What a startup must do first

As an entrepreneur you have a very good idea to starts a company with a clear vision for success. You hire the best workers who share your technical passion. Together you build a great product that you think customers would love to have. However after working 16 hours a day for six months to make your vision become a reality, one day you suddenly realize that things seems do not happen like you thought. Your startup does not make money as you expected. Your vision that you share with your workers seems to fade away. Your product that you spend many months to build has a lot of bugs that it would take many months to fix. You do not have any customer knocks at your door even you have quite a few people visit your website. Your workers begin to lose confidence in you and some of them have threatened to quit. You find that your small capital borrowed from your family is running out. You do not know what to do and you do not know why things do not work as planned.

This scenario has happened all over the world to many entrepreneurs and countless startups. The simple reason is they all made the same mistake of following the product development life cycle taught in most business schools: Starting with an idea, build product based on the idea, test product, and start company to sell the product. You may wonder what is wrong with this lifecycle that thousands of company already used successfully. The fact is this lifecycle is designed for existing business where the market and customers are known and the product can be designed to meet customers’ needs. It does not work for startup at all. Actually it destroys startup.

For startup, you will need to build a business model to test your idea and your vision to determine whether it make sense or not. Your “wonderful” idea is only an assumption that you believe customers would want but as an assumption it must be validated to turn the assumption into fact. Your vision on how the company operates is only a guess so you need to go to the market and check with customers if the it is correct or not. If you spend all your time and money to build a product without knowing what customer wants then you are quite an optimist. Of course, you cannot ask people: “I have a great idea, can you tell me that you would like to buy it.” or “I have a vision to start a company that someday would be another Microsoft or Apple, would you let me know if my vision is correct or not?” Many people would probably think you are insane or arrogant. You need to build a business model by asking yourself first. Only by honestly answer these questions then you will have something to discuss with people in your market research.

Basically a business model explains how your startup makes money with your idea. By focus at all the key questions by the model and finding ways of answering these issues, you have better chance to start a business that can be successful and achieve the vision of the startup. There are several business models but for startup, the best is the model develops by Alexander Osterwalder where he focuses on the nine key components.

The Value: This is the product or service that you deliver to customers as well as the support that you provide to the customers.

The Customer: These are the groups of customers that you want to do business with.

The Customer Relations: The activities that you must do to get customers, keep them happy to retain and grow them.

The Channels: Channels are the means that you deliver the value (Products or services) to customers.

The Activities: Thing you do in making, marketing and distributing your value (Products or services) to customers.

The Resources: The physical, financial, intellectual and human resources that you need to do business.

The Cost: The costs involved in operating your startup company.

The Revenue: The money you make by doing startup business.

To build the business model, you must answer a number of key questions such as:

Who are the prospective customers that you want to provide value (Products or services) to?

How big is the group of customers?

Do you know what problem that they are having?

Can you solve the problem that they need?

Can you make money by helping them?

How do you reach customers?

How does customer know about your company and your product?

How do you satisfy them and ensure that they come back for more business?

How do you deliver your product or service?

Is it a new product in the market or an improvement of existing product?

Is there a market’s need for your product?

How big is the market?

How do you create this new market?

What specific activities will you need to set up the startup business?

How will you finance the costs for starting the business?

How do you set your price?

How do you make profit?

Will your cost structure generate profit at reasonable prices?

Do you need partners for your startup?

What are the specific types of revenue that you can generate with the set up you create?

Is it possible to attract more business by subsidizing one segment of customers?

By careful review of the above questions, you will be answering the full range of strategic questions involved in converting your business idea into a viable business. This is the first step that every startup must follow to ensure that they validate their ideas and vision before even thinking about starting anything.

Sources

  • Blogs of Prof. John Vu, Carnegie Mellon University

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