So you want to launch a Startup?

by Ahmed Humayun

SeedlingConventional wisdom has it that if you don't like your job or want to pursue your passion or just have a great idea, you should just go ahead and launch a startup, because the barriers to launching a for-profit company or social venture are lower today than they have ever been.

People will cite different reasons to bolster this claim, but the revolutionary impact of the Internet on connectivity is a big one. The Internet makes it easier to identify, access, and sell to potential customers or users. This has all kind of effects, such as increasing the pace of product iteration and the potential to scale quickly. Increased access to local or global labor, and a robust culture and infrastructure of venture capital investment, especially in technology centers such as Silicon Valley, are other reasons cited by those who encourage people to launch companies.

I don't know if it is a good idea for some or even most people to launch a startup- it is easy to get sucked into the hype while significantly understating the risks, effort, skills, and time involved in constructing a successful organization with a working, scalable business model from scratch. This true of any organization, let alone the multi-million or billion dollar entity we all might fantasize about retiring on. It can take many years to build a successful business – some estimates are, perhaps a decade. It all depends on the level of your interest and commitment (Do you really care about an idea?), personal goals (Do you want to build the next Amazon or a company you can sell after a few years?), skills (Do you have the wherewithal to realize your vision, or identify and attract people who do?), your appetite and ability to incur risk, and so on.

Peter Thiel, the co-founder of Silicon Valley juggernauts such as PayPal and Palantir, and venture capitalist, says in his book Zero to One, that even if you excel in what you do, it could be much better to join a great, fast growing company than launching one yourself. There is a vast disparity in returns between the tiny minority of the most successful, fast growing companies and the rest of the lot. This matters because:

'differences between companies will dwarf the differences in roles inside companies. You could have 100% of the equity if you fully find your own venture but if you fail you'll have 100% of nothing. Owning just 0.01% of Google, by contrast, is incredibly valuable.' [1]

There are rare circumstances, in other words, that it would make sense for most people to choose an alternative to early-stage Google.

Still, whether it makes sense for you to launch or join a startup or not, there is a lot that can be learned from the process of launching a startup itself, no matter what you do. There are a large number of resources – articles, books, videos, and social media networks, etc. – committed to understanding the conceptualization and implementation of startups. These tend to emanate from technology centers and start up clusters in places like Silicon Valley, and the genre is populated with step-by-step how-to manuals, origin stories of successful startups, use cases, lessons learned, precepts, best practices, etc.

Below, I lay out some scattered, provisional notes based on some of the literature out there. In no way are these notes exhaustive or definitive or authoritative – on many points, there are likely any number of alternate ways of thinking about things, and many subtleties to consider. My purpose here has been to to identify some basic, interesting thoughts that can aid in brainstorming, not lay down ironclad principles or profound guidance derived from experience. For the latter, look to the armies of experienced and successful entrepreneurs, tech gurus, and authors out there.

What is a startup?

One influential definition by Steve Blank and Bob Dorf in The Startup Owner's Manual has it that 'A startup is a temporary organization in search of a scalable, repeatable, profitable business model.' [2] All elements of this definition may not be equally relevant for all business types; it depends on the end destination. For example, some startup owners may aspire to build small businesses and put less emphasis on the scalability of their organization. Others may seek to quickly build businesses that will eventually be bought by other companies. This is especially the case for certain types of web startups – so short term profitability may be less important than a powerful idea that has been validated by a vast, enthusiastic user base.

Others may want to build massive businesses, and therefore focus on markets, technologies and products that have the potential to attract venture capital quickly in order to facilitate scale. These types of companies tend to dominate news coverage of startups – say, a company like Snapchat, that enables seamless self destructing photo and video sharing between smartphones which has a hundred million users a month. Needless to say, these comprise a tiny minority of companies.

Other startups focus less on monetary gains and more on solving social problems, or creating social value. Here the principles of scalability and repeatability still apply, with some caveats and qualifications, while the strategies for acquiring large amounts of venture capital are less relevant.

