Most entrepreneurs start with a problem statement. They wish to make money by solving the problem that people are facing. Building a product can be a long, challenging and expensive task. Nobody wants to be undertaking the effort with no certainty of whether or not the product would be accepted by the market. In order to mitigate this risk, an minimum viable product (MVP) is built to test the market and ascertain the demand for the solution.
I often find many startups go with a quick and dirty version to potential customers to find out what they think of the solution and if they would be interested in using it. Often the solution is pitched in the absence of a financial cost because it is very basic! When the real product hits the market, entrepreneurs find it hard to get customers to pay for the product. The discount spiral begins and continues down a slippery slope.
During one of the meetups that we were conducting, we were brainstorming some ideas with students at the Vellore Institute of Technology. In a room of 50 students, one of the students came up with the idea for an app, which would be able to show the mess menu. Since their hostel are 7 stories high, they find it inconvenient to come down to check the menu before every meal, in order to determine whether to eat at the mess or go out.
We asked the group of 50 students in the room, how many thought that the problem was worth solving; all of the hands went up. We then discussed what kind of app could be built and the features that would be required in the app. Everyone seemed to agree that the solution was great so I popped a question, “How many of you would pay Rs. 60 per year for the app?”; 2 hands went up!
There are inherently two types of test that the MVP should be able to succeed on.
Testing for behaviour
Every business is based on an insight into human behaviour. The entrepreneur exploits the behaviour to generate an income and a profit.
The first thing that the MVP is supposed to be able to do is prove that the behaviour that one is seeking to exploit does exist. If you are building an e-commerce business, the assumption is that people are ‘lazy’ enough to want to sit at home and shop for products than to visit the shop and buy the product. One of the biggest USP of e-commerce against traditional retail is ‘convenience’. The job of the MVP is to prove that people actually perceive a convenience. This is to test if the expected behaviour is shown.
Are people okay with buying goods from their computer? Are they willing to go ahead with a purchase in the absence of tactile feedback? Are they willing to pay online? Do they like the vast choice being offered?
Testing for value
The next step is to prove that the users see value in the convenience being provided. So is the user seeing enough value to pay money for the convenience being provided. If your solution cannot generate income, the path to sustainability is unclear.
Too often entrepreneurs miss out on testing for value, which arguably is the most important part of establishing an business. The purpose of any business is to create value for the customer and exchange that value for money. The value creation should be apparent for the customer.
Being able to test both of these aspects is critical to being right about the product that is being built. Therefore, an MVP must be a product that can be sold to the customer. The MVP is not a model, it is a product that performs a function in a much simplified manner.
I have been working with startups for a fairly long time now. The fun part of working with startups is that there is absolutely no way to anticipate what would come next. You have to be fast and nimble, constantly adjusting to the changes that are happening around you.
This is precisely what makes building a startup really challenging as well. There are those who thrive under these circumstances and then, there are those who don’t. The trouble is that as one proceeds through the life cycle of a startup, the things that are an asset at the beginning turn out to be a liability later on. Founders need to constantly adapt and change to the changing realities of their business.
Working with startups, I have come across three distinct phases of building a business. I am going to focus on product businesses since most other businesses cannot be deemed startups according to me, simply due to the challenges posed in scaling such businesses rapidly.
Building a Product
The first phase of embarking on a startups is to build a product. But even before you build a product you need to verify that the problem you are looking to solve is real and that the customer you are going after feels it.
Every business is built on the basis of a keen insight into human behaviour, businesses exploit the behaviour to make a profit.
The need to test the behaviour hypothesis and ensuring that it is correct is extremely important to ensure that the product does not fail once it has been developed. We have worked with startups that have used all kind of tools including whatsapp, Facebook page and groups, Pinterest, etc. to build the quick and dirty manifestations of what the product is likely to do. In certain cases, we have had startups run the product like a service before taking a dive towards developing it. Running it like a service tends to be people heavy and hence cousins, friends, siblings, etc are exploited to pitch in from time to time. Once the same can be tested with small groups of 100 to 200 people, the proof of the behaviour is surely in place.
