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AGILE MANAGEMENT OF STARTUP STAGES 1 THROUGH 5 WINS: What they are, why they are important and how to manage them (1 in a series)

Startups are like children: they go through a series of stages. How they are managed through the series determines the health of the outcome. It is easy to know the stages, yet very challenging to manage the new enterprise through them.

This short series focuses on what the startup stages are during the early years, what is important about each, and how to manage the startup through the stages to win.

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Let's start today with the stages each startup will pass through. Like the stages of a baby, the stages for the new enterprise are unavoidable. Let's get familiar with them and then you'll feel more creative and courageous managing through each stage.

1. The Idea.  Your idea for your first startup will just pop up one day. Yes, you can be searching  and thinking about ideas for months. Some entrepreneurs work years or more, that is how most people begin. But a rare few just get the idea one day and go from there. I've not found a process, a drink or a mountain top on which to reside to find that great idea. Instead, I think that the initial idea is like the thought the parents have before making the baby: it is where you start, what eventually is born will be very different than what you started thinking about. Serial entrepreneurs will agree and so will experienced VCs. You can think of this like the ultrasonic pictures of the living, tiny baby (medical people call it a fetus).
   
   
2. The Demo. This comes next. You will create something visible to show off your idea so you can communicate more to other people who may join your startup, to potential investors and to friends who can help you shape your idea further. The demo may be of a causal game, or a few web pages of your social network site, or a mock-up of the medical disease sensor device. This gives clarity to a confused audience, tests your ability to be realistic and stirs excitement about your cool, clever idea. Think of this like hearing for the first time the heartbeat of the growing baby.
3. The Prototype. This is more serious than the demo and takes a lot more work. It is a working prototype, does something valuable and notches up the emotional excitement of the viewers. You often will need some very clever engineers to complete the working prototype. They usually expect to be paid for their (often very difficult, creative work). The outcome of the work will begin to tell you how difficult or trivial the technical challenges are going to be, what the first estimates of cost to build it will be, and what you could and could not do with it to make more money. Think of this like feeling the baby kicking inside mother's womb.
4. The First Product. Now we are getting very serious. This is the thing (product or service) that you are going to sell to your first customers. It comes with a lot of details describing it, it works very well, and it does valuable things for the end user. When added to your Business Model, it will enable you to generate a lot of revenue (sales) in a short period of time. Your marketing work will have shaped the first product after the prototype was completed. A lot of hard work by a lot of people will get you to this stage. it will cost you a lot of real money. Along the trail you will have encountered a lot of surprises, good and bad. Your responding decisions will shape your First Product. Your idea will be well beyond and very different than your initial idea. This is the final months stage in the pregnancy. The baby is about to be born.
5. The Launch. "For Sale" is what happens now. You are going to offer your First Product to the world to use. It may mean a public beta for an online game. Or it might be sale to distributors of your first semiconductor. Your plan may call for immediate cash from sales, or it may call for eventual revenue from advertising. But "it" is now "sold" to people who are or will get it to end users. When an end user is using your creation, your product is launched. Congratulations. This is the launch of the first rocket payload. There is no turning back. It is for real. It is very public. Everyone is watching what will happen next. It is exciting and frightening. Think of it as giving birth to your first baby.

BOTTOM LINE: After this, it's a matter of growing your business. If you get the first five stages done well, your baby will be born healthy with a good chance of continuing to successfully go through the stages of adolescence that follow. Knowing the stages your startup will go through is the first step. Next comes understanding the importance of each so you can manage them all with brilliance. That knowledge will attract the people you are missing, the investors you need and the media attention you must have to win. It is a key to building an unfair competitive advantage. You can do it!

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Tomorrow I'll discuss the importance of each stage.

TIP OF THE WEEK: Study how a real bootstrap went from $24,000 to a digital studio

Bootstrap is a well documented story of a real company that accomplished a lot on next to nothing in seed capital.

Study it and mark the differences with your bootstrap idea.

Then think about (1) how long it took and (2) if you want to got that long on your savings.

BOTTOM LINE: Bootstraps are very difficult and rarely succeed. They can build an unfair competitive advantage, but the personal cost can be very high. Think before you leap.

SEED ROUND TIPS: What you should watch for and aim at in today's special market for startup capital

Today's market for startup money has altered. You should understand what to do about it.

I found this article an excellent update and useful guide for planning your seed round in today's changed market for startup funding: The New Seed Round .

The author, Caine Moss is a corporate and securities partner at Wilson Sonsini Goodrich & Rosati. He is very clear on what an entrepreneur will face when negotiating the terms of a seed round for startup capital.

