You have an original idea for your startup, and you may be wondering what to do first. Luckily for you, regardless of what the business is or what unique attributes you have, the steps you need to do first change from one business to the next.
In this video, I’m going to take you through the typical lifestages of very early-stage technology businesses – i.e. how you go from “idea” to having enough initial traction that you can start scaling.
So let’s do it.
* CONTENTS
There are three types of founders, and I write content for two of them. The three of them are a) a non-technology person who’s worked in industry for 20-ish years, sees a way to make that industry better, and wants to give it a go, b) a non-technology person who has an interest or a passion and sees a way of building a business that allows an authentic community or following to congregate, or c) a technology person who sees a gap in the market.
I don’t necessarily produce content for technology people but you’re welcome to stick around and see if there’s anything good for you.
Regardless of the type of founder you are, the general “roadmap” of what we’re trying to do looks the same, and there is only one significant fork in the road. Everything up to that fork looks more or less the same for everyone.
The fork in the road is whether you are going to try and get institutional investment or not, you can conceptualise that as to whether you are going for AGGRESSIVE growth or not.
That’s a very personal decision – and it’s generally true to say that founders are not encouraged to reflect on the personal nature of that decision, because people who talk about entrepreneurialism tend to amp up the idea that a business is only a proper business if you have millions in investment, and hundreds of staff, and you’re out there moving fast and breaking things and going for massive growth like it’s the only real purpose of meaning in our infinite cosmos.
But if you’re in your mid-40s and looking for a second career and you want to retire sooner rather than later – this being a very typical model for my first type of founder that I prefer to make content for, and some say this is the most common type of founder full-stop -- you may find that all you want is to build a little £2m/£4m ARR (annual recurring revenue) business that books £500k, £1m profit per year, that you can ultimately sell on and retire. Because wherever your starting, 10-15 years consistent effort can almost always get you there without needing to have institutional investment.
The only REASON to get investment is because you want growth to come in quicker and have a business that’s scaled up to say £20m/£40m ARR and £5m, £10m booked profit per year. And again, this is a personal decision in a subculture of, particularly Western business values, where personal decisions and modest thinking is not encouraged.
But, as I said the initial steps required to get to the fork in the road where you either choose to get investment or not doesn’t have any bearing on the first things you do. So in this video, we’re going to look at the first part – getting from our idea through to a point where we have enough pieces put together that we can then look at getting institutional investment if we want OR we can start scaling the business from the fact we’ve actually got the business up to speed and training. Regardless of the choice though, you need to get to THIS JUNCTION JOINT.
Although we’re talking about a choice to get “investment”, you will need some money in order to fund any of this – you can’t build a technology business with absolutely zero money.
The way that fundraising normally goes is that you have:
FF&F – Friends, Families, and Followers, and/or your own savings, and/or some personal income that you divert into the business to “bootstrap” the cashflow,
Seed capital – usually this is provided by angel investors,
Venture capital.
FF&F is not classed as institutional investment – the other two are. (Even angel investment is a form of private equity.)
To be clear on this, you always will need some FF&F level money – i.e. you’ll need to arrange some non-institutional investment to come in – or you won’t be able to create any forward motion. What we’re saying in terms of investment after this point is that you don’t NEED seed capital going onto venture capital to build a decent sized business of £2m-£4m turnover, but you DO need to do this bootstrapping part.
The sections we’re going to through are:
The Flywheel – what I think is the most helpful analogy to describe early-stage startups,
Marketing 101 – a quick grounding in an approach to marketing that’s more likely to succeed,
Minimum Viable Products – the first version 1 product that you need to build,
Pilots – a quick word about getting your first version out there,
Being Investor Ready – which is different to being “investment ready”.
The Flywheel
Although we’re not focussing on necessarily needing institutional investment, it’s useful to try and see our business through the eyes on an investor because – all things being equal – investors will only put money into ventures that they feel are working. Our business needs to work for us to, so we can use investor sentiment as a benchmark.
You will hear that investors talk about “traction” – this is a helpful metaphor, but to be honest it’s not my favourite way of putting it. Traction talks to the idea of “moving”, and hopefully there’s an implication that you’re moving forwards rather than backwards, but the analogy that I like better is that of getting a flywheel up to speed.
For those unfamiliar with the engineering concept of a flywheel, the principle of one is that it takes a lot of energy to get started, but once it is started and running at speed, it takes a long time, or a lot of force, to stop it from spinning. And this is what you want with a business – you want to put a ton of energy into it to make it move, but once it’s actually functional, you want it to become self-sustaining and be difficult to stop.
From an investor’s perspective, the existence of a notional flywheel spinning away merrily strongly implies that the business will continue to grow and be profitable – which is what they are looking for. If you don’t have investors, you also want this because you don’t want to be nurse-maiding your business every day just to keep the lights on – you want a baseline performance that you can improve (and frankly, improve if you want).
