February 10, 2013
This article originally appeared on January 30, 2013 in the Globe and Mail.
Whether the latest headlines are cautionary (“Bubble set to burst,” “Egos and mismanagement”) or sensational (“Company X just closed $Y-million dollars in funding!”) there’s little doubt startups are now media darlings, commanding more than their fair share of column inches.
The startup market has gone Hollywood, and entrepreneurs have become the new A-listers – idolized in glossy magazines as they breeze through the latest West Coast cocktail party on their way to securing another multimillion-dollar financing round.
Buoyed by investor dollars and with the “field of dreams” mantra ringing in their ears, creative startups are – more than ever – adopting a “users now, customers later” approach as they seek to legitimize spending and place an illusory foothold on a crowded rock face.
Unfortunately these startups are just as likely on their way to a hard-learned lesson: just because you build it, doesn’t mean they will come.
When it comes to making money, especially in the consumer tech-obsessed era we’re currently in, there are literally thousands of different ways to establish a revenue model. They key to finding the right one, or a combination of several, for any startup is agility and adaptability. When a startup fixes its revenue model too rigidly, relying on a business to evolve strictly as planned, to play out as expected and to convert users into happy paying customers in line with their requirements, they will likely be very disappointed.
Despite the persistence of startups all across the continent, that isn’t how business works. Customers validate revenue models, not the other way around. When startups focus on gaining as many users as possible while not properly attending to the question of generating revenue, chances are they’ll find themselves orphaned and burning through their cash reserves sooner than later.
Early stage startups need to focus on one thing: finding customers. Industry gurus Steven Gary Blank and Eric Ries in their respective works, The 4 Steps to the Epiphany and The Lean Startup, are vocal advocates of the notion that real customers should be driving product and business development.
When startups delay defining where their customers and markets are, products get developed in a vacuum with no questions about their true value. This lack of exposure and validation from the people that would purchase these products or services can do untold, and even terminal, damage to the businesses. Successful startups commonly focus on establishing their initial customer bases early. Once this is in place, the customer development model acts to shape and structure their own revenue models.
Discover and validate
Startups should operate in an environment of continuous learning and maintain their ability to be adaptable in every aspect of their businesses. Customer discovery is the primary step, and by working with a sample group that can validate or discredit any previously held assumptions, startups can avoid the damage misplaced expectations might have down the road.
The discovery-andvalidate cycle is one that will commonly require a great deal of hands-on work and a substantial amount of iterations. It’s therefore not so surprising that startups delay the steps necessary, despite them being critical to their sustainability.
Create and build
Once a startup emerges from the discovery and validation cycle, it can then move forward and create a sustainable revenue model that speaks to customer needs. By focusing on feedback and the iterations undertaken in previous cycles, these startups are able to create revenue models that speak not only to the strengths of their companies, but to the needs of their customers. This, in turn, enables entrepreneurs to scale their companies in a manner that spikes investor interest and gives them a roadmap toward further development and growth.