After having created several startups, and having seen and analyzed hundreds of them, and especially after making so many of the same mistakes we entrepreneurs always seem to during this complicated process, I’ve learned that, on too many occasions, startups don’t make it due to avoidable mistakes.
In most cases, what’s missing is some basic education about what a startup is and what minimal elements need to be guaranteed in order for the startup to fulfill its mission. I’ve seen too often how the lack of this overall perspective makes entrepreneurs spend more time dealing with “noise” that this lack causes than trying to show that the startup is viable.
Despite the fact that many excellent books have been published on this subject, I’ve always noticed the absence of a simple pattern to follow. So, over time, I’ve conceptualized a very simple model that’s helped me to have a good overview of what a startup is.
My experience and that of my entrepreneur friends has shown me that if you don’t have and don’t understand the five links of the value chain that make up this model, sooner or later problems will arise that will put your startup in danger. And unfortunately, you’ll use up all your time and energy trying to put out fires instead of devoting them to the vision that got you to start up a new business.
I’m afraid to say that following this model will not ensure success. I wish. In order to have success, you have to solve a relevant problem by radically improving the market’s predominant solution. According to Ben Horowitz, “radically” means that you have to do it at least ten times better. If you have a product that’s only two or three times better, you won’t get customers to change over to your product fast enough or with enough volume. When you have a product that’s ten times better, then you have to conquer the market.
What this model does provide you with is an overview of the resources that will avoid the collapse of your startup while you’re trying it. This vision should become the framework through which you lead your project.
The 5 links of the value chain
This model is based on five elements or links that form the value chain of any startup:
In order for your startup to have a chance at success, you need to respond to these five aspects, and to especially understand how they’re related. When you’re clear on this, it will help you make up an appropriate team, to know what each member provides and how much value it is worth, and that in turn will serve to clear up how you should distribute your company’s equity, which will later help you to talk with investors as a professional, along with other aspects I’ll be explaining in future articles. Let’s take a look at them, one by one.
Even today, I still find people who confuse the vision with the idea. They think that the idea is everything, and therefore refuse to share it, fearing someone will steal it. This attitude is the clearest example of the lack of knowledge of how a startup works, and therefore, of the startup value chain. If a startup is going to thrive, it must successfully cover all five links. The idea is only one of those links, which means that in the best of cases, with an idea all you’ll have is one fifth, or 20%, covered. However, what you actually have is nothing, as I’ll explain a bit later.
What’s more, the idea is not the same as the vision. The idea pops up when several points align in your head, and a spark turns on that little light bulb: Eureka! The idea is a necessary condition, but not sufficient. On the other hand, the vision is the idea with context, which is the argument why that idea makes sense. In this argument, you need to explain what goal it’s pursuing, what differential advantage it provides, why it makes sense now, what target demographic it’s aimed at, etc. From this vision, your pitch will come.
Therefore, instead of keeping your idea secret, what you should do is shout it out from the rooftops. And you should do it with an attitude of continuous improvement. Use the feedback you get as an opportunity to improve your vision. Constructive criticism, even destructive criticism, will help you find your weak points and to develop a more solid argument. The next time someone gives you the same feedback, you’ll have a better response. The quality of your vision is directly proportional to the amount of feedback you get.
Execution is the ability to develop the solution that you propose in your vision. Depending on the type of startup you’re creating, your ability to develop your product or service will be greater or lesser. For example, projects with a technological base will require a team of excellent engineers, with demonstrable experience in similar projects that will guarantee the technology gets developed. On the other hand, if your project is based on logistical services, you’ll need an expert in logistics. What you need to ask yourself is, What is the minimum viable product I need to get my first customers? Do I need them all at the beginning or can I incorporate them as the startup grows?
An important factor to keep in mind is that entrepreneurs must be experts in the core matters of their startup. For example, in the earlier examples, include a technology developer or logistics expert who shares your vision. It’s suicide to delegate the core of your startup to third parties. No one knows what you need better than you, and no one is going to put in as much time, energy, and precision as you will when developing your product or service. I’ve seen a lot of startups freeze up or burn out because the business’ core was handed out to third parties who didn’t meet expectations. Don’t delegate your core business.
This link refers to the ability to specify, detect, and acquire the customers who will use your product or service. In my experience, this link is by far the least worked on by startups, especially technology ones. As with execution, depending on the type of product or service you’re developing, the search for customers is going to be very different. For example, it’s very different to get customers for a B2B model than a B2C model, or an SaaS business when compared to a traditional one. Each one has its own channels for reaching customers. Nor are all the necessary profiles the same. If you’re creating an e-commerce site, you’ll probably need growth hacking, inbound marketing, etc. If you’re creating a video game for a console or a PC, you’ll need a PR person to connect with publishers and platforms, etc. The questions you need to ask yourself are, Who is my target market? Who knows how to reach those customers? How much will it cost me to reach them?
