(& what’s Paul Graham single survival rule for “first-year startups”)
By Andreas12 May, 2015
“The older I get, the less I listen to what people say and the more I look at what they do” - Andrew Carnegie
Think for a moment…..
Have you ever wondered what distinguish startups that survived their first year in business with those that are not?
images 2Ok, let’s give you some options.
Is it a matter of having (or not)……
- An experienced founder’s team
- A well-capitalized startup
- A strong “board” of advisors/mentors
- A Strong domain expertise
Or….
Yes you guessed right, the answer is not a simple you should have (or not) that! Let’s leave these superficial formulas BS for the “chosen(s)”….
So, what our today post will all be about?
It’ll cover just 3 things:
- It’ll highlight the fact that aspiring entrepreneurs before “jumping in” they should get their priorities right and avoid screwi$% around with spreadsheets (and yes explain WTF is the spreadsheet paradox)
- Then, explain what’s the close cousin of “build it and they will come” and what’s the danger with this unsound approach
- And finally, wrap things up with Paul Graham survival “rule” for first-year startups and what’s the rationale behind it
Playing with spreadsheets is a dangerous “game”
According to the conventional (startup) “wisdom”, one of the first “exercises” a new entrepreneur must undertake after she make up her mind which market to “attack”, has to be a market sizing analysis (put simply, calculate the overall market size).
As Steve Black explains in his book (yes, Startup Owner’s Manual) “Marketers typically think of market size as 3 numbers; TAM (total addressable market), SAM (served available market) and target market (the ideal customer segment/group the company wants to target)”.
For example:
TAM of a new mobile language app: (Let’s say) 2 billion smartphone owners worldwide
SAM if the app works only on an android: (Let’s say) 700 million android users
Target Market: Android users that are based in China and want to learn English: (Let’s say) 70 million
So the rationale behind this “activity” according to Mr. Blank is to “help you determine whether the payoff from your new venture is worth the toil, sweat and tears, or whether you’re about to do your first pivot”.
And this is where (often) the magic shi% happens!
The close cousin of “build it and they will come”
We all know it (or at least I hope so…), the “build it and they will come” is an utterly outdated model for building a startup.
So, what the fu$% I am talking about?
Introducing the “cousin”: “If we can only capture just 1% of the market”
As Jim Price nicely describes in a great post here “A close cousin of build it and they will come is an entrepreneur going after a multi-billion dollar market, and glibly notes that if s/he just captures one percent of the market, it’ll be a $20 or $50 million company. No go-to-market plan”.
Unfortunately many “outsiders” (pre-launch entrepreneurs) are over-optimistic (and some of them could be easily described as delusional) with their market penetration assumptions.
Therefore what I am trying to say is that playing with spreadsheets is comfortable (only) until to get out there and face the harsh reality (as someone told me once in the pre-outside the building phase “you should know that you don’t know”).
As Sergio Schuller puts it in a post of him; “Until you have your first 10 clients, you have proved nothing, only that you can multiply numbers”.
The spreadsheet paradox
image 2And yes the spreadsheet paradox has to do with the fact that spreadsheets were first developed for accounting/bookkeeping tasks for enabling organizations to run their operations in a financially sound way but what we see instead is that very often are being used for doing exactly the opposite.
Ok, let’s move on with the “way out” option….
The alternative: “Hunt what you can kill”
Instead of targeting the “universe”, make a conscious decision to hunt what you can realistically kill as an early-stage startup that is still trying to figure it out.
You certainly heard the “go big or home” advice (strategy go out of business) and as I explained in an older post you should not put yourself in this situation suicide mission.
In this sensitive stage of your startup business this is the last thing you want.
Paul Graham: “Get ramen profitable”
image 3So what Paul Graham means by that?
“Ramen profitable” means a startup makes just enough to pay the founders’ living expenses. It’s not rapid prototyping for business models (though it can be), but more a way of hacking the investment process”.
Although Paul Graham suggests that for getting some leverage (by having some small but hard numbers under your belt) before starting a conversation with investors for raising capital, this tactic can certainly have another application.
After all is not a secret that this blog has nothing to do with venture-backed startups, but there are always some lessons that need to be learned from this “front” as well.
So, what we can be taught with the “ramen approach” is the fact of the matter than as Sir Richard Branson advocates; “In the 1st year of running a business, your only goal should be surviving”.
Yes is no brainer, but I am afraid many first-time entrepreneurs lose sight of what matters (staying alive by “bringing in more than going out”- and along the way prove your proposition is really viable) and get distracted by doing everything else except that.
So the question is; are you willing to focus on what matters figure it out and make it work?
Today’s Key Takeaways
- Don’t get tempted by the “build it and they will come” closest cousing
- Hunt (only) what you can kill
- On your first year the goal is “to get ramen profitable”, anything else is distraction
****
That’s all from me.
Until the next time take care.
All the best
Andreas
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