Business
Metrics
  • Page views
  • Number of users who sign up for trial that we convert
  • Who’s paying for our product (identify industries to target).
  • Measure the impact of weekly blog posts
Branding
  • Logo
  • Home page redesign.
  • Improve copy on home page and sales page
Paid conversion
  • 1 month trial instead of free
  • Collect emails and generate a monthly newsletter for paying customers.
  • Improve “first use” experience after signup.

What do you think?

A: You are making an implicit assumption that you have the right features for the right target customer to deliver a compelling benefit. This is a marketing campaign that assumes you have validated the customer hypothesis.

Normally you are in a customer discovery mode with a new app like this, formalizing your assumptions/hypotheses and engaging in conversations with early prospects and early users to determine where you can create differentiated value. This is a brutally competitive space and a target of “Small business” is not a useful discriminant.

Vacation obligations and payment are subject to regulatory oversight, so while it’s good to stress the ease of use it would be useful to explore the integration required with the payroll system to make it truly stress free for a manager or small business owner.

Without A Revenue Hypothesis Your Business Model Is a List of User Activities

Written by Sean Murphy. Posted in 1 Idea Stage, 2 Open for Business Stage, Customer Development

Q: I am building an app that helps people build nearby interest groups (e.g. local model railroaders, quilters in your town, etc…). I am trying to establish a baseline for my value hypothesis testing and am considering the following metrics:

  • Registration rate of those who come to landing page
  • Rate of registered users who join or create an interest group
  • Rate of interest group members who interact (post etc) in a group
  • Rate of interest group members who log in again after a month

Even if I estimate the each of these rates at 50% I cannot tell what this would mean in terms of validating my business. Also I cannot determine how to use these metrics to determine the features to put in my MVP.

Any advice for where to start in a minimum set of metrics and features for an MVP for this service?

A: For the sake of an initial model let’s accept your estimate of a 50% rate for those four metrics. There are two key sets of hypotheses that you are missing:

  1. What are your hypotheses for how you generate revenue? What will your customers pay for and why? 
  2. What are your hypotheses for the cost of acquiring and servicing a paying customer? How much will it cost to get them to the landing page and to maintain the service?

Your answers to these two sets of hypotheses interact to tell you how long you can stay in business.

Q: Those are great questions but I feel like they are related to growth, something I think I should explore once I have figured out the value testing.

A: Getting paid is proof of your value hypothesis. You need to map your path to revenue. Once you can do that then planning how to do it in a repeatable scalable way is your growth hypothesis. Given that you are zero revenue you need to grow to at least break even to keep running experiments.

Q: OK I understand the importance of the monetization strategy in the hypothesis testing, but I don’t think it’s relevant to my original question. Suppose I added a another metric:

  • Rate of interest group members who convert to a premium account (e.g. for unlimited messaging)

And I assume it costs me $1 to get new visitors to my landing page. So now I have six hypotheses:

  • It costs $1 to get a visitor to the landing page
  • 50% of visitors register
  • 50% of registered users join or create an interest group.
  • 50% of interest group members interact in a group.
  • 50% of interactive group members login after a month.
  • 50% of persistent interactive group members upgrade to a premium account

What does that tell me? I still cannot tell if I have a  good starting point.

A: I think it makes all of the difference in the world, now you are optimizing for revenue in your experiments. The others are all vanity metrics if you don’t have hypotheses for their relationship to revenue and impact on cost.

You can enter whatever you think your conversions will be a priori, and now you can construct a hypothetical business that is profitable.

Without that you don’t have a (profitable) hypothetical business, you have a list of activities that users are engaging in.

Feeling Lucky Is Not a Strategy

Written by Sean Murphy. Posted in 1 Idea Stage, 2 Open for Business Stage, 3 Early Customer Stage, skmurphy

“Luck cannot be duplicated.” Richard Kostelanetz

Riffing on a Nov-2-2013 TechCrunch post by Cowboy VenturesAileen Lee (@aileenlee) “Welcome To The Unicorn Club: Learning From Billion-Dollar Startups” Ryan Hoover suggests that you should “Forget What You Know: There is No Right Way to Start Up”[1][2]

“They didn’t talk to people. They didn’t do market research. They didn’t create a landing page to see if people would enter their email. They just built it. For the past year, they invested in the team and technology to prioritize speed of iteration with disregard to traditional methods of customer development and company building.”
Ryan Hoover in “Forget What You Know: There is No Right Way to Start Up”

This is not a methodology, it’s hoping to get lucky. The article cites several startups that may have gotten lucky as proof of…I am not sure, I guess that it’s possible to get lucky.