Make sure you include someone on your team who can answer these questions, and who has done so in the past. Again, I’ve seen many entrepreneurs think about customers when they’ve already created a product, with the consequent frustrations and unhappy endings. I’ve even seen entrepreneurs who don’t even want to discuss customers until they have a completely finalized product. The risk these traditional waterfall-type approaches take is that they may find out, after several years of development, that the product doesn’t interest anyone, or that they’ll need another year to get it into the market, and they don’t have enough financing. Nowadays, there are a multitude of agile methodologies, like Lean Canvas, which emphasize finding potential customers early on, in rapid development cycles. Use them.
Financing is probably the easiest aspect to understand because its impact is felt from day one. You notice when you’re not making any money. The most common thing to do is to create a growth hypothesis, where, in addition to defining how you think your revenue will grow, you also reflect how much financing you’re going to need over time. The responsibility of this link is to guarantee the financial viability of the company under all circumstances. Here, the questions to ask are How much money am I going to need to create the first stage of my startup? How am I going to get it? Should my financing by private, public, or a mix? How much am I going to need for the later stages? How much can I burn through in a month? How much time do I have left with this money?
As with the other links, depending on the startup, the financial needs and the ability to get that financing will vary widely. So, for example, securing public financing, with its requirements, amounts available, preparation time, and conditions is very different to securing private financing with investors or bankers. It will all depend on your needs. The most important thing is, once you know how much money you’ll need, you’ll need to figure out how you’re going to get it. If you opt for private investors, you should know that it’s a full-time job and you’ll have to plan well. Therefore, you need a team member with experience in fundraising, or a mentor who can guide you.
Leadership is the ability to align and coordinate the work of the other links in order to grow your startup into a big company. There absolutely must be at least one project leader who will be the person who provides the official face and voice of the company. Leadership is a tremendously complex concept, but an imperfect summary would be that the project leader has to: be comfortable in situations of extreme uncertainty, have a well-developed ability to communicate and persuade, have a lot of emotional intelligence, have the ability to prioritize tasks quickly, have the ability to make difficult decisions, have a strategic mindset, and know everything that’s happening inside the company and out, promptly. The team leader must be able to create a free-flowing communication network between all team members, to implant agile work methodologies that provide measurable knowledge, to define the company’s vision and mission, and to stimulate and maintain a company culture that is based on the values of the startup. Take that!
The links don’t add up, they multiply!
The fact that there are five links doesn’t mean you need five people. What’s most common in the initial stages of a startup is that there’s one person in charge of several areas. It’s very frequent for a promoter to cover the vision and the leadership, and perhaps even the financing. And then there are two other people, one for customers, normally with a marketing background, and another for the execution, normally with a technical background. However, the distribution will depend on each startup and each team member.
The most important thing about this model is not the identification of the five links of the value chain, but rather how they’re related. The vast majority of first-time entrepreneurs are fed up with hearing about the importance of covering these areas, but most of them don’t get that these links don’t add up, they multiply! That is, most think that each link adds up between 0 (the link is poorly covered) and 1 (the link is perfectly covered), so if a good team is put together, 1+1+1+1+1=5. So, for example, if my marketing person has never actually done marketing before, but is my cousin and is eager to work and learn, well, that’d add in a 0.4, making 1+1+1+1+0.4=4.4. Not bad, right?
Unfortunately, it doesn’t work that way in reality. Teams are not ruled by sums. If one team member fails, everybody fails. A chain is only as strong as its weakest link. If a link is broken, the chain will no longer fulfill its function. Startups work the same. What I’m trying to say is that the values don’t add up, they multiply. So, in our example above, with our cousin the new marketing graduate, it’s not 1+1+1+1+0.4=4.4, but rather 1×1×1×1×0.4=0.4. So now, our best possible result is 1×1×1×1×1=1, and our worst 0×0×0×0×0=0. So a 0.4 would be just under a passing grade of 50%, simply because one link is not adequately covered. So, what happens with startups that haven’t covered all the links of the value chain? Well, anything multiplied by zero is zero. You can have top people in the other areas, but if one fails, you’ve got nothing. It’s that simple, and that tough.
Therefore, the value of this model is not only that it’s necessary to cover the vision, the execution, the customers, the financing, and the leadership, it’s also in that you need to cover them all masterfully. Any deviation in any of the links will directly affect the whole startup, be it positively or negatively.
Once you know what areas you need to cover, and the vital importance of doing so adequately, you suddenly realize you’re unconsciously identifying which people are providing the most value to the company, and you can even quantifying it. This matter will be fundamental to deciding how to divide up the company’s equity, define bonuses, give out stock options, etc. We’ll deal with these topics in future articles.