Ray Crowell of humble impact and Melissa Perri of ProdUX Labs answer additional questions that were submitted by viewers during the recent GIST Guru online program, How to Run Your Startup. Watch the recorded broadcast below.
How can I make the most of my funding in the early stage of my venture?
If you’re still in the idea phase, don’t focus on building a final product right away. The goal isn’t to ship as many features as you can in the early stages. Instead, you want to validate your startup idea. You can do that by building enough product to demonstrate what it can do. You can use concierge methods to manually deliver value. Here’s an example of concierge:
You have an automated permit pulling service via a web/mobile tech product.
You build out the customer UI/UX to submit for the permit and pay transaction.
You have a team of expediters that physically go to building departments to pull permits until you can automate on the municipalities’ end.
If you do have a product or service to sell, focus more on trying to turn a profit and less time on trying to get outside investments. Too many startups focus on getting funded. Their goal should be to build a sustainable company.
What do you do if you can’t secure funding?
Focus on your business model. Validate qualitatively and verify quantitatively. If you’ve done enough assumption testing and have landed on a solid problem/solution-fit, the math will start making sense. Customers are the best investors. Get in the mindset of bootstrapping to investment.
Watch the GIST TechConnect, Knowing When to Seek Capital and When to Bootstrap below.
How do you know when you have enough financing to take your venture to the next level?
Below is a basic formula for understanding scale:
Yearly Revenue Target / Customer Lifetime Value will give you the number of new customers you need annually. Here’s an example:
Yearly Revenue Target: $10M per year revenue
Customer Lifetime Value: $200 per month for a 2 year life term
Total: $4,800 Lifetime Value
Customer Throughput: $10M divided by $4,800 Lifetime Value
New customers you need per year: 2,083
From there you’ll need to map that against month-to-month lead conversion to customer activation. This information helps you understand how many leads you’ll need to bring through your sales funnel and convert to paying customers in order to achieve expectations set with scale. You’ll also more easily deduce where there are constraints in the levers you need to pull to scale sustainably (for example, acquisition, activation, retention, revenue, and referral). For more information about this topic, read Scaling Lean by Ash Maurya.
How do you manage investors who suddenly want to take control of your startup?
The reality is, many startup founders are asked to politely bow out of executive roles by investors when scaling. Not everyone is the right fit to serve as the leader as a company matures - and equity holders want the best return on their investment. With that in mind, entrepreneurs need to think about control, equity and decision-making implications of partners, co-founders and investors from the beginning.
If anyone is facing this challenge, reach out to me on Twitter: @raylcrowell. We can connect you with some experts on this topic.
How do you measure growth?
Measure in batches (cohorts): daily, weekly, and monthly. You have to derive causality in order for your metric to be actionable. Make sure you’re measuring apples to apples. Consider creating a dashboard to measure the following data points:
Scaling Lean by Ash Maurya is a great “how to” manual for measuring growth and breaking constraints.
How do you know when it’s time to move from idea stage to venture stage?
It’s best to determine your venture’s current phase. Here’s a helpful article from Entrepreneur on the business lifecycle. If you’re unsure about allocating precious resources in order to take your idea to the next level, remember that you can run no-to-very-low cost experiments to see if you have problem/solution-fit. Many startups conduct experiments before registering as a legal entity.
Watch the GIST TechConnect, Your Startup Priorities below.
How can you test the robustness of your business model before you start scaling?
Get in front of customers. You need solid product-market fit to scale. A large percentage of business offerings change significantly when crossing the chasm. Because of this, most “products” fail due to premature scale.
Watch the recent GIST TechConnect, Product-Market Fit below.
How much research is required in order to convert an idea into an actual business?
Focus more on validation and less on research. Research is essential in the very early stages, but you’ll eventually want to know if your product solves a problem for customers.
How do you create a solid exit strategy that can be incorporated into the business idea presentation?
Everyone should be thinking about an exit strategy from the beginning (especially if you’re thinking about a high-growth tech business). Here are a few recommendations to consider.
Recommendation 1: Have everyone on the team write down what a favorable exit would look like.
Recommendation 2: Make sure you understand the previous number in relation to how much investors are putting in and their expected returns. Remember, you’re the last ones to get paid when you exit.
Recommendation 3: Consider brand alignment, values, vision, goals, etc. with the potential buyer (example: Twitter acquisition of Twitpic).
Don’t let exit strategy be the sole driver of your business decisions. Follow the lean mindset and validate scale opportunities against what customers are telling you.