“Lean methodology and the startup community at large, espouses customer interviews, landing page tests, concierge experiments, and other tactics for testing hypotheses and measuring demand before building a product. In many cases, this is good advice but sometimes it’s a waste of time or worse, directs entrepreneurs away from something truly great.”
Ryan Hoover in “Forget What You Know: There is No Right Way to Start Up”

For every team that gets lucky I wonder how many thousands run through their savings in search of the truly great without talking to customers or testing their hypotheses. Perhaps a more careful and detailed analysis will uncover ways to duplicate the success of some of these startups but I worry that it may be like trying to select the winning lottery ticket: the fact that some people do it does not change the fact that on average it’s a terrible investment strategy.

“Diligence is the mother of good luck.” Benjamin Franklin


Ryan’s essay also appeared on LinkedIn and TheNextWeb:

I don’t think this “Forget What You Know” post is representative of the quality of Ryan’s insights. Here are three blog posts by him that I have found very useful and recommend reading:

 

Video from Lean Innovation 101 Talk at SF Bay ACM Nov-20-2013

Written by Sean Murphy. Posted in 1 Idea Stage, 2 Open for Business Stage, 3 Early Customer Stage, 4 Finding your Niche, Events, Lean Startup, skmurphy, Video

The video from my “What is Lean–Lean Innovation 101” talk is up:

Here is the description for the talk

“Lean” provides a scientific approach for creating a product and developing new businesses. Teams can iteratively building products or services to meet the needs of early customers by adopting a combination of customer development, business-hypothesis-driven experimentation and iterative product releases. This talk covers:

  • Why more and more companies are using Lean
  • What is Lean, what it is not
  • Key concepts
  • Get Out Of Your BatCave
  • Use an initial product (MVP) as a probe to explore the market
  • Build-Measure-Learn
  • When and how to pivot
  • Rules of thumb for successful lean innovation

I want to thank Alex Sokolsky for his outstanding effort on behalf of SF Bay ACM doing the video capture and editing.

Five Serious Financial Mistakes Bootstrappers Can Avoid

Written by Theresa Shafer. Posted in 1 Idea Stage, 2 Open for Business Stage, 3 Early Customer Stage, First Office, skmurphy

Five  serious but avoidable financial mistakes we hear from time to time at a Bootstrapper Breakfast:

  1. Mistake: using credit cards to finance your startup.
    Fix: Pay cash, trade favors, barter, go without, but don’t let your monthly balance roll over and accumulate.
  2. Mistake: not having a stopping rule for when you need to stop bootstrapping and look for work. This can lead to bankruptcy.
    Fix: set a time limit and an expense limit for getting your new business off the ground. Work part time and work on your business part time to maintain break even cash flow.
  3. Mistake: not keeping your spouse in the loop if they are working and keeping the lights on while you bootstrap.
    Fix: treat your spouse as an investor or a board member: provide ongoing detailed accounting of plans and spending.
  4. Mistake: hiring a full time employee too soon.
    Fix: start with contractors, make sure you can at least break-even on a regular basis with the contribution the employee will make vs. the additional expenses incurred–understand all of the expenses you first full time employee will trigger (e.g. workers compensation, payroll service, fixed salary expense (vs. contractor)).
  5. Mistake:  signing a lease on an office too soon
    Fix: use co-working space, look for an informal sublet, be clear on why you need an office (e.g. just pay for meeting rooms as needed, barter for lab or working space as needed, look at hourly/day rate offices for conference calls or meetings).

#3 got picked up by Entrepreneur Magazine in a roundup of 7 tips: “Funding Your Business on Your Own? Learn From These 7 Entrepreneurs.”  I thought these three from the list were also common and avoidable:

  • “Branding too soon” by Rebecca Tracey of The Uncaged Life
    This is really investing too much in messaging before you know what works. I have made this mistake and I see others do it as a way to make the business seem “more real” or “like an established company.”  Trying things out in conversation gives you the fastest feedback and is the easiest way to iterate if you are deliberate about it.
  • “Idealism about costs” by Tom Alexander of PK4 Media
    This comes in many forms, but the most serious that he touches on is not understanding how long it can take to get paid, especially by a larger firm. 90 to 120 days from invoice has not been uncommon for many of our clients. Small firms tend to pay faster, and getting paid the first time by a large firm can take much longer than subsequently.
  • “Failing to calculate burn rates” by Steve Spalding of Project MONA
    This takes several forms, but one mistake is to pay yourself a salary (incurring State and Federal taxes on the “round trip” from your savings back to your bills instead of putting less money into the business and living off of your savings. It’s also better to provide the bulk of your starting capital as a loan instead of equity, so that early profits can be distributed as loan repayments instead of salary or dividends.