Note carefully the percentage you will be expected to give up and the special terms VCs will ask for.

I suggest you decide what you will aim for in the negotiations before you start to raise your money. That will save you a lot of time otherwise wasted in fruitless negotiations.

Note also the value of hiring an lawyer who is active in doing seed round deals with startup investors. That person can be strong when you are uncertain about what you should insist on.

A simple term sheet is also available from TheFunded.com. It will help you get started in the direction more favorable to you, the founder.

BOTTOM LINE: Knowing the current market for startup money will get you the best deal. Today's new seed round terms have changed. Study them and prepare for a seed round favorable to you. It will be one of the stronger elements of building your unfair advantage.

 

A SIMPLE PLAN FOR A STARTUP GRASPING FOR DIRECTION

After listening to the Norwegian entrepreneur, it became clear that he was very creative, ambitious and able. He was also trying to decide on what direction to take his fledglingstartup business. We discussed his alternatives and came up with the following plan. It is simple and a good example of how to give a startup a clear direction:

• Grasp for Revenue. Reach for sales, not cost reduction. Find and grab each incremental source of revenue. Wring more out of the market you are currently focused on. Avoid reaching for fresh, different markets.
• Sell What You Have. Focus on finding sales from selling what you already have to sell. Avoid projects to add other products to the existing basket you are working with. Aim to dominate your market segment with what you already have. That makes the most out of the scarce resources (time and cash) that you have.
• Focus. Avoid distractions. Focus all your thoughts on how to sell to the market segment you are focused on. Back away from adding more and more to your markets and products. That dissipates your scarce resources and makes you more vulnerable to competitive attacks.
• Use Your Unfair Advantage. If you are a famous Norwegian salmon fly fisherman, or innovative semiconductor design engineer, use that and all the related skills, network of friends and suppliers and more to build and exploit your unfair advantage. You know your domain well, so use that know-how to build a formidable competitive advantage.
  
• Aim to Dominate. Your goal is to become the gorilla of a new market segment. Avoid trying to become a chimpanzee or monkey. Aim high. Go for the gold. That will energize you and demoralize your competition.

BOTTOM LINE: This simple plan helped an excellent startup leader get on track to grow his fledgling business. Plans like that are tricky to create but worth the effort. They come out as clear, focused and very simple plans. Learning to do that is part of what serial entrepreneurs are all about. You can also do that. It can become part of your unfair advantage.

STARTUP CEO LESSONS FROM A NOWEGIAN FLY FISHING TRIP

I returned refreshed from a remarkable fly fishing trip to the far north of Norway. As I meditated on the adventure this past week, I realized there were some important lessons I could share with you startup CEOs. So over the rest of this week, I'll share them with you.

1. Don't take life for granted. As my plane rose to 21,000 feet altitude after taking off from Frankfurt airport for Oslo, we heard a loud bang, felt the plane shudder and saw a large, orange fireball burst from the left jet engine. Its turbine had disintegrated. A few wobbles later the pilot made a sharp U turn and headed back for the airport on one engine. Twenty two sobering minutes later we landed on a runway lined with fire trucks, lights flashing. During those few flying minutes the people on the plane became very silent. There are no atheists in foxholes and on airplanes limping home on one engine.

The startup lesson here is simple: Even in startups, life happens, so do not take it for granted. You cannot put your life "on hold" and do your startup. So expect real things will happen that test your character. They are the things that make you ask "What happens after death?" and "How have I lived my life?" They are part of what makes your character stronger and more resilient.

2. Let life happen. I spent a fortune on the phone (at German hotel rates) that night re-arranging connections, flights, car rentals and contacting my wife. It was easy after I let go. For me, that means letting God do the work and trusting Him for the best for me, whatever happens. The next morning all was re-arranged and off we flew in a different airplane. I and the rest of the passengers were mostly calm (except for the young woman next to me who was crying). We arrived at Oslo intact but my fishing rods were lost. I thought about it for an hour and then decided to trust God and the attentive lost baggage agent for that additional part of my trip. The connecting flight took off with me and when I arrived at my final destination, I walked to the baggage carousel and surprise of surprises, there were my fishing rods, already arrived! My host showed up soon thereafter and off we went to the river to go fly fishing for Atlantic salmon and sea trout. That part of the adventure was wonderful and filled with much less anxiety.

The startup lesson here is to let things happen when the chaos becomes so great that you cannot control it. If you do, you'll burn out. It is far better to let go, and see what happens. For some of you  control types, that is unthinkable, I know. But it works well in startups. I've watched serial entrepreneurs float over the top of the foam of chaos, calm and serene. Things worked out well.

