Entrepreneurship and the concept of building a startup is now perceived as pretty cool, right?
But, have you ever taken the time to think about what really goes into building a business? From ideation all the way through to delivering your product or service at scale?
As you’d imagine (or may have experienced) this is a multi-faceted and often ubiquitous experience where you start off knowing very little, and have the good intention of turning that ‘very little’ into something very big.
Plenty of people have done it before, and plenty of people will do it in the future. The best part of learning from others experiences is that we now know much more about how we can give ourselves the best chance of taking an idea, nurturing or incubating it and eventually delivering it to lots of people.
To help set out some of what we now know, I’ve teamed up with Malcolm Burrows, former technology entrepreneur turned lawyer at Dundas Lawyers (I give him a hard time about that too) and Drue Schofield, a director at 4Front Accountants.
Throughout this three-part series, both Malcolm and Drue will help me cover some of the legal and accounting implications of building an early stage venture, while I discuss some practical steps for doing so.
If you don’t know why setting the right accounting and legal foundation is important, see here.
As I said earlier, when you start out, you typically know very little about your customers and the potential business models available to you. This is absolutely okay as it’s now your job to start testing what you think you know, so that you can find what you really need to know in order to make your idea work as a business.
There are a number of practices to help you achieve this such as, Design Thinking, which is relatively theoretical and focuses on how to think about innovation and its potential. This is really good while you are searching for the right problems and ideas.
There are also more practical methods, namely Customer Development from Steve Blank and Lean Startup from Eric Ries that focus on the iterative development and continuous improvement of your business model.
Based on my experiences, both practically and theoretically, and the experiences of those around me I’ve come to work on something that’s been dubbed Design Doing.
Basically Design Doing takes many theoretical elements, and combines them with practical elements to give a more developed methodology for incubating ideas and addressing problems, exploring potential business models and eventually executing them at scale.
Having said all that, this series is about three things, Business Model Exploration, Business Model Validation and, Business Model Scale; and of course, how these three phases of your venture can be approached most effectively.
Where does it start?
If you’re only just beginning or have yet to act on an idea, it’s likely you’re in the Business Model Exploration phase.
You’ve got an idea, however it’s likely to be relatively un-refined and in need incubation. You probably also have some hypotheses about your market, customers and competitors. Again, these are likely to be raw and need to be further explored.
So, what do you do?
Well, it’s your job to refine your ideas, and test your hypotheses and what you think you know about your entire group of potential business models.
One of the most important components of what you are about to do is to test whether or not what you are proposing to do will deliver something uniquely useful to your prospective customers. This will be your differentiator, and perhaps, an opportunity to deliver true innovation.
Learn more about genuine innovation, and what some also classify as ‘innovation’ here. This is the most succinct summary I have seen, so it’s best I direct you to it than try paraphrase.
How can I test my ideas?
There are numerous different ways to test potential business models, but the two most important things are speaking to actual customers, suppliers and potential partners, and, actually tracking the results of your tests.
A business model is never complete and the process of incubating ideas, exploring and then executing a business model is by nature iterative. There is too much else going on in the world for a business model or plan to be “set-and-forget”.
Therefore, if you choose to remain solely inside your own world, and build a business model around what you assume, your risk goes up and your likelihood of success, especially longer term, goes way down.
My suggestion is always be testing and measuring as each test idea gets you closer to something that might resonate with a potential group of customers, suppliers or partners. Or it may highlight an issue.
According to Burrows, an often overlooked issue is whether the business model is legally feasible. “We often provide legal feasibility studies for start ups, that identify the legalities of the business model and the legal contracts that are required to get to market.” “You’d be surprised at how often an entrepreneur discovers that they need to comply with legislation which makes their business plan prohibitively expensive.” “A Telecommunications Licence or an Australian Financial Services Licence (AFSL) do not come cheaply and it’s important to know that pretty early on.”
Knowing how to test is also important and understanding the metrics by which you measure success is equally as important. Spend some time identifying what your pass and fail metrics are, and hold yourself accountable.
If a test fails, and by fails I mean didn’t meet the expectation you set when testing your hypothesis, that’s great. You’ve now learned something that you can use going forward.
I’ll give you a quick fictional example of a hypothesis and the type of pass or fail test you may run to validate its accuracy.
Define your hypothesis
We believe that a direct sales model is the most appropriate way to sell our B2B software (you need to take into consideration the cost of acquiring a customer, lifetime value etc. More on that in the next phase)
Create your test
We are going to cold-call 200 prospects and out of those prospects we expect that 40 will agree to meet with us, and out of those 40 face-to-face meetings, 20 people will purchase our software.
Define your pass and fail indicators
From our initial cold-call efforts, we will consider this test a pass if we generate at least 40 face-to-face meetings and 20 sales from those meetings. We will consider it a fail if we do not achieve those numbers.
Capture the results
From the test we conducted, and the cold-calls we made, we were able to secure 41 face-to-face meetings and 21 sales. Due to the pre-set pass and fail indicators, this test was considered a success and we will now proceed to scale the effort slightly for the next attempt.
This is a very ‘high-level’ fictional example, however the process by which you develop, test and validate a particular hypothesis is consistent regardless of the detail. This validation then drives your next decision and the next hypothesis you test.
How do I know when I’m ready for the next phase?
Before moving to the next phase of your early venture it’s critically important that you have conclusively validated that a) customers actually exist, b) they are engaging with numerous components of your business model and, c) your product or service delivers something uniquely useful to its users.
Ideally you are on your way to validating some sort of strategic advantage that can’t be easily replicated as soon as you get to market.
It’s really important to note that you shouldn’t try and move into a business model phase that you aren’t ready for e.g. scaling your customer acquisition or demand creation activities when the costs are too high. This will put you out of business fast and isn’t at all smart.
It’s also important to link this to your burn rate (how fast you’re spending money). According to Burrows the most overlooked factor for Startups is the tyranny of time – “things take three times as long and cost twice as much.” Therefore, ensuring your burn rate is reasonable requires some thought.
Now that your testing or ‘fact finding,’ try and base your decisions on the facts you find and only move to the next phase when you are 100% confident to do so.
Okay, so what’s next?
Now you’ve validated that customers actually exist, they are willing to engage with numerous components of your business model and that you have something that differentiates you from your competitors, it’s time to test whether or not your business model has validity.
According to Schofield, this is when it becomes more of a numbers game. “It is crucial that the stakeholders sit down and develop a document that quantifies the Design Doing results, and that focuses on the expected commercial strategy you’re about to test going forward. It is also vitally important to consider events that have the ability to disrupt cash flow (e.g. supply chain issues such as manufacturing or shipment delay for a product business).”
“Doing this will also assist in identifying just how much funding the venture is going to need initially, and at the various stages in its life-cycle. It will also assist you in testing the right hypotheses during phase two of Design Doing. And, ideally, this will assist funding planning, your future equity model and should enable you to more effectively communicate with your current and potential future investors.”
“From the outset, this document must be ambitious, but realistic and based on the data collected in the first stage of Design Doing.”
In other words, this just got more serious and we’re about to test the commercial viability of the business models you’ve recently explored and incubated.
Nathan Kinch is a former elite athlete who suffered a career ending injury that he believes could have been avoided. Since that day, he’s worked in and around startups and sports technology helping provide elite athletes and team’s with technology that helps mitigate injury risk and increase performance. He currently holds the role of Entrepreneur in Residence at edgelab ventures and has recently raised funds for a new venture.