Update Thu-Feb-27 (morning): Elia Freedman offered a common critique of this post, In Getting Good At Making Money by Justin Williams and “How to Get Good at Making Money” by Jason Fried. Writing “The Art of Bootstrapping” he observes

The only thing a bootstrapper needs to know: CASH IS KING. Nothing else matters and every decision needs to be made to maximize cash. The articles refer to revenues, but revenue is not cash. Here’s an example: I do a contract development job today for $10,000. When done I submit an invoice and the company takes 60 days to pay. Yes, I have $10,000 in revenues today but I don’t get the cash for 60 days. How do I pay my bills in the meantime?

I am relentless when it comes to managing cash. I have a spreadsheet that gets duplicated and updated with actuals and projections every month. This allows me to make cash flow decisions months before the negative shortfall actually happens, allowing me at various times in the history of the company to ratchet up spending, lay people off, cut payroll or minimize other expenses. Because of this work, I see the company very very clearly on a month to month basis and can make appropriate choices.

I think it’s a fair criticism. An accrual accounting perspective has too much parallax from bootstrapper’s actual cash position and offers a false sense of security. I tried to sharpen the advice from the Entrepreneur round up on “Idealism about costs” toward this but I would add a sixth mistake to make it clear:

Mistake: Using accrual accounting (ignoring the timing–the real cash impact–of cost and revenue items) will kill you.
Fix: Forecast  and manage the explicit timing of cash in and cash out for your business. Understand that people will cash your checks immediately but be slow to pay your invoices.  Some won’t pay the full amount or even pay at all. Rely on clear understanding and simple plain English agreements, don’t hope that “legal language” in a contract will make a difference to your getting paid (assume any contracts you sign will be enforced against you by larger firms.

I think trust is as important, if not more important than cash. Bootstrappers who focus exclusively on cash without also managing trust and social capital will often fail to prosper as well. Related blog posts:

Update Mar 8: this post was included in the Founder Institute’s “Mar 2 2014: This Week’s Must Read Articles For Entrepreneurs.

Getting More Customers Workshop on March 25, 2014

Written by Theresa Shafer. Posted in 1 Idea Stage, 2 Open for Business Stage, 3 Early Customer Stage, 4 Finding your Niche, 5 Scaling Up Stage, Events, skmurphy, Workshop

Getting More CustomersLet’s face it, finding customers can be quite a challenge. In this interactive workshop, we will cover a variety of proven marketing techniques for growing your business: attendees will select one or two that fit their style and develop a plan to implement them in their business in the next 90 days.

  • Speaking – small groups, large groups, conferences, …
  • Writing – blogging, newsletters, articles, …
  • What Other People Say About You – referrals, testimonials, case studies, …
  • Getting Found When and Where Prospects are Looking: adwords, Craigslist, trade shows, SEO/SEM, …

March 25, 2014 9am-12:30pm
Sunnyvale, CA
$90 includes lunch

Register Now

“This workshop provided great material to bounce off of. SKMurphy created a fertile space for me to think about my business and plan a concrete step forward. Thank you.” Paul Konasewich, President at Connect Leadership

Real Prospects, the Simplest Functionality They Will Pay For, and Team Members Who Can Help

Written by Sean Murphy. Posted in 1 Idea Stage, 2 Open for Business Stage

Q:  I have worked as a manager in corporate IT for many years, saved my money, and now have an idea for a new product. I need a plan to go from essentially nothing but the idea to building an organization that can support a service-first or  concierge MVP and the metrics in place to enable migration to a full product and profitable business.  Getting off zero seems to be my problem.

A: There is a temptation given you have a good idea and money to last for a while to go into execution mode: writing code and hiring staff. but there is probably very little risk that you cannot get the code developed and if you have some experience in hiring to bring reasonably talented people on board. The risk is in building–or offering in the case of a service-first MVP–something that people will pay for.

At a subconscious level this may be why you are having trouble getting off zero. It’s also possible that after many years in corporate IT you may be more energized by a career than a startup: in either event you should pay attention to your lack of energy.

