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How does an entrepreneur know when it’s time to go to market? Or how to grow a handful of customers into a viable revenue stream? Chicago Booth’s Waverly Deutsch shares some of the ideas, methodologies, and research findings that can help entrepreneurs make sense of where their company is at, where it needs to go, and how to get there.
1. Finding your MVP
For companies in their earliest stages, Eric Ries’ Lean Startup methodology can help determine the minimum viable product necessary to start developing a customer base. But that’s just the beginning.
Waverly Deutsch: Hello, again, entrepreneurs. So you’ve started your business. You’ve got your idea, you’re set out to launch, and the first thing you do is you read Eric Ries’s book The Lean Startup. You mean you haven’t read Eric Ries’s book The Lean Startup? OK, go read Eric Ries’s book The Lean Startup, or follow the Lean Startup Movement online.
The Lean Startup really defines the very early stages of building a start-up company. The goal of Lean Startup and the great success of Lean Startup is about getting off focusing solely on the product and getting something into the hands of your customers as quickly as possible. And iterating: a little bit more for the customer, a little bit more work on the product, a little bit more for the customer, a little bit more work on the product, so that you find the right product-market fit.
But there’s a limitation on Lean Startup. What Lean Startup is gonna get you to is something called the minimum viable product. The Lean Startup methodology takes you from idea to the smallest thing that you can develop with limited resources and put in the hands of your customer and create value for your customer. And you’re gonna finish that start-up stage with a working product, but it’s not gonna be terribly robust, it’s probably not gonna be at all scalable, and it’s probably gonna have very few of the features that you ultimately envision that product happening, and a handful of customers. And those customers are gonna be helpful in validating whether your product or service or offering creates value, but not whether you can be profitable and self-sustaining as a company.
So what I want you to think about is, Lean Startup is really only stage one of launching your company. And a minimum viable product is not a product. It’s the beginning.
Think about an airplane taking off. The start-up phase, the Lean Startup phase, is your gate check and your taxiing to the runway. But you’re just getting going.
2. Bridging the traction gap
You have a product and a small base of customers—but not necessarily a viable business. Here’s how to determine metrics and milestones to track your progress toward sustainable success.
Waverly Deutsch: Hey, entrepreneurs. So if start-up is—in the metaphor of an airplane about to take off—your systems check and your taxiing out to the runway, what is accelerating down the runway?
Well, there’s interesting work being done by a venture-capital group called Wildcat Venture Partners, and what they’ve identified is something they call the Traction Gap. The Traction Gap is that period of time between when you have a product and you’ve got some customers, but you don’t have a business yet. It’s not self-sustaining. You’re not repeatedly generating revenue. And what they’ve done in the Traction Gap methodology is they’ve defined a couple of key inflection points in your business where you’ve created meaningful value.
The first is from your minimum viable product to minimum viable revenue. That’s when you’ve shown that you have a sales process, that you can engage customers repeatedly. And you’ve been able to launch a couple of iterations of your product and implement it with customers repeatedly. You are at minimum viable revenue. Then you have to accelerate into minimum viable traction. So that airplane is speeding down the runway and lifting up off the ground before it gets to scale. Minimum viable revenue is where you show you can be a self-sustaining business with or without other people’s investment.
They’ve also identified some key metrics and milestones based on their experience with business-to-business software-as-a-service companies. For a B2B SaaS company, minimum viable revenue comes at about $2 million. From minimum viable product to minimum viable revenue typically takes a company about 18 to 24 months. If you’re not selling in the first couple of years of developing and launching your product to the market, you’re probably not gonna hit minimum viable revenue.
Minimum viable traction is when you triple that number to six million over the next four to six quarters. You need to show steady, incremental growth quarter over quarter. Minimum viable traction is when the big venture capitalists wanna come in and help fund you to scale.
3. Courting—and being courted by—investors
The goal of an initial pitch isn’t immediate funding, it’s generating enough interest to start a relationship with an investor. Finding the right VC or angel investor is like finding a spouse.
Waverly Deutsch: Entrepreneurs come to me all the time to look at their pitch deck, to work with them to prepare for a meeting with an angel investor or a venture capitalist, because they’re trying to raise money. And I always ask them this question: What are you trying to accomplish with this pitch deck? And they always say, “Raise money.”
Wrong. You are not trying to raise money. No investor has ever heard an initial pitch and said, “You’re there. I’m giving you $500,000.”
What you are trying to do is begin a relationship, a relationship that could grow into a long-term investment in your company and governance of your company over its life.
Think of it this way, folks. Getting an investor is dating. Think about your elevator pitch. Your elevator pitch is the shortest version of your message. What is your business? You use it when you meet someone new and they ask, “What’s your company do?” You use it when you meet an angel investor and they ask, “What does your company do?” It’s your pickup line. Your goal isn’t to get money. Your goal is to get the digits. You wanna get to the coffee date.
Think about it: your job in the coffee date is to intrigue them into wanting to know more, intrigue them into being willing to read your business plan, invite you into their offices to meet with some of their other partners. You’re trying to get to the dinner date. You are not trying to raise money. You are building a relationship.
Over the time that you work with an investor before an investment—we’re talking about courtship; we’re talking about dating—lots and lots more information is gonna come out about what your business really is, what its strengths are, what its uniqueness is, and what its weakness is, what that investor’s gonna help you with.
Think about getting a term sheet as an engagement ring. Right, we’re not there yet, but we’re pretty darn close. Once that contract is signed and the money’s in the bank, you’re married. That investor is gonna sit on your board of directors.
They’re gonna have something to say about strategy. They’re gonna help you find the right people to hire. And guess what, they’re gonna have something to say when you do something wrong. Marriage is ‘til death do you part. Investment is until exit do you part.
4. Learn to promote your team
For many investors, the people behind a company are at least as important as the company’s product. Here’s how entrepreneurs can help sell themselves along with their business idea.
Waverly Deutsch: Entrepreneurs, we know how important communication is in your ability to engage with an investor. We put lots of time and energy into how we tell the story of our product, our offering, our market, and our customer.
But guess what? Venture capitalists invest in opportunities; but, more importantly, they invest in teams. You have to learn how to talk about yourself and your team in order to engage with an investor.
Research by [Chicago Booth’s] Steve Kaplan, [Harvard’s] Paul Gompers, and others indicates that the team is probably the most important factor in whether or not you’re gonna get an investment. Forty-seven percent of venture capitalists say it is the most important factor. So all that work you’re doing on telling the story of your product, you have to tell the story of your team.
What does that mean? It means you can’t rely on your LinkedIn profile or your résumé to show why you’re a great entrepreneur for this business. It’s your job to tie your relevant experience, hobbies, passions, networks, resources to this company. Why are you the right guy or gal to start this company?
And dig deep. This may be stuff that you took off your résumé a long time ago. That landscaping business you ran through college to help pay? Guess what, it means you have direct-sales experience. It means you have customer-service experience. That time you spent as a waiter or waitress: you’ve dealt with the public. You’ve dealt with restaurant operations. You’ve got to figure out what aspect of that consulting job or what aspect of that banking job is really relevant to what you’re going to do for this company.
And your degree matters, but you’ve gotta connect what you’ve learned at school to what you’re doing for this company. You and every member of your team need to do a good job of connecting yourself to this business. Because, ultimately, they’re investing in you.
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