Idea-Product-Company

One simple way to think about a startup is in terms of Idea-Product-Company.

Every startup needs to account in some way for an idea or vision, a product that embodies the idea, and a company committed to fulfilling the vision. The thinking is you can't build a great product without a great idea, and you can't build a great company without a great product. [3] Each of these is a distinct phase that poses its own unique challenges. Conceiving a great idea that in theory solves a problem for customers is different from creating a high quality product that actually does so and is perceived as such by the customer, which in turn is different from building an effective organization capable of producing these products on a small and then ever-growing scale.

Of course, this is just a way of thinking about the process – these steps don't strictly take place in sequence. You can't wait till you have an idea or product in its finished form before you build an organization.

There is a constant emphasis on iteration and experimentation in the literature – viewing the ideational, product, and organizational development stages as recurring feedback loops. You want to get early, heavy feedback, at a low investment of time, effort, and resources, on basic concepts and prototypes. You especially want to maximize opportunities to devise and test hypotheses about customers. Along the way, you have to figure out how to plant the seeds of an effective organization. Regardless of the destination, the ideal process is one of constant, specific learning to optimize performance. This is quite self consciously an engineering sensibility.

Startup origin stories tend to focus heavily on lessons learned. Sometimes they play almost like morality tales – ‘here, a best practice was not followed and these were the negative consequences, but here, on the other hand, a certain axiom wasn't really applicable.'

A Winning Idea

What are some of the features of a great idea? Many tech gurus have it that a great idea should inspire passion – even, fanaticism – in you and in your potential users. Addictiveness, the need for people to use and reuse the anticipated product or service, is the prize here. It is easy to see how this characteristic is fundamental to many of the most common web applications out there, especially social media, like Facebook and Twitter.

In a typical formulation, Sam Altman, the President of Y-Combinator, an ‘accelerator' that provide funding and mentorship to early stage startups, says don't make something people like, make something they love that they will recommend to others. A great idea should involve a breakthrough change rather than incremental improvements relative to what is already in the marketplace. What exactly distinguishes a breakthrough idea from an incremental one may not always be clear; however, accelerators or successful venture capital funds claim a track record of success at identifying the winners.

How to Generate Ideas

There are a lot of principles, strategies and frameworks out there for identifying potential startup ideas, from the highly abstract to the more specific. In no particular order, here are some thoughts people have offered on how to go about it.

The Passion: Focus on a problem that you are passionate about, addressing which requires doing something you are especially good at. Perhaps you have spent thousands of hours working in a particular field and are aware of problems, limitations, constraints, for which no good solution seems to exist. Perhaps you are the right person to identify a solution and figure out a way to sell it.

The ‘Deliberate Idea': Dan Lewis, head of product at Wavii, a company acquired by Google, outlines a more structured, systematic approach, that includes identifying your principal motivation, framing problems, generating ideas, evaluating ideas, getting input and validation from others more knowledgeable than yourself, and so on. The key is to generate a range of possibilities and then look for the best fit, where there is alignment between your interests, potential customer/audience types, and business models. You want to do some version of this process with a range of ideas before you get too far down the road with any given idea.

The Right Market: Peter Thiel suggests targeting a very small market that you can monopolize. ‘The perfect target market for a startup is a small group of particular people concentrated together and served by few or no competitors.' [4] The idea is then to expand to related and broader markets. Amazon is the paragon here: Jeff Bezos wanted to dominate online retail, but deliberately started with books before moving on to CDs, software, and pretty much everything under the sun.

There is a lot more out there, but this should give a flavor. I might in future installments talk about other interesting thoughts and resources.

[1] Peter Thiel, Zero to One: Notes on Startups, or How to Build the Future (New York: Crown Business, 2014): 91-92.

[2] Steve Blank and Bob Dorf, The Startup Owner's Manual (California: K & S Ranch, 2012).

[3] Sam Altman, How to Start a Startup, Lecture I.

[4] Thiel, 54.

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