I would suggest that you do not force yourself too far into execution mode until you were confident that you had identified a problem that people would pay you to solve and that you knew how to find people or firms with the problem.

One way to start, which you can do without quitting your day job, is to make a list of a dozen to three dozen people you can talk to about the problem you plan to solve and contact them.

See if they have the problem, what their view on what a solution might look like, and what the value of the solution would be to them.

Mastering the mechanics of starting a company don’t represent a risk reducing milestone; here are three critical near term risks to focus on instead:

  1. Finding real prospects who acknowledge they have the problem, want to talk about it, and believe that it’s a critical business issue for them.
  2. Finding early team members who are energized by the problem and not a paycheck and can contribute relevant skills and/or domain knowledge.
  3. Understanding the minimum functionality or result you need to deliver to get paid.

You can work on all three of these without quitting your day job. Keep saving your money, you’ll need it once you start bootstrapping. And managing the conflicting priorities of a day job and a bootstrapped startup will be good practice for managing the conflicting requests from early customers and early prospects.

Difference Between a Hypothesis and an Assumption

Written by Sean Murphy. Posted in 1 Idea Stage, 2 Open for Business Stage, 3 Early Customer Stage

Q: What are the key hypotheses you need to address first getting your startup off the ground? What is the difference between an assumption and hypothesis?

When you are looking for early customers the value hypothesis is critical. You may reach them using non-scalable methods that don’t address your first real growth hypothesis.

My take on the distinction between hypothesis and assumption, your mileage may vary:

A hypothesis is what is being tested explicitly by an experiment. An assumption is tested implicitly. By making your assumptions as well as your hypotheses explicit you increase the clarity of your approach and the chance for learning.

The two things that can trip you up most often is an unconscious assumption that masks a problem with your hypothesis or an unconscious bias in who you are testing the value hypothesis on. In particular you may have defined your target customer by certain selection criteria but your actual choices for who to speak to (or who will speak with you) are not sampling from the full spectrum of possibilities.

See also


Update Wed-Jan-29-2014: Tim Allen left a great comment that elaborated on the need to focus on value first even if your methods don’t scale:

There was a bit of a light-bulb moment for me what I read the line:

“When you are looking for early customers the value hypothesis is critical. You may reach them using non-scalable methods that don’t address your first real growth hypothesis.”

I feel this is so often forgotten, especially in the situation of legacy systems and trying to execute lean product design within larger organizations. One example that I have been involved in, and which I regret not pushing back harder, was a requirement to use some legacy data services.

This meant that we couldn’t initially execute a hand-cranked, non-scalable solution to data storage and retrieval that our product required, which would have been better as it would have enabled us to get to customer quicker and get real learnings about how they are using our product.

At the time it didn’t seem like a big deal, but in the end it was, and continues to be an issue and an impediment in getting to the customer quicker. Likewise, any real growth hypothesis, results will most likely be skewed by the performance of systems that are not in your control.

I want to thank Tim for offering a practical story that elaborates on the principle of confirm the value before worrying about scaling. When I was at Cisco the focus was always on “will it scale,” as in we shouldn’t do something because “it won’t scale.” This sometimes led to us releasing a product that could have been more valuable if we had proceeded a little more thoughtfully and incorporated early feedback before rushing to launch. Techniques that work “in the small” to gather insight have their place even inside of large firms.

Q: How To Pull The Trigger On A Pricing Model

Written by Sean Murphy. Posted in 2 Open for Business Stage, skmurphy

The following is based on an e-mail exchange from 2013 I had with a startup team on pricing. It’s been recast as a Q&A and some identifying information has been altered. I have included an analysis at the end.

Startup: We have  a complex pricing challenge for a new B2B service we launched 8 months ago that will be sold on a subscription basis to several distinct categories of business customer. We offer alerts to events based on keywords. Here is a chart we came up with to identify options, cost drivers, and concerns.

Options for pricing/tiering:
  • Number of alerts
  • Number of entities followed
  • Weighting of entities followed based on member count and/or total events they generate
  • Number of users receiving alerts
Cost drivers:
  • Setup cost for tracking a new entity
  • Verifying feed for any event types an entity generates
  • Operating costs are very low compared to setup
Our concerns:
  • It’s a new type of service in a new market.
  • Possible customers range in size from individuals to small firms to large enterprises to non-profits to government agencies
  • Plan to follow a wide range of events and entities

But we seem to be all over the map in internal discussions and cannot decide how to proceed. We have some grant money but need to transition to a business model to keep going.