This may be seem obvious to state, but in order to get the flywheel up to speed you need to be bringing in money by making sales. You also need to be bringing in more money than you’re spending, because to keep the analogy going, making a loss effectively slows the flywheel and brings it to a stop. After all, “cash is king”.
For a technology business, the most common model for selling is to provide a service that is paid for by the customer on a recurring monthly basis. This approach is sort of the “holy grail” for technology businesses and most founders seek to build their businesses on this model. This is very commonly called “software as a service”, or “SaaS”, but for me that term is so old it’s meaning has got somewhat lost in the mists of time. Most software these days is sold on a recurring monthly, subscription basis – but back in the olden days software was usually sold on a “perpetual” license. E.g. you might spend a few thousand on some software, but you’d have a license to use that software in perpetuity.
The reason why the software industry moved to a monthly recurring basis is that rent seeking is more sustainable than selling outright. Specifically recurring to the flywheel, if you have a thousand customers call paying you £100 a month, that creates a consistent cashflow of £100,000 per month. If you sold the same amount in real terms, e.g. you sold a thousand customers a one off license fee of £2,400 (which over two years amortises to the same amount at the end), you create a lumpy cashflow.
You also create a business that if you have a functional recession like we have now at the time of recording this, you can find a sudden drop in new sales, whereas if you have everyone on monthly recurring revenue, you are much more cushioned against structural issues with the broader economy. This fits neatly into the flywheel analogy that we’ve been looking at – monthly recurring revenue is highly sympathetic with the flywheel model because if the economy is bad and you start losing customers, the effect of that loss is slower.
Most people think of SaaS solutions a purely a business-to-business (or B2B) play, but actually you find the same rent seeking/recurring monthly behaviour in business-to-consumer (or B2C). HelloFresh is a good direct example of this where this business seeks to sell a subscription service turning something you might do once or twice into something you might do for many years. You also have companies like Just Eat who try to create habits that result in create monthly recurring activity.
The phrase you want to remember here, because you will hear it a lot, is “MRR” (“monthly recurring revenue”), or it’s cousin “ARR” (“annual recurring revenue”). Keeping an eye on whether monthly – i.e. MRR is increasing – tends to be a good metric for whether the business is growing.
To get your flywheel up to speed, what you need to do is to build a machine that is focussed on increasing this MRR number. And this reason why I say this is that a lot of founders don’t come out of the gate like this, and end up faffing around before realising that ultimately being able to point to the fact that getting MRR to increase month-on-month is what growth IS, and investors want to see that this is happening before they put in their money.
(And again we’re not saying you need institutional investment, but using their measures is a helpful analogue for the measures that we should be using.)
Let’s look then at how we get this flywheel spinning, and using the tried and tested method of goal planning whereby if you look at where you want to get to, then look at where you are, you can derive what steps you likely need to take.
If you’re starting from nothing your direction of travel is “not having a product” to “selling that product” – to put it more colloquially, we need to build something to sell and know that we have some hope of being able to sell it in meaningful numbers.
The steps you need to go through are:
Having a rough idea of what you think people will buy,
Having a roughly put together product that you can put in front of people (this is known as a “minimum viable product”),
Operating a pilot project with at least one of your ideal customers,
Having a “good enough” marketing strategy that means you know how to actually sell what you’ve built.
Coming onto the four steps of starting up, marketing underpins everything we’re doing of them so let’s tackle this first even though we don’t have anything to sell yet.
I don’t do content specifically on marketing, but authoring the type of content that I do do for early-stage businesses, some marketing chat is unavoidable. As such, I will give you a quick starter for 10, with three specific pointers.
Firstly, marketing is much more difficult and much more important than most first time founders think it is. The mistake that they make is that you only have a business if you are able to access your market, and this truism effectively dictates that you have to build a marketing organisation first, and then wrap your operational delivery around the outside. Most people (especially founders from a tech background), will design the business with operational delivery at its core, and then apply a light smear of marketing on the outside.
Secondly, marketing – B2B or B2C – is much easier if you centre your approach on whatever “transformation” you want the customer to have. Look at “desired transformations” is a much more modern approach (and a more effective approach) that combines the idea of “customer pains” (i.e. what problem they want solved) and “customer journey” (i.e. how they got to where they are and where they want to get to).
A very quick exercise can solve this for you. Just fill out this statement: I HELP ___ TO ___ SO THAT THEY CAN ___ WITHOUT ___.
That once sentence when filled out is your one-sentence marketing strategy, and hanging everything you do on that will shortcircuit most problems you have with your marketing.
(If you want to go a bit further, go and get a book called “The 1-Page Marketing Plan” by Allan Dib.)
Thirdly, consistency is everything, and you have to be consistent even if it doesn’t look like you are getting results. Whatever tactic you choose to do, you have to do it for a minimum of six months before you will see anything come back to you at all.
Finally, what you do ultimately need is very skilled, life-stage specific, and industry experienced specialist to help with a proper marketing strategy. But they’ll love you forever if you can kick off your marketing efforts with those three things that we’ve just been through. Also, try not to outsource your marketing as it’s a key business function that you need to get better at. It’s not something you just DO if you’re trying to scale a business, it’s what the business IS. The two things technology businesses should never outsource are a) software engineering, and b) marketing.
