Nolsen Bedon, Ltd.

First Customer: Find a great first customer you can leverage.

Sell to someone noteworthy. You can then leverage your bragging rights all over the place. The key to doing this is to show that you’re in business for the long haul, not here today and gone tomorrow.

Customer acquisition is a key metric of success for a startup. If you can show that you’ve got your foot in the door of your target market by acquiring an early customer who is highly influential, it becomes so much easier to fund and grow your startup. The ability to find and keep these kinds of customers is invaluable from a startup perspective.

While early customer revenue is important, linking up with a “lighthouse” customer can be the make-or-break point for a startup. These are the customers who believe in what you’re doing and who are prepared to act as references for you in your marketing efforts.

A common problem with startups is that they attempt to go after too many market segments simultaneously. They in effect attempt to be all things to all people and therefore end up failing to completely wow anyone in particular. Successful established companies don’t fall into this trap so much. They know their market niches, who their best customers are and stay focused on keeping those customers happy. Startups need to narrow their emphasis, identify a specific market segment and attempt to secure the business of an influential customer within that segment. Once that happens, you have a blueprint on how to get more customers in the future as well as a worthwhile marketing reference point.

There are always multiple ways to segment a market. The more a startup understands the needs of a specific segment, the better it can match whatever it is developing to those actual customer needs. This connection to the marketplace can drive the product development efforts and lay the foundation for a sustainable competitive advantage. This will only happen if the startup narrows its focus and attempts to become established in one specific market segment first rather than going after too many markets right at the outset.

Startups also struggle with the issue of deciding when the appropriate time is to bring onboard a “gunslinger” — a high-octane sales champion who boasts an impressive track record of previous success. As the name suggests, gunslingers are in it for the money, so they will only get involved if there is the potential for them to earn a stellar income as a percentage of the new business they personally generate. Gunslingers are great because of their tenacity and their drive to succeed. Therefore, they find their way past the gatekeepers and get face-to-face with the decision makers. They’re prepared to live or die on the strength of their results and can boost sales revenues quickly in the right circumstances. On the other side of the equation, however, they don’t come at all cheaply and hiring them only makes sense if you’ve already got enough production capacity in place to deliver as much as they sell.

There’s also a balancing act for startups between making one big sale to a single client and fostering sales channel partners who will generate a succession of small sales. Both approaches have their advantages and disadvantages. Startups generally prefer having a sales pipeline that delivers an ongoing flow of smaller deals because there is less perceived risk. There is also the fact that a large single customer — even a highly influential one — might pressure a startup into developing products that are well suited to its particular needs but less valued by the general marketplace. A marquee customer may end up being more trouble than they’re worth, especially if they attempt to suck all the profits out of their transactions with the startup. For this and other reasons, most startups like to attract business of a bellwether customer but also build sales channels that will deliver smaller customers in higher volumes.

Good startups meld together the founder’s vision with the customer’s expectations. They think outside the square and visualize markets where others have never thought to tread. They land blue-chip customers who influence others to buy as well. They educate potential customers about what’s feasible, thereby helping shape customer expectations. And they’re flexible enough to adapt their business plan to meet and embrace customer opportunities in specific markets that get uncovered along the way. They find and win loyal customers. All of these achievements are a balancing act that’s impressive to see come together.

Startups That Work

Targeting Market: Target a market that already exists.

It’s far better to develop a product or servive that will appeal to an existing market than it is to attempt to create your own market. Develop products that are better, easier or cheaper rather than those that are pioneers.

As a general rule, if you solve a problem that already exists for people, you’ll do better than if you develop a solution looking for a problem. It’s better to develop a product or service that meets an existing need than it is to try and create a new market entirely from scratch. That’s not to say you cannot succeed identifying an untapped market need, but serving an existing market is always less risky.

When you’re trying to develop a product for a market that does not yet exist, you’re aiming at a moving target. Staying ahead of an emerging market is a challenge. If you take too long to develop your product or service, your business might run out of cash before you even have an opportunity to become established. Conversely, if you move too quickly and launch too soon, competitors might emerge with superior products just as the market takes off. In these situations, you need to be flexible enough to accelerate your operations as needed — which is always difficult to pull off in practice.

What are the key advantages of targeting an established market as opposed to growing a greenfield market yourself?

If you genuinely have a product breakthrough, you can license your technology to existing companies working in that industry or in other industries altogether.

You can form a strategic alliance with existing customers to develp new products that will be attractive and worth buying from their perspective.

You can benchmark the offerings of competitors and figure out how to be better.

You will have a fair idea of the features customers are interested in and willing to pay for.

You will have a realistic idea of the actual market size so you can plan your manufacturing and staffing accordingly.In all, it’s always better to solve a problem that already exists. This is far easier than having to educate people about their pain points. Find your market niche, develop a product they will love and then work hard to serve that market exceptionally well. If you’re very lucky, you might even be able to target a market niche just before it takes off and grows explosively. If you pull that off, you can grow very big very quickly. Just make certain you have the right strategy and the right mix of resources to be able to perform to your best potential.

