Follow the money not the model
If I had a nickel for every time a startup sent me a business plan to review, I’d already had a better plan than theirs, because I just made five cents.
Come on. That’s a pretty solid joke considering the degree of difficulty.
In all seriousness, I’m seeing a growing epidemic of startups built off surefire business school concepts and buzzword-heavy strategies. I’ve got three recent examples of startups who reached out to me — they did everything they were supposed to do, everything they were told to do, and yet they still flamed out.
There’s a common thread between all three: They all started with a really good plan.
Why Startups Build From the Model Out
Startups will follow an established business model because it’s easier to get the traction that way. Or at least something that looks like traction.
I’m not surprised by the trend, and it’s not necessarily new. I’m not talking about daydreamers here, in fact, some of them can get pretty far: They have customers, they have employees, sometimes they even raise money and make splashy headlines. They often look like they’re bigger and sexier than their balance sheet. And that kind of hollow success fuels the myth: Get a great idea, follow the steps, make the money.
But it doesn’t work like that. In fact, in a startup, it’s the other way around. Making that first honest dollar is no joke — that first, not-your-mom, not-your-friends, repeatable, scalable dollar of revenue. It’s a hard thing to do, because if you’re building something unique and successful, there is no plan to get you there. There are no steps, because no one has done it before.
So it’s a lot less daunting to follow models like these.
Model 1: Building from the brand up
Startups built on a growth-of-brand strategy are still really popular. This is especially true among first-time entrepreneurs.
The model for these startups starts with an audience, which is in fact the only metric that usually gets measured, whether it’s in site/app visits, monthly average users (MAUs), or members. The audience is convened for the purpose of soaking up then building up the company’s brand, which is, for the most part, the company’s product.
The audience then becomes a community, which grows virally, and usually there’s a side-plan for initial revenue to temporarily come from advertising. Then, additional “real” revenue streams are injected via a subscription on one side of the audience and, sometimes, the goodwill of the other side to provide part or all of the product.
There’s actually nothing wrong with this model in and of itself. In fact, none of the models I’ll cover here are inherently broken. And in many cases, the founders are smart, well-meaning people who actually have a good idea.
Following the money: What I’d do, and actually, I’ve done this a couple times, is first throw out advertising. It’s not going to work we’ll spend all our time not selling ads. Then, instead of building a critical mass of audience, I start by finding its first two members and converting them immediately.
If two people will pay for whatever the thing is we want to be generating our revenue from, then we’re actually on our way to building a customer base of a million people or whatever number we have in our heads. Then we can learn and replicate.
Model 2: Scaling the super niche
A bit of advice I hear over and over again that I just can’t reconcile is to start building a product by focusing on one small thing and getting really good at that thing before you “boil the ocean.”
Right? I hate that phrase too.
The model here is to fixate on one small part of our startup equation, whether it’s one feature of the product or one small segment of the eventual customer base. Then we do it over and over again until we get really, really good at it, and only then do we expand outward. Again, nothing super wrong with this model. It’s kinda good advice.
The problem arises when the startup is building in a modern digital economy. We’re not just building a simple product, but a multi-functional experience, complete with its own sales funnel, onboarding, customer success, and so on.
The company that contacted me (I wasn’t advising them), had a great idea and they were executing on it brilliantly. They had an end-to-end solution with customers and revenue. They were also flatlining. Right away I saw three obvious problems:
- The model had them reduce their target market to a very niche segment of customers, requiring a tailored pitch and custom experience at the exclusion of everyone else.
- Furthermore, this was not the market that would get them to revenue quickly and easily, mainly because they were selling quick and easy to a segment that was traditionally mired in red tape and bureaucracy.
- The model also convinced them to only turn on one part of the product. Admittedly, this was the core part, but using it was like getting all excited about the possibilities and then hitting a wall with nowhere else to go.
Following the money: If we’re going to build a multi-functional product, we need a balanced approach — somewhere between being all things to all customers and being the best product in our own niche corner of the market.
Especially in the beginning, we won’t know where our niche corner is until our customers tell us, with their dollars. If we aim at the wrong group, or turn them off with a limited functional experience, we’ll never get that signal.
Model 3: If you build the tech, they will come
The tech-first startup model appeals to anyone looking to put a little time and money into building the next X for Y (i.e. Uber for Kids).
So let’s actually talk about Uber for Kids, because there are a bunch of these startups already online, making it easy to understand why the model is so tempting and also why a follow-the-model approach will fail — HopSkipDrive maybe notwithstanding. Because I’ll say again, the model itself isn’t the problem, but it can create what a colleague of mine calls “entrepreneurial tourists.”
The tech-first startup model takes existing tech and reverse engineers the game-changing nature of that tech to reach a new market segment.
What can’t be reverse-engineered is all the headaches.
There’s a reason why Uber won’t ride kids under 18. At their scale and under their model, the nightmare involved in moving that precious cargo comes with a whole new set of problems to solve.
Uber already has their own problems. And just as Uber probably didn’t anticipate their own problems — or at least they didn’t anticipate the size of the headaches those problems would cause — the Uber for Kids startups sprung up with great tech and landed in a world of brand new unanticipated problems.
What results is a completely different model than Uber’s, from different processes and flows to different onboarding and communications to completely different pricing models. All these new problems impact and redefine the purpose of the tech. Get any of them wrong, starting with the pricing model, and the business will implode quickly.
Following the money: At my current startup, Spiffy, we see this all the time. There are tons of mobile car wash companies out there, and scale usually knocks them over, because while they have the tech to take on business at scale, they lack the ability to scale the business because of all the problems that come with scale.
They actually wind up taking on a lot of business they either can’t handle or can’t make any profit from. If you’re familiar with HBO’s Silicon Valley, this is the lesson of Sliceline.
So we actually build our tech last. Whenever we do something new — whether that’s turning on a new feature, opening a new market, creating a new line of business — we roll it out mostly manually and see where the money comes in and where the problems pop up. Then we build the tech to capitalize on the former and minimize the latter.
Look, I’m someone who believes that if you do what you love, the money will follow. But I’m also someone who has spent almost their entire career founding and building companies, and I’ve very much evolved from a model-oriented entrepreneur to a revenue-oriented entrepreneur. Not because I love money, but because in business, you have to be oriented in something, and dollars are the only honest metric.
Article first time appeared here