In the case of hardware related products, prototyping the product is crucial. Thanks to the advent of crowdfunding, it is possible to gauge the demand for a product in the market fairly quickly, sometime even before the prototype is ready.
At this stage it makes sense to take the time and invest the resources necessary to build the product. If you have a founding team that is solid on the tech side, it is possible to build out versions of the product that are extremely simple and addresses 2 or 3 of the most critical features that the end product will have. Trying to get all of the features or functionality of the product into the first version is difficult and dangerous.
Apart from establishing the hypothesis, the advantage of doing the quick and dirty product is pure insight.
I tend to compare most things to mathematical equations and if you were to look at a business as a mathematical equation, there are several variables that you may know but several that you cannot even foresee when starting out. This process gives you an insight into many of the variables that you would have normally missed out on.
Building a product is hard – You need to take all of these insights and turn it into a workflow that would be well suited to the use case that you are building for. The product has to be able to accommodate all of the exceptional requirements that would arise and function intuitively.
Building a Business
Now that the product is done, one needs to build a business around the product.
People only spend money on something when they believe that the value that they get would be greater that the cost they must incur
Value is a belief – This is exactly the reason why some people would go and spend 1,00,000 rupees to buy a trouser at Prada and others would stand around haggling for a 1000 rupee trouser at the local market.
Building a business involves instilling the ‘belief’ that the product that you are selling is worth a lot more than the cost that they would be incurring.
Steve Jobs was neither a hardware guy, nor a software guy. What did he bring to the business?
Well, he brought this thing called belief.
Making money is all about making the other person believe that there is value in what you are looking to offer them. This comes down to two things.
Firstly, how well has the pain been understood. If you understand that pain felt by the customer well enough, you would have a clear understanding of how willing or unwilling the customer is going to be to get rid of it. The bigger the problem, the easier it is to perceive value. Secondly, how well is the solution being projected. Most luxury businesses are just projection alone.
I had written another post on the art of selling here.
Turning the product that you built into a torrent of money is challenging because this is where being fast and nimble has a huge role to play. As an entrepreneur you need to get constant feedback from the customer fine tune your product repeatedly and iteratively in order to reach the state of perfection investors like to call the ‘Product-Market Fit’.
According to me, you reach product-market fit when you have clarity of what the market requires. Most often the consequence of this understanding reflects in being able to tell the returns one can expect from investment in marketing.
‘If I spend $10 Million in marketing, we should be able to triple our user base over the next 18 months and gather a 5% share in the category that we are targeting.’ When you have ‘Product-Market Fit’, you can essentially express scaling-up in the form of an equation.
Building an Organisation
The final stage is to move towards organisation building. If you thought building a product and the business was hard, this is far and away the hardest.
A successful business is one which has a high degree of predictability of Income.
In a startup things tend to be rather impromptu, most of the decisions are taken in response to the market. Strategies can flip in a matter of months.
Once the company has established a market position and a certain degree of predictability has set into the business, the focus of strategy has to shift away from exploring many pint sized markets to addressing fewer barrel sized market. This involves building an organisation that can take care of certain repetitive functions. You must first of all define these functions, these revenue units, these business vertical and hand them over to appropriately talented individuals.
In my experience it is important to think about organisation building, when you pass the product stage. Thoughts on organisation building has to begin simultaneously with the process of developing the business.
What would a 100 people organisation look like?
What roles are people going to play?
What are the kinds of skill sets may be required?
Recruitment is a long and arduous process, especially in today’s world. If you find someone who is talented, make a mental note of what role you would want them to play in your business and where you would see them fitting in. Its like a game of chess where you are setting up your pieces for the right time to come along.
Some founders have a latent network available to them which is quite powerful. Some have to go out and build them. Preferably bring in people who have equally strong networks in their area.
At the end of the day any organisation is only as good as the people who are a part of it. Bringing together people who are consistently better than yourself, and nurturing them, is the best way to build an organisation.
The best organisations are ones where the job of the leadership is only to provide direction.