Leaders establishing a startup on a tight budget

Ask yourself this question: What are the problems in your area? Is there a better way of doing things? Or, could there be a better product to solve those problems? Who has the technical and financial resources to address those problems? How could local or regional community members/organizations support any given solution? What are the particular merits of your area? Innovative leaders start with asking questions like those.

One idea to get answers to those questions is for the leader to ask if local innovation centers exist. For example, one can look for a Microsoft Innovation Center; Microsoft Innovation Centers (MICs) have been developed by local government organizations, universities, industry organizations, or software or hardware vendors that have partnered with Microsoft with the common goal of fostering growth of local software economies.

By the innovation leader talking to them, he could work on a potential startup or perfect on his startup concepts or offering.

Establishing a startup

Even with very little financing, there are things a startup leader can do to get his local project off the ground. I learned a very good approach from the book The Lean Startup, by Eric Ries.

According to Ries, entrepreneurship is a kind of boring management. It follows a boring step-by-step process. Instead of spending years perfecting the ideal product, innovative leaders should build a “minimum viable product” (MVP) and start asking potential users (customers) what they think. Then, they can find what needs to be improved and what needs to be left alone. The startup leader starts learning what customers really want, not what they say they want or what you think they should want. That takes experimenting, meeting people, and along the way building a community of interested people.

Therefore, one must prepare many prototypes for them to use and try to get their real impression (validated learning). Sometimes, even making videos on how a product works could visually present and illustrate the use of the proposed item or service.

The innovator must demonstrate empirically that there is a need and want. He can also determine what is not needed. This will determine what to cut, what to improve on, and what to leave as is. This must be done as fast as possible, no hesitation to keep costs down. The longer it takes, the greater chance of startup failure. Why did they like such a feature? Why did they ignore a feature? Did they hate a feature? This must be found out through experimenting with the product. It can’t be done by just asking focus groups or doing market research. People don’t know what they want until they see it, try it and use it. These activities are taking the Open Organization principle of collaboration to an advanced level.

Build-Measure-Learn

If a leader is to get a project going and build a team, according to Ries, the basic activities are to turn ideas into products. Then, measure how users (not investors who are interested but won’t use the product) respond to those products. After that, the leader can learn whether to pivot or persevere. All successful startup activities should be geared to accelerate that feedback. It could determine if the products should be modified or even that different users should be approached. Notice this feedback loop below.

The feedback is both qualitative (such as what they like and don’t like) and quantitative (such as how many people use it and find it valuable). This is a continuing learning process, all experimental through which defects, shortcomings, errors and weaknesses are sought out, expected and amplified. Ries recommends asking users five times why they feel the way they do about the product, and do it with just enough users to learn a lot but keep costs down. That way, concerns can be addressed, leading to building a sustainable product, business model and startup company.

When it comes to planning, the feedback loop “Build-Measure-Learn” works somewhat in the reverse order. We figure out what people think they need and then work backwards to see what product will work to satisfy that need. We experiment to learn if he actually needs it. Thus, it is the customer’s idea, not our initial idea of a need, that pulls work from actual need to product development and other functions.

The benefits of this “Build-Measure-Learn” feedback loop are that it is not very costly and saves time. It also quickly finds opportunities, and it builds a user contact base and even possible testimonials.

The feedback loop starts with making “leap of faith” assumptions and tests assumptions as fast as possible with a minimum viable product (MVP). Then, the startup gets that MVP into the above build-measure-learn feedback loop and applies them to actual users, not development engineers or designers. You need those users’ reactions, particularly those who have the greatest critical need for the product/service. Once the leader has a good feeling what the MVP is, he can move to the creation of a broad introduction and demonstration of it to the public.

I live in Japan and have noticed that the Japanese love to tinker around with product ideas. They take this Build-Measure-Learn loop to a form of art. In my area in southern Tokyo, there are thousands of small fabricators. Most are low technology, but some are world-class. These companies don’t promote their products. They promote the advanced equipment and skills they have to quickly produce what the customer wants. One company, Kitano Seiki, even makes testing equipment strictly for researchers. All these companies continually apply this Build-Measure-Learn loop with their customers. The faster a startup can build prototypes, the lower the development costs.

How to get investor attention

Once the above product is established, investors are needed. Finding investors was written about in another book, The Rise of the Rest, which evolves around incubator and accelerator activities with pitch programs. Once a startup innovator has determined his MVP and found some kind of innovation center in his area, the next problem is how to make an effective pitch. Here are five steps a leader can consider:

1. Pitch/join: He promotes his concept and gets acceptance. He has to develop a five to ten minute presentation that convinces people that he understands the market, and has a product/service or concept that that market needs. He has developed, or has the ability to develop, a good team to service that market, and he has a plan on how to service that market. If he has weaknesses in those areas, he can ask for support or suggestions to address them.
2. Get/give: The leader can get expertise by giving a share in the company, if the people he presents to believe in the startup purpose. (For example, give 7% or 8% of equity for a project)
3. Hit milestone: First the leader has to set and hit an initial target that more than likely will be required for the first investment. Then, after looking at the target results, more money could be offered to be invested.
4. Get more: Further investment is offered after initial trial introductions.
5. Graduate: With some successes and testimonials in place, the leader can approach and demonstrate to major venture capitalists for long-term investment.

To learn how to do the above, PitchBook can help quickly construct a presentation to promote a startup project. But, before that presentation, a startup concept and product or service have to be developed and that is why I recommend using the build-measure-learn feedback loop above.

Environment of uncertainty

Startups are different from ongoing businesses, as there is greater uncertainty. Therefore, the leader must very actively set up a market learning process. He could reach out to consultants or experienced advisors who have participated in the establishment of startups to reduce that uncertainty. Innovation is a bottom-up, decentralized and unpredictable thing, but it can be managed through a vigorous, speedy trial-and-error system. Impacted by set-backs, entrepreneurs must be supported, nurtured and held accountable for learning and advancing.

Ries believes that a fast-cycle testing system must be applied (run, learn, test, relearn and retest). The entrepreneur has to not only follow this testing system to get all his team members involved in it, but also he has to get them to envision what can be achieved.

It is always painful to throw away what is not producing the results (for the target user), but sometimes the team has to stop and start all over. In this case, the faster they can make that judgment, throw waste away and start all over, the less costly it will be in the end. This is the user needs and desires learning process that even the user himself has to go through. Because the user is not sure what is valuable, surveys are not that reliable, only experimentation works. What the team is doing is studying what is important and what is irrelevant.

For that trial-and-error process to be successful, the team has to break down plans, goals and targets into very small doable and measurable parts, tasks and activities. These tasks have to be put in some sequence, and milestones have to be set along that process.

From vision to tasks

Once the leader has a general vision of his startup's purpose and explains it to his members, that vision must be broken down into specific issues, one being to confirm that their product/service actually provides value. Another is if a large enough number of users will buy into that value. Who are the early product adopters that need the product the greatest and are willing to experiment with a test product and make it as useful as possible to them? They are the people most willing to give feedback, as it is for their own benefit. The leader and his team must find those early adopters.

The team must find these early adopters and get them to use their minimum viable product (MVP). It could be for sale, rent or just use, with the understanding they will honestly report what features they like, dislike, need, and don’t need. They could also be asked how easy or difficult the product is to use. These people are more than likely to try a second, more improved prototype. This is all done repeatedly until the product is ready for a mass product launch, as those early users will not be enough to make the startup viable.

To keep the learning process moving forward and keep costs down, the initial launch could be done to specific types of users or in a specific region. With all that learning, the startup should be on track to mass market success.