Startups That Work

Cash Flow: Manage your cash with financial discipline.

Always know how much money will be required for you to become profitable. Act with financial discipline and never lose sight of the fact that startups are speculative investments.

Unless a startup learns how to manage its cash flow, it probably won’t be around very long at all. It’s essential to keep a steady hand on just how much cash is being used. This is more a characteristic of good management than it is a reflection on how much capital is available.

A smart startup will use the majority of its cash in customer acquisition activities rather than building a large staff structure too early. It will balance its actual income and its capital expenditures in a sustainable manner. This means stopping people from doing unwise or foolish things that chew up cash but generate nothing of lasting value. This would include leasing excessive office space, buying unnecessary equipment or overpaying staff beyond what the market value of their services actually is. Successful companies don’t fall into these traps.

When it comes to managing your cashflow, there are four questions you need to be able to answer at any time:

1. How well are you currently managing your cash, and what systems do you have in place to do this?
2. How accurately are you able to forecast your future cash requirements?
3. When exactly will your company run out of money if it continues with its present cash flow expenditure?
4. Do you have a strategy in place for extending your cash reserves before you’ll need them in the future?

It’s important for your business strategy to match and reflect your cash flows. There is nothing to be gained by reaching a situation where you’ve burned through all your cash and then you’re forced to scramble around to scrape together enough to meet payroll. This is not a very efficient way to do business, because the management will constantly be in panic mode rather than focusing on growing the business.

There’s always pressure for any startup to become cash flow positive. However, the public companies in your industry should give some benchmark of when that milestone should be reached. Look carefully at their experiences for clues on what goals you should be pursuing. In some industries, a long gestation period of investment is required before sizable sales revenues can be expected to materialize. For other industries, it’s possible to become cash flow positive much sooner and any early-stage capital raised becomes more of a financial cushion than anything else.

The fact is that most startups are tested financially at some stage of their history. It helps ot have a management team in place who can maneuver through this kind of challenge without losing sight of the ultimate goal to create value. This is an area where it’s possible to become penny-wise and pound-foolish. It makes perfect sense to invest in whatever will create value further down the track rather than struggling along. The key is to stay clear eyed and level headed when the pressure is on. Cash flow management is often a genuine stress test for most startups but the balancing act between resources and strategic priorities is vital to master.

Startups That Work

Creating Value: Concentrate on creating value, not your exit strategy.

Focus exclusively on creating long-term value and payoffs when you do a startup. Build a great revenue stream and your exit strategy will take care of itself.

To build a successful startup, you have to create a functional and rigorous business model. You have to be clear in your thinking on how you plan to generate sales revenue. The business model dictates whether a company is viable and likely to be in business for the long haul, or whether it will simply disappear once all the startup funding has been exhausted.

A robust business model always has several key characteristics:

The business model has to identify clearly what line of business the startup is in. Once that is clarified, appropriate processes and organizational strategies can then be put in place. For example, Virgin Atlantic Airways has a business model that specifies it is in the entertainment industry rather than the transportation industry. That decision has many flow-on consequences.

The business model always encompasses a pricing model. That way the company can use successive degrees of economies of scale to maximum advantage. It provides discipline and focus. Sustainability comes from being able to generate a profit rather than solely the stubbornness of the founders. There must be a clear understanding of the economic value of the firm’s products and services along with mechanism by which profits will be generated.

The business model has to be scalable. Rather than focusing on one single product introduction, good business models have a vision for a product line. You want to be able to offer a family of products that can be scaled up in the future rather than treating each customer like a one-off transaction.

The business model needs to be flexible so it can be amended to match changing market conditions. Business models always change as startups become better established and therefore it makes sense to have a business model that can be varied rather than one set in stone.

The business model needs to built around one clear, concise objective. The only way to build team spirit within an organization is for everyone to be working towards one clearly stated goal. Everything that happens should then be measured against that objective.

Startups That Work

Talented People: Build a network of talented people around you.

The best way to run a startup is to build your network of talented people well before you need them. That way you can bring together compatible people on your team who can work towards a common goal without internal conflicts.

It’s impossible to do everything yourself when growing a startup from scratch. The ideal situation is to start with a group of people who have worked together successfully in the past. If that isn’t feasible, you want to have available a pool of talented people you can draft into the management team. This never happens in an instant, if for no other reason than it takes time to check people’s references and do other aspects of your due diligence. Therefore, you should build a network of people you’d like to work with in the future. When the time and circumstances are right, you can then draw from that pool.

Don’t forget that your early-stage investors will also be able to recommend people to join the management team. Managing the rivalries that will arise is all part and parcel of running a startup. You have to find your way through this challenge if you’re to have any hope of getting the right people on board at the most opportune times.

