What to expect from running a startup

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(and what to do about it)

What to expect from running a startup

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Successful startups are created with Wizardry.

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Successful startups are NOT created with Wizardry.

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Successful startups are NOT created with Wizardry..

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Startup Theory Part 1: ValueWe will fix the problem like this.

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Startup Theory Part 1: ValueWe will fix the problem like this:

How will the product or service deliver value to people once they are using it?

Sample Hypotheses:+ Lower cost/time+ Better experience (increase willingness to pay)+ Improve supply chain for customers (B2B)+ Increase volume for customers (B2B, B2C)

Understand Your Value Hypothesis:

Source: Value Hypothesis concepts comes from Eric Ries, The Lean Startup

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Startup Theory Part 2: GrowthPeople will find out about us like this.

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Startup Theory Part 2: GrowthPeople will find out about us like this:

How new users will discover product or service

Sample Hypotheses:+ People will tell their friends (viral)+ Via advertisement (paid)+ Marketed directly to enterprise customers (sales)+ Established partners will distribute product.

Source: Value, Growth Hypothesis concepts come from Eric Ries, The Lean Startup

Understand Growth Hypothesis:

Lean Startup = Startup Science(NOTE: still A LOT of art left)

• Business plans are wrong, all startups are built on untested flawed assumptions (risks).

• 70-90% of startups fail

• Key risk is scaling too quickly• i.e. spending too much time/money based on

assumptions instead of knowledge

• Think about productivity not in terms of how much stuff you are building, but how much stuff you are learning.

• Make sure you are learning as quickly as possible.

Successful startups go through phases

1. Discovery(avg 5-7 months)

2. Validation(avg 3-5 months)

3. Efficiency(avg 5-6 months)

4. Scale(avg 7-9 months)

Many startups say they are here…

…but are actually here

Best time to spend $Riskiest time to spend $

Trick is: Know where you’re at!

Discovery Phase (T+ 5-7 months)Purpose: Validate whether startup is solving a meaningful problem and whether anybody would hypothetically be interested in their solution

Events: • Founding team formed• Many customer interviews conducted• Minimum viable product• Team joins accelerator• Friends and family round• Mentors & advisors

Key Graduation Milestone:-Customer Validation of Problem-Complete Minimum Viable Product

Key Stats (Avg):# of employees: 1# of $ raised: $200kMonthly User Growth: 6%

Source: Startup Genome Project

What is Minimum Viable Product (MVP)?MVP = F(Customer, Problem, Time or $$$)

• Primarily, MVP is a way to test your value hypothesis

• Focus on CUSTOMER– Qualitative Discovery, Quantitative Validation

• Get to know habits, problems, desires (FUN MATTERS)– what causes pain? what causes pleasure?

• Define 1-5 TESTABLE Conversion Metrics of Value– Attention/Usage (session time, clicks)– Customer Data (email, connect, profile)- Revenue (direct or indirect)- Retention (visits over time, cohort behavior)- Referral (users evangelize to other users)

• Note: Paid Solutions drive FOCUS (& pay rent)

SOURCE: DAVE MCCLURE, 500 Startups, Metrics4Pirates Presentation, June 2011

Validation Phase (T+ 8-12 months)Key Milestone:-Product market fit

Key Stats (Avg at end of Phase):# of employees: 4# of $ raised: $800kMonthly User Growth: 21%


Purpose: Get early validation that people are interested in product through exchange of $ or attention.

Events: • Core features refined• Initial user growth• Metrics & analytics

implementation• Seed funding• 1st key hires• 1st paying customers• Product/Market Fit

Boil down assumptions to 5-7 key Metrics that you can measure

Seven metrics that matter: 1. Acquisition: (rate of gaining new users)

2. Engagement: (how deeply are you engaging users)

3. Virality: (new customers coming from existing customers)

4. Monetization: (% of total users participating in the business)

5. Churn: (loss of existing users)

6. Lifetime customer value (projected monetization returns by class of customers)

7. Program Productive (Yield on promotional activities, both paid and viral)

Source: Escape Velocity, Geoffrey Moore (2011)

Look for Product/Market FitPMF = F(Customer, Solution, Alternatives*)

• Product / Market Fit occurs when value hypothesis is validated:– Customers like your stuff better than other options– Not static, Not optimal – just Local Max 4 F(customers, solution, time)– make sure you’re moving in optimal direction 2 local max

• Q: what competitive solutions are available? – … that your customers know about?– how are you diff/same? – in ways that people care about? (will pay for)

• KILL a FEATURE regularly (or rotate 1% tests)– Q: what is MOST $ cust pay 4 LEAST func MVP relative 2 BEST alt?

• NICHE 2 WIN: RE-define cust + DIFFerentiated featuresSOURCE: DAVE MCCLURE, 500 Startups, Metrics4Pirates Presentation, June 2011

Efficiency Phase (T+ 13-18 months)Key Milestone:-Conversion Funnel Optimization-Growth Theory Validated

Key Stats (Avg at end of Phase):# of employees: 4# of $ raised: $900kMonthly User Growth: 29%


Purpose: Refine business model and improve efficiency of customer acquisition process to avoid scaling with a leaky bucket.

Events: • Value proposition refined• UX Overhauled• Conversion Funnel Optimized• Viral growth achieved• Repeatable sales process &/or

customer acquisition channel

Develop a marketing strategy based on what customers are doing

Q: What channels? Which users? Why?A: High Volume (#), Low Cost ($), High Conv (%)

• Design & Test Multiple Marketing Channels + Campaigns• Select & Focus on Best-Performing Channels & Themes• Optimize for conversion to target CTAs, not just site/landing page• Match/Drive channel cost to/below revenue potential

• Low-Hanging Fruit: – Blogs– SEO/SEM– Landing Pages– Automated Emails

SOURCE: DAVE MCCLURE, 500 Startups, Metrics4Pirates Presentation, June 2011

Conversion Funnel vs. Cohort Analysis

Scale Phase (T +20-27 months)Key Milestone:-Next round of financing-Real Revenue (Breakeven?)

Key Stats (Avg during Phase):# of employees: 17# of $ raised: $3MMonthly User Growth: 43%


Purpose: Step on the gas! Drive growth aggressively.

Events: • Large Investment Round• Massive Customer Acquisition• Back End Scalability

Improvements• 1st Executive Hires• Process Implementation• Establish Departments

Key risks to scaling too early


Key takeaways

1. (Tech) startups go through phases

2. Understanding what phase a Startup is at is key to being able to evaluate the startup

3. The more intentionally (and leanly) startups learn, the faster they are likely to progress towards scale

4. Being able to identify correctly what phase an organization is at, should impact the way KF invests.

Economy & Finance

What to expect from running a startup