BOTTOM LINE: Startups are as real as real life. They are not an escape from reality, painful breakups with someone you loved, cancer or nasty people. Startups are life. They give life to an idea, birth it, and work hard to grow it into a healthy, growing new enterprise to be proud of. When you understand that, you'll be on your way to building a powerful personal unfair competitive advantage.

GONE FISHING: Back on-line August 16

This time I'm going far north, above the Arctic Circle, in Norway. In this land of the midnight sun, I will be fishing with a talented young man whom I greatly respect, his  eight year-old son, and a friend of my host. We'll be fishing, cooking and sleeping along a spectacular river which is currently producing excellent salmon and sea trout. When you read this, I'll already have begun casting with dreams of catching the big one.

Startups are like that: an idea grows into a dream and finally a decision to make the dream happen, with people you like and whose talent are confident of. It takes some dreaming, creative thinking, conscious risk-taking and courage to get going, as well as wisdom and common sense.

I hope this finds your dream transforming into a wonderful experience.

I'll be back in Oslo on August 16 and will then be back on-line. I look forward to sharing some of my related experiences with you then.

JOHN

TIP OF THE WEEK: Agility is required for survival

I'll be in Norway next week fishing for salmon and sea trout, thinking about how I can be agile enough to keep up with my very much younger host and his ten year old son.

When I go fly fishing I watch how agile the fish and the bugs they eat are. It is amazing to see how these beautiful creations of God change direction suddenly when they encounter either opportunity or danger. Swimming, flying, leaping, they are rapid in their responses to necessitated change.

There is a great lesson about agility in the August 3, 2009 Wall Street Journal story about startups changing business models.

Slide and other high profile startups continue to struggle to get significant revenue traction. So what have their CEOs done? They have abandoned selling advertising (dumped whole teams doing such things) and jumped into another business model in hopes of finally getting it right.

This is not a sign of bad management. It is a sign of agility.

To stand still, tough it out, "work until we get it working" leads to suicide, death of a startup. Large corporation managers are prone to do that (once).

Street smart serial entrepreneurs instead jump off the losing business model and invent a new one.

This takes a combination of wisdom, courage and creativity. Agility is not about gut feel leaps of faith over cliffs. It is about calculated moves. The changes are risky and are done with deliberation. Numbers are produced as well as intuitive thinking. The core team openly debates alternatives. The mixture leads to creative ideas about possible new business models and what to do them.

If you were also thinking about strategy, you are right: agility is closely related. Both involve moves (maneuver in French). But agility is applied to much more than strategy. When agility works on a business model, the whole company switches into action.

BOTTOM LINE: Agility in changing business models (how you make money) is key to survival of a new enterprise. Yes, a carefully thought through plan is the best way to start, but if it is not generating the revenue you need, have the courage to drop it and go create a new business model. When you get it right, you'll realize both great revenue and see your business building a powerful unfair competitive advantage.

BECOMING A STARTUP GORILLA: What, Why, Who, How (3 of 4)

Google, Baidu, Netease, Cisco, are in different countries, compete in different market categories and are lead by different styles of management.

But all of them have one thing in common: they are startups that became gorillas of a new market category.

Now they are brands respected around the globe, public corporations profitable and growing.

That is your objective as a startup: to become the gorilla of a new category.

In this series I'll explore what a startup gorilla is, why it is important to become one, who does that and how it is done.

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Who should focus on becoming a gorilla?

Answer: Not every startup.

For example, today I met a very talented medical professional. His idea for a business is not yet ready for working on a plan to become a gorilla. Instead, he needs to go through the "proof of concept" phase next. That will reveal the potential of his idea. If it is large enough, then he can do the hard work of preparing a plan to become a gorilla of a new space.

Also, don't aim at becoming a gorilla of a market already dominated by a gorilla. He will crush you. Beware of dreaming your technology will overcome the gorilla (that has inferior technology). And don't expect your "quicker, faster, cheaper, better" to leapfrog the gorilla. Instead, find a different market segment to focus on, use a flanking strategy to avoid confronting the powerful gorilla.

And, if you insist on "this is my company" as your rock solid position, then you should instead focus on becoming a big fish in a small pond. Soleproprietorships are made of that. There is nothing wrong with such a lifestyle, but do avoid dreaming you'll become the next Dolby Labs within five or ten years. It took him a lifetime to get there and most die trying.

Who should focus on becoming a gorilla?

Answer: Everyone else (than the above).

