The magic formula part 1

Today entrepreneurship is a new trend among college students in the U.S. There are stories about college students dream of something in classroom, start a company and become the next Marc Zuckerberg or Bill Gates. Of course, everybody loves success stories and it seems like startup is an easy ways to make a lot of money. However, in reality it requires much more efforts and “know how” to start a company and makes it successful. Last week, a student asked me: “Is there a secret or magic formula in startup business so somebody is successful but other is not?” The class laughed aloud as everybody thought that it was a joke. To their surprise, I confirmed: “Yes, there is a magic success formula and if you can do it, you will be another Steve Jobs or Bill Gates and I will teach this formula today.” As the class all laughed, I explained:

“The successful startup does not start with the idea as most people think. Everyone can have great idea but there are many things that you must do and some are not so obvious. Technical students often believe that they have technical skills, they can create websites, they can write code then they can create startup. That is the old belief of the failure dotcom era. To succeed in today environment, it comes down to formulating, planning, validating, executing, marketing and competitive positioning. These factors can be summarized into a magic formula that you will learn in this class.

Every startup can follow a magic formula: “To solve a problem that lots of people have and offer them a reason to pay you a lot of money for it”. Steve Jobs used this formula and solved the problem that lots of people have: They need a computer but could not afford as Mainframe computer costs over million dollars. Steve offered a small computer that can do many things like a mainframe computer but sold for only three thousand dollars. In just two years, he sold over two millions Apple computer and within five years Apple captured the computer market.

Google also followed this magic formula. It is important to note that Google was not the first search engine company. There were seven search engine companies at that time but they were all difficult to use so only few people with computer skills could use them and they had to pay to use these search engines. Google solved the problem by make it easier to use than other search engines and offered it free of charge. Their value proposition was simple: “Why pay for a difficult to use search engine when you can use an easy to use search engine without paying anything.” In a short time, Google captured the market then grew to be the largest Internet company.

But that was is only half of the magic formula “Solving problem to a lot of people.” Google also approached business companies with another value proposal: “When people search for something relating to your product, we will display your advertising in but you do not pay us anything until they click onto your website. You “pay per mouse click”. This also solved the business problem as it was more effective than random advertising because people search for book would never pay attention to car advertising. When people click onto advertising, they were mostly interested and intended to buy and it solved problem for these companies so they were glad to pay Google a lot of money for it. By approach customers with different value proposals and different relationships, Google became successful because it knew the magic formula well.

How do you apply this magic formula to your startup? If you have an idea, you must ask yourself: Does it solve a problem that many people have? (Value proposition) How many people have this problem? (Market size) Who are these people? (Customers Segment) How do you reach them? (Channels) How much are they willing to pay? (Revenue) How much does it cost you? (Costs) Are you solving this problem in a way that differ from others and in a way that is not easily copied by others? (Competitive positioning). Basically, if you have something people need and your solution is unique then you have better chance to success.

Since technical students may be unfamiliar with the business model and its nine components. I often shorten them into three simple questions (What, Who, and How) that they must answer:

What: What is the problem are you trying to solve? What is your product? What is your service?

Who: Who are your Customers? Who has the problem?

How: How do you solve this problem? How big is the market? How are you going to reach the customers? How do you drive demand? How will you make money?

By answering these simple questions, students can validate their ideas to determine whether they have something that can be developed into a vision for a startup and overtime it can grow into an enterprise in the future.


  • Blogs of Prof. John Vu, Carnegie Mellon University

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