Martin Leon Barreto
Early on, Airbnb noticed it had a smaller market than it had expected in New York City compared with other locations. The company realized that one problem was that the photos that went with the postings did not make the accommodations look welcoming. Again, the solution wasn’t based on technology. Airbnb simply hired photographers to take great pictures of these New York apartments. This in turn helped grow that and other markets, as people could see that better photos meant a better chance of getting bookings, and at better rates.
Another early challenge for Airbnb was its lack of inventory. It didn’t have a lot of listings in some of the markets where it was operating. The solution it came up with was to limit how many options a search turned up. The website would offer just three places in order to get a visitor interested. Meanwhile, behind the scenes, employees were calling around trying to find more places to stay in that city to give visitors more options. Again, a tech company was employing a low-tech solution by keeping its attention on problem-solving.
Startups that aren’t focused on problem-solving often find they aren’t generating as much revenue as they would like. In many cases, they respond by trying to sell the same thing, but harder. They hire a seasoned head of sales from a big company, assuming, “If that person was successful with them, they’re bound to bring us success too.” In such situations, that person typically leaves within a year, because the product still hasn’t yet found customers prepared to pay to solve a problem.
Problem-solving startups find it easier to learn, and to adapt their offerings to the market. In the early days of a venture, entrepreneurs are trying to figure out what their product is really all about. Every early sales call has two parts: first, you’re trying to get the order; and second, you’re trying to learn what you need to do in the future to get the order. This is an important distinction. In many cases, startups don’t actually know why their customers bought from them. Some assume they know why, but don’t ask. Others really are not interested in the reasons. This is a mistake. Asking good questions, listening, and learning are critical to long-term success.
Technology is a tool, not a vessel. It is only useful to the extent that it can get you to where you want to go.
A lot of entrepreneurs think about their startups on the revenue side, the same way they think about product development. If you think about developing software, it’s a linear process. You can figure out your requirements: you’ll develop a minimum viable product, tweak it, come out of beta testing, make your changes, and then go to general release. We can put a time frame on all of this. Unless we’re breaking brand-new ground, such as making a carbon-fiber aircraft for the first time, most software development has two main inputs, time and money, so it can typically be well defined in a linear fashion. This is why entrepreneurs try to make their revenue models linear too. If an entrepreneur knows her product will be released six months from now, she knows it’ll be in beta in four months. She calculates that two months in, she will need to have a head of marketing so the company can start to define the leads and get the process going. A month later, she needs a head of sales, to bring on sales reps and train them, so that within the first 30 days of the product’s general release, her marketing team is generating leads, and she’s got 40 salespeople selling, and we all hit our numbers, and we’re a big success.
But in reality, generating revenue for a startup follows a process that resembles the Customer Development cycle, a model developed by Stanford’s Steve Blank. Blank identified that customer development is an iterative rather than a linear process. Very few businesses finish where they started, which means at some point, they were wrong about something. In order to get a good fit, the best startups end up in an iterative process involving what they are offering and to whom they are offering it. That means their first customers may not be the customers they really want. They might have to tweak their targets to get the right target and alter their value proposition a little bit, all to get a good fit. This needn’t be what we typically think of as a pivot, a big moment where we started out selling meals and ended up selling bikes. Instead, what make our product offering stronger are lots of small tweaks that shape the offering and the way we sell it.
None of this should be understood to mean that if you have an idea, develop some great technology, and ultimately fail, the idea is necessarily a bad one. Take Webvan, the online grocery business founded in 1996 by Louis Borders, the cofounder of Borders Group. Webvan raised hundreds of millions of dollars from investors such as Sequoia Capital and SoftBank, and through an initial public offering. It spent $1 billion building unbelievably efficient robotic distribution centers all around the United States, plus a fleet of delivery trucks, so it could deliver within 24 hours at low cost. But the business needed a ton of volume to stay alive, and ultimately, the market wasn’t ready to buy groceries online, because not enough shoppers had broadband internet at home, and because they weren’t comfortable transacting online or buying groceries on the web. So Webvan went bankrupt in 2001, not because the idea was terrible (companies such as Instacart are proving that it wasn’t), but because the market just wasn’t ready. They had put their faith in technology, scale, and disruption, and had failed to focus enough on problem-solving.
Technology is a tool, not a vessel. It is only useful to the extent that it can get you to where you want to go. That destination must be meeting a need that customers will pay for. Better to start your venture with finding and serving that need.
Michael D. Alter is clinical professor of entrepreneurship at Chicago Booth.
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