Why? Here is what I suggest you consider:

• Gorillas win. They end up on the top of the mountain, victory cup in hand. They are branded as the winner of the new space (category). That not only feels good, it also is worth a lot of money. Customers win as they benefit from the value your product/service has brought them. Employees win as they bath in the glory and wealth of having build a portion of the gorilla everyone is raving about. And so on goes the list of people who love it when thestartup wins by becoming the gorilla.
• Only a few will survive. The race is to win. There is room for only three on the awards platform at the end of the race: one gorilla and two chimpanzees.Either you enter to try to become the gorilla, or just be a spectator. Joggers will get trampled by the herd stampeding to become the gorilla.
• Investors run to potential gorillas (and ignore the rest). The investing world is intense, highly competitive and very risky. Experienced venture capitalists have learned (the hard way) that their money is best spent investing in people who have the idea and talent to convert those resources into a huge winner. That is why it is so important to dream large from Day One. Without the big dream you'll not get the attention of the quality investors you need to win.
• There is no other race. There is no money for people who say to investors and employees and the media "We plan on selling to a rich corporation in three years." That is like telling the Olympics coach you are trying out to win the silver or bronze medal. If you don't set your sights high enough, you'll not even have a chance to win as a chimpanzee. No one remembers who won the silver, they just recall who lost the gold. You have to instead go for the gold from Day One.

BOTTOM LINE: Gorillas win big. They run the race for the gold. Most startups must do the same. The alternatives are not going to attract the people and money you need to succeed. Some ideas are not ready for prime time yet. They need work, proof of concept, before a believable plan can be created to convert the idea into a gorilla. When you figure that out, you'll understand how it feels to have an unfair competitive advantage. It will be worth you hard work.

BECOMING A STARTUP GORILLA: What, Why, Who, How (2 of 4)

Google, Baidu, Netease, Cisco, are in different countries, compete in different market categories and are lead by different styles of management.

But all of them have one thing in common: they are startups that became gorillas of a new market category.

Now they are brands respected around the globe, public corporations profitable and growing.

That is your objective as a startup: to become the gorilla of a new category.

In this series I'll explore what a startup gorilla is, why it is important to become one, who does that and how it is done.

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Why should a startup focus on becoming a gorilla?

Simple: because then your startup has the greatest chance of emerging from the highly competitive fray with the most value, most success, most to share with investors, employees, media, customers and suppliers.

Here is what I mean:

• Do or die. If you do not succeed to become the gorilla of a new market category (microprocessors/Intel, routers/Cisco, China search/Baidu), then you are in great danger of going out of business (sold for a low value to another company, so low that your share of the wealth is zero). In fact, only three of the competitors in a new category emerge with enough wealth to make you, the founder, wealthy. Those three are the gorilla and two chimpanzees. All the rest of the startups are sold (mostly in pieces) to a late-arriving corporation who pays very little for the startup (in pieces). That is what investors and founders mean when they politely say "We sold the company to XYZ Inc. last year."
• Attract the top talent. Do you remember when Google was preparing to go IPO? Want-to-be employees were camping out in the company parking lot trying to get an interview. Resumes were crashing the Google email server. Bloggers could not say enough about Google's future. Stories were published about the company in newspapers and magazines around the world. Television reporters showed up to interview the company. The buzz attracted the best of the bunch: "I gott'a work for them!"
• Attract the top investors. When startup Cisco began to take the lead in routers, leaving competitors behind, top tier venture capital firms pounded on the doors of seed round investor Sequoia Capital. They wanted in, right then, at whatever price. And so it goes for other startups who "get on a roll" as excellent execution of the plan to become a gorilla begins to accelerate. EXAMPLE: Twitter recently completed a secondary round of venture capital financing that attracted many top tier investors even though the startup has yet to demonstrate its business model can be profitable.
• Generate the most buzz. Readers like to read about the extremes: the amazing winners or amazing losers. No reporter finds a readership interested in the in-between startups. You want to be in the gorilla race and be covered by eager bloggers, Twitterers and other media. You don't want to be described as the also-ran competitor (don't worry, you will not be, the reporters won't bother with that story). Either you are either Lance Armstrong (cycling king) or a couple of his close competitors, or you do not even get mentioned in the stories.
• Get the big customers. CEOs of large companies prefer to pick the startup gorilla over the (often better technology/service/product) competitors. This is a risk reducer for the customer. Your gorilla status will attract continuing financing, top talented employees and market share dominance. What else would a wise CEO customer want? In other words, once you move into the position of gorilla of a new category, use it aggressively to increase your share of market (at