A similar line of thought applies to your sales efforts. Your startup doesn’t necessarily have to make all its sales itself. Instead, you can build marketing alliances and develop channels of product distribution that will be more respectable than anything you could achieve on your own. Many startups fail to think through just how their products will get sold. They don’t think about:

Who will actually buy the product or service

How they will buy

How much they will be willing to pay

How the product will be physically distributed and servicedInstead, it isn’t uncommon for startups to have vague notions about “selling direct to the customer” at some point in the future. Generally speaking, this isn’t good enough. Startups need to be forming marketing alliances and building distribution channels well in advance of when they will be requiredc.To build a marketing alliance, a startup needs to convince its partners of the value of the relationship. You have to demonstrate that you have a marketable technology that customers are willing to pay for. You need hard evidence that the end customer views what you have to offer in a favorable light when compared to everything else already on the market. In other words, you need to provude documented evidence of customer interest, perhaps in the form of some actual sales of prototype products.

One possible approach is to hire someone who has worked inside your prospective channel partner’s organization or at very least inside the industry. Their knowledge of the lay of the land can prove invaluable in generating credibility. Channel partners often evaluate who is working for a startup just as intensively as they look at the technical merits of the product or service being discussed. Anticipating this in advance and getting the right people on board early may be very worthwhile investments from this perspective.

In some industries, having the stamp of approval of the major players may also be required before you can gain any traction.

For example, for a technology startup, having Microsoft, Cisco, Hewlett-Packard, Dell, Oracle, SAP, Siebel, or IBM endorse your product instantly moves you from obscurity to respectability. Not only that but having these companies onboard also removes any nagging doubts about whether or not you will be around in the future to support what you’re selling. For these and other strategic reasons, many startups form development alliances with major companies.

To make these alliances work, startups need to:

Figure out up-front what both parties to the alliance want to achieve. Be very clear about this. One-way alliances are never sustainable.

Focus on quantifiable results rather than harder to measure activities like the issuing of a joint press release.

Treat alliance partners like customers and make sure they are deriving worthwhile benefits from the arrangement.

Use alliance partners to gain a foothold in new markets.In forming marketing alliances, startups have to be careful not to let these partners shield them from customers. You don’t want the information that comes back from the marketplace to be filtered before it reaches you. You need to hear firsthand how end customers are using your proudcts or services and what issues are arising. Keep in mind that your alliance will represent only a minuscule percentage of your partner’s business turnover but a very large proportion of your own sales. Don’t trade off closeness to your customers for the prestige of working with a big, well-established player.Investors often pay close attention to the existence of channel partners and strategic alliances. Obviously, the more partner relationships you have, the more favorable investors will be to providing additional rounds of funding in the future. The difference between being a company with a cool technology as opposed to having a relationship with the largest company in that industry can mean millions in company valuation. The ability to develop strategic alliances with those companies that are well established in your industry is highly beneficial.

Startups That Work

Marketing Personnel: Get a marketing person on your founder’s team.

Technical people are obviously important, but you need someone who will have their eye fixed squarely on the marketplace. And don’t worry if the technologists and the marketers argue — that’s normal and should generate some creative ideas.

To succeed over the long haul, someone on the management team needs to be consistently focusing on the key question: “Is there a market for this idea?” If everyone is completely fixated on product development and building a better mousetrap and nobody is focusing on identifying who will buy the product and how, problems lie ahead. Therefore, it always makes good sense to have at least one experienced marketer on the senior management team and ideally as one of the founders.

Marketers focus well on what needs to be done to get the product sold. They think about all of the more mundane issues the technologists can’t be bothered with: Continue Reading »

Founders: Start with a group of at least three or four founders

The larger the group of founders you can put together, the better. This broadens your new company’s skill sets and access to capital. To further enhance your chances of success, put together a team of people who have already worked together on other projects and share power broadly.

In startup companies, nothing much happens at all unless you have great people involved in the management. Pure and simple, great companies are built by great teams. A strong management team can turn an average idea into a genuine winner but an average management team can kill even great ideas. This is why venture capitalists evaluate the quality of the management team first and foremost and walk away from the deal if the team isn’t strong and first rate.

This means that the more experienced your management team is, the greater your chances become of succeeding. You need a balanced team of founders, each of whom will contribute something worthwhile to the running of the startup company. Venture capital providers always bet on fantastic teams rather than on fantastic products. A founding team that has a diverse set of skills will always be a more attractive proposition than a founder working alone. If the members of the team have worked together previously either at another corporation or on a different project, then investor confidence will increase.

There is one other key point that deserves attention. Smart business leaders know when it’s time to bring in professional management. They know intuitively when it’s time to go against conventional wisdom and when it’s time to have in place the people who can add professionalism and systems expertise to the enterprise. If an investor can feel confident that the founders are willing to step aside when the time is right, they will see that as a very positive endorsement.

Startups That Work