Stanford Professor Steve Blank says “a startup is a
temporary organization in search of a repeatable, scalable, profitable business
model” (steveblank.com). You may recall from my last column that he believes an
initial business plan is a series of unproven assumptions, and that the
entrepreneur’s initial task is to test those assumptions quickly and cheaply.
He sees this happening in two stages: (1) customer interviews and (2)
bringing minimum viable products to the market place. Both are designed to gain feedback from those who might
purchase the product or service.
In the first stage the entrepreneur interviews people who may be able to
give feedback on the assumptions such as potential customers, suppliers, and
channel partners. As data is
collected from the interviews, the assumptions are refined until the
entrepreneur believes she has validated all the assumptions in the business
model.
In the second stage the entrepreneur further tests the
business model by offering the market place an actual product or service, but
the minimum (the “minimum viable product”) necessary to find out if the market
will pay for the product and how the customers will use it. In other words, it is a mistake to try
to bring a full-featured product to the market before learning what features
the market values. And the best
way to learn this is to bring out a modest model.
Steve Jobs was a master at this. Think back to the first iPod, iPhone, or iPad and the
iterations since they were released.
These early versions had just enough features to learn if the market
were interested. Then Apple could watch how the products were used, and modify
them accordingly.
We use this
approach at Venture College. For
all fall the student-entrepreneurs have been out interviewing prospective
customers. As they gained insight
from potential customers they modified their assumptions about their business
model—in some cases radically.
Several of the entrepreneurs in our first cohort are
beginning to bring modest products or services to the market, still in a test
mode. For example, one of our
entrepreneurs has a passion for teaching financial responsibility to teenagers.
Through her interviews she learned that teenagers want to know how to afford to
move out of home when they are ready to go to college. But teenagers don’t have the funds to
pay for such knowledge.
Further interviews with the parents of teenagers, led her to
the insight the parents are also interested in how their children can
successfully move out of home when the time is right, and at least some parents
are willing to pay for this information.
So now she is creating her service, a seminar to teach
financial responsibility to teenagers.
Initially she is producing a low-cost brochure that sets forth the content
of her seminar. The brochure is the minimum viable product. She will use the
brochure to try to obtain paying customers for her seminar. Should sufficient customers sign up,
she will then proceed to develop the seminar itself.
In the local angel community there is wide acceptance of the
notion that an early stage company is an experiment in search of a repeatable,
scalable and profitable business model.
The local angels often fund companies just as they are ready to bring
the initial version of their product or service (the minimum viable product) to
the market.
This allows us to invest modest amounts and give the company an
opportunity to refine its business model.
Once the business model is proven, the risk is reduced and it is
generally easier for the company to then raise substantial capital to execute
its business model.
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