Sean:  I  would start with a detailed analysis of the value to each of the different types of customers you have identified.

  • What action will your customer take as a result of your notification or review of search results?
  • What costs or risks do you help them reduce?
  • What opportunities will you enable them to identify and take advantage of?
  • What they are doing three minutes before they decide to add a keyword search request to your service?
  • What result are they actually paying for? Is there valuing in knowing a keyword (or perhaps a synonym set) does not appear?

I think you have focused too much on what you can do and what your costs are, not enough on what customer is actually paying for.

Q: We agree, this is largely a value-based pricing question. We have many trial users that tested the service and originally said yes to certain pricing. But we are now covering more than 500 entities and several thousand events. Also we are selling a basic service now but believe we will have a long runway  to increase the delivery of valuable data and insights over the lifetime of the relationship: getting relationships is key. Put another way, we believe we are in a “land grab” situation where getting the relationship is key and extracting value is really a secondary issue.

Sean: It’s a secondary issue until the grant money runs out. Also, there is a very big distinction between asking a free user to agree to certain pricing and actually getting them to pay. Either asking them if they will pay or how much they will pay typically has very little predictive value of conversation rate or price point validity.

Q: So if asking them if they will pay or how much they will pay does not work, what should we do instead?

Sean: Make them an offer and see if they do pay. If you are doing a “freemium model” now where you are giving away the service you need to either time limit access (e.g. a two week or 30 day or 60 day trial) or remove certain features and make them accessible only if they pay. In your situation it might be that some entities are free and the rest cost and/or some event types are free and others cost.

You should ask them what they are doing now and what it’s costing them in time, effort, dollars, opportunity cost, risk, etc… That’s factual. And from their answers you should be able to infer a value for your offering if it satisfies their needs and their constraints on a solution.

Q: We are still having trouble assigning a value (or a  price), in part because we have several different customer types who we believe will gain very different value–or have very different ability or willingness to pay–from our service.  We think the range might be as much as four times for the same subscription. We are not sure we want them to see each other’s pricing but are not sure how to hide it.

A: It sounds like your are more worried about leaving money on the table than getting people to pay. Normally your risk is that people don’t pay, not that you pick a price that’s too low and too many people sign up. It’s usually the case that  there are other features the “high value” customers want and are willing to pay extra for. The trick is to engage and get them to pay something so that you can continue to work with them to refine and improve the service.

In addition to tiering pricing based on features or capacity customers are comfortable with different pricing for the same service based on other objective criteria: in particular enterprise customers accept that non-profits, schools, and students may pay less  for the same service.

Q: We have an MVP, a good team that built our software, and a lot of interested customers but no pricing strategy. We have built a ton of models for various options and approaches but we are still struggling to go to the next step.

At some level setting a price, making an offer, and seeing of it’s accepted–or at least countered–trumps continuing to do more  detailed analysis. As long as you have a theory for the value you are creating for your customer: your cost model is important to determining business viability but much less a factor in your pricing. You can make these offers individually or privately,

The negotiation can be more important than the opening offer especially for early customers where you are simply trying to move them from free to paid.

Here are some alternatives that are more in the nature of fixed configuration instead of user configurable you may want to consider:

  • it may be easier for you to curate lists of keywords than to put the onus on the customer to define what keyword they want searched. This will also simplify your setup and testing.
  • There may also be a value in selling a report with a set of common searches that address a certain fixed set of entities.
  • There is probably a higher value letting the customer define a unique set of searches so that only they are notified, but less total revenue than a standard report.
  • There may be value in indexing archives going back five or ten years to sell reports/briefings on trends and to provide a context for the last few times the same event was detected. This archive could also act as a training set to develop a taxonomy or ontology of key concepts.

Q: Thanks, we have decided to continue with our current open and free approach and negotiate individually with people who ask for new features.

Analysis

The fear of making a mistake can often paralyze a team. This seems to affect some teams more than others but all of us are affected to some degree. Early financing based on winning contests, grants, generous relatives, understanding spouses, or anything that does not come from a paying customer can de-focus a team from the need to develop a clear value proposition and business model. With money in the bank they can be distracted  from making firm offers that may actually convert their “free users” into paying customers.