I’ve started with marketing before talking about delivering a product because the one thing that kills more startups than anything else is failing to find “product-market fit”. You may have heard of this term, but it’s just a way to say “there is demand for what you are trying to supply”, or to put it more simply – you have something that people will buy.
If you design the product cold without thinking about how you will ultimately market it, you will find it much harder to find product-market fit. Specifically coming back to the “I HELP ____” statement above, if you have that statement in your mind as you’re designing the product, you are of course far more able to come up with a product that is compatible and sympathetic with that statement.
The next challenge you have is on the topic I have a lot of content on my socials about which is building your MVP, or “minimum viable product”.
I have a very strict philosophy about this. Firstly, your MVP has to be a real piece of software. There are people out there who will tell you that you can kind of fudge the first version of your product, by using prototypes strung together using Google Sheets and no-code/lo-code solutions. “Some” of those people who say that are trying to sell you something.
You have to think about this from the customer’s perspective. They want something real – they need to actually use something and have it work. You can’t expect them to put time and energy into something that isn’t ultimately what they’re going to buy. Plus, if someone is following behind you with a real product whilst you’re carrying a naff prototype, guess what happens next.
The second problem with MVPs is that non-technology founders almost by default end up having to give the project to an offshore software development agency. In my experience, MOST people who do this suffer catastrophic results. Having spent a decent amount of time researching this over the past few years, this isn’t really the agency’s fault. They feel they have an offer that works for non-technology founders and will deliver that offer, but that offer more often than not gives poor results.
Agencies exist to augment EXISTING technical teams, not to be an organisation’s ONLY team, AND this gets worse when you factor in the fact that startups are working in full-on “experimental mode” and don’t actually know what they are going to build.
The only safe way to do this really is to bring a technical person into the business. This in and of itself is complicated, but it does hugely ameliorate the risks around outsourcing. But, I also give away a lot of content for FREE on my socials and in my V.I.F. programme to help non-technology founders do this.
One thing you should do – which will not be how the agency suggests working because they don’t work like this – is to pare the project down into separate slices that you can deliver and test with prospects to see if it’s converging on product-market fit. If you do have in your mind that you’re trying to converge on that (again, see the “I HELP ___ DO ___” statement from before), and you’re doing the project in smaller pieces, this will really help if you’re not able to find or don’t want to bring someone technical into the business early doors.
Once you have built your v1 MVP, you are now ready to run a pilot project. For B2B businesses, this typically means that you find one business that fits your ICP (ideal customer profile), and you agree to use your solution on a real output for them. For B2C businesses, this looks more like a soft launch where you have to find a collection of people that fit your ICP and treat them like VIPs, giving them special, “behind the scenes” treatment.
An easy mistake to make with pilots is to assume that the pilot will confirm that you have now found product-market fit. In reality, the pilot will show you were product-market fit almost certainly lies. You will need to spend more money on the MVP to get from where you run the pilot. An analogy I use for this is flying a plane and doing some pilot hopping on some tropical islands. Once you’ve done the pilot you’ll need to fly off somewhere, and this means having some “fuel” (i.e. cash) available to do more development to get to where you need to go.
Overall though, the point of completing a pilot (and/or doing any remedial work that might be required) is that you have a product that people probably will spend money on and it’s time to start bringing the business up to scale.
At this point in the proceedings we are very close to being investor ready.
A trick that the industry plays on founders is that what people called “investment ready” isn’t the same as being “investor ready”.
The way that the entrepreneur community within the UK presents itself has become highly distorted over the 20+ years since the dotcom boom. There is a feeling that in order to be a “proper” startup, you need to be a certain type of founder and behave in a certain type of way. A big part of this is theatre particularly around fundraising, as this aspect of starting and scaling tech businesses has become one where you’re only seen to have value if you’re seen to be raising a certain amount of money. You’re also supposed to raise in a certain way – a way that both parodies and defines itself by looking like Dragons Den (or Shark Tank in the US, which is a much better name, because VCs are very sharky people).
This has created an industry of people who will get you “investment ready” for a “nominal” fee, which usually involves putting together your pitch deck and financials. Those same people will happily be paid for providing that, even though your business isn’t actually investable.
Investors at seed stage need to see the business actually function, and that’s the purpose of the preceding sections in this video – we need to show that the idea that we have actually has product-market fit, that we have a baseline amount of technology that we can build on and use as a foundation for the next phase, and that we have a sensible marketing strategy and are able to actually find people who want the transformation that we’re promising, and that we have enough credibility around delivery of that to convince them to actually give us some money.
As I’ve said since the start of this video, getting to this point of being “investor ready” means that you can then get your pitch deck and financials done and go out there and try and find the right investors for you, or you can be your own investor and get to the next stage of scaling up your business through cashflow.
SIGNOFF