Small Kid in a Big Suit

Startups are NOT a smaller version of a big company. This is a fairly recent perspective propounded by Steve Blank, Eric Ries and others. Because they are different, they should do different things. Not understanding this is one reason why so many startups fail so spectacularly.

There are actually two phases of startups.

The first phase is a company so new it has yet to learn how to make money. This is when you’re launching a product so different, people have never bought it before. Consider Twitter. Who ever made money off a tweet before?

Companies like this have only one task in life: LEARN. Discover a business model that can scale.

Some companies skip this phase. They start off in life following a proven business model. Cheese Boy, for example. Maybe no one sold grilled cheese like that, but fast food has been around for a while. It’s a proven business model. Likewise with many of the apps that people are inventing today. They’ll either make money by selling advertising or by selling the apps themselves at a profit. Both those business models have also been already proven.

Companies like this have also one task in life: SCALE. They’re done being startups when they’ve got enough revenue to cover ongoing operating expenses.

But a company whose task in life is to learn does things very differently from one whose task is to grow. So if you run a startup, it’s critical that you know which phase you’re in so you don’t do the wrong things.

Don’t all startups need investors?

Actually no. In the USA, about 500, 000 companies get started every year. Angel investors fund about 60, 000. VC’s fund about 3,000. Even accounting for the fact that a lot of those companies are really freelancers or solopreneurs, that’s still a big gap of companies that don’t get money from investors.

And that’s a good thing. Why? Well just because you’re short of cash doesn’t mean your company is a good investment.  Nothing personal, but some companies can’t grow big enough fast enough to give their investors the kind of return they need. It’s got as much to do with the market you’re going after and how much competition there is, as it does with all the factors you can control. What happens if you do get money from investors when it’s not the best model for you? As Chris Dixon says ” … a wide range of outcomes that would otherwise be good become bad. ”

If yours is the kind of company that is a good investment, and you’re around Connecticut, Boston or New York,  checkout the Angel Investor Forum. If you’re in a different part of the world, check out The Angel Capital Association.

If yours is one of the hundreds of thousands of startups that should not be taking equity investment learn how to bootstrap. You’ll be happier and richer for it.

What Does a Business Model Look Like?

It looks like knowing the aswers to these questions:

  • Who are your customers?
  • Why do they buy from you?
  • What does it cost to get a new customer?
  • What’s the lifetime value of that customer?
  • What’s the optimal number of customers to maximize profit?
  • How do you balance your capcity to sell with your capacity to provide the value customers pay for?

Takeaways

  • The CEO skills I teach in Boot Camp (except for the occaisional Startup Boot Camp) are not useful in a startup.
  • Startups need to discover a business model. That takes a different skill set.