It’s OK to leave money on the table. In the beginning having a few customers pay something is an enormous risk reduction in your viability. Once you have established that at least a few people are wiling to pay something you can raise prices to where you actually make a profit on the offers that get accepted and achieve, or at least start moving toward, break-even cash flow. It’s as important to plan for customer reference as much the cash value of the deal when you are getting started.

You can grandfather  a small number of early customers with low pricing for a long time provided you are increasing prices for new customers and are on the path to break-even cash flow.

It’s normally a good idea to be slow to raise prices on your early adopters: this recognizes the risks they took to embrace your offering early and the time they invested to help you refine  your features and your sales and support processes. Instead of raising price ask for case studies, testimonials, and referrals once they are satisfied with our product. You can also negotiate on price in parallel with the level of reference and other terms and conditions.

You can continue to  increase pricing over time as you add customers you can talk about, which reduces the perceived risk of your offering to new prospects, and as you move down the learning curve on onboarding and support so that can make firm promises about the impact of your offering on their business and how long it will take to achieve. Adding new features based on customer request and your deeper understanding of their needs also allows you to further differentiate and charge more, if only for a subset of your total customer base.

The Likely Consequences of Entrepreneurship Require Perseverance

Written by Sean Murphy. Posted in 1 Idea Stage, 2 Open for Business Stage, 3 Early Customer Stage, 4 Finding your Niche, Rules of Thumb, skmurphy

Justin Kan (@JustinKan) wrote “Startups Don’t Die They Commit Suicide” in 2011″ (mirrored on his blog here)  reflecting on what he had observed and learned as a serial entrepreneur. It was reposted on the Philly Startup Leaders list earlier this week which led me to write the following comments mixed with excerpts from Kan’s post.

Startups die in many ways, but in the past couple of years I’ve noticed that the most common cause of death is [when] founders/management kill the company while it’s still very much breathing.

I think this is right, two key requirements for building a business are team morale–shared vision, enjoyment of working together, hope for the future–and cash flow. And morale can get you through periods of poor cash flow  more than cash flow can compensate for poor morale and team dynamics. I think a lot of teams lose their “gumption” and give up.

Long before startups get to the point of delinquent electricity bills or serious payroll cuts, they implode. The people in them give up and move on to do other things, or they realize that startups are hard and can cause a massive amount of mental and physical exhaustion — or the founders get jobs at other companies, go back to school, or simply move out of the valley and disappear.

I think bootstrappers are in some way at less risk for this because they know it’s going to be hard, although perhaps not how hard.
A lot of times the founders don’t maintain their health and energy and cannot weather a setback or analyze their situation with enough emotional distance: debugging your startup requires peace of mind

Often the root problem can be traced back to a lack of product traction — it’s rare to find people willingly quitting companies with exploding metrics. But one thing that many entrepreneurs don’t realize is that patience and iteration are critical in achieving product market fit.

Keeping a ‘captain’s log’ or other journal can give you a place to vent your frustrations–and let them cool for later analysis–jot down your fragmentary insights for later revision and recombination, and allow you to look back at earlier crises you have managed and problems solved: record to remember, pause to reflect. We have worked with a couple of Finnish teams and they have a great word “sisu” that is the Arctic version of gumption.

Overnight successes might happen fast, but they never actually happen overnight.

I think a lot of the desire for overnight success  is driven by trade press accounts of young millionaires who clean up the real story to make it seem simple and inevitable. I have met a number of entrepreneurs who think that one deal or one relationship will be the point of departure for a rocket trip to the stars. That’s always the way the success narrative is cleaned up and presented, but the reality almost always–barring a few lottery ticket winners–involved a lot more hard work and the slow accumulation of many small insights, decisions, and advantages.

On the other hand, happy people don’t normally start new companies: as Sramana Mitra has observed, startups are founded by mavericks, iconoclasts, dropouts, and misfits.  In fact, I think Barry Moltz is right: you need to be a little crazy.

Still, I think morale at an individual and team level is a key resource, and the teams that persevere seem to be more driven by the thought of proving a new idea right than proving  former co-workers, bosses, or  relatives wrong. While 0roving folks wrong can be the start–bold action coupled with frank expression has inadvertently launched many a deeply felt entrepreneurial career–it’s rarely what sustains an individual much less a team.

“It’s only after you fail once or twice and learn to rely equally on thought, analysis, and anticipation–in addition to speed, talent, and execution–that you can really call yourself an entrepreneur. ”
Barry Moltz in “You Need to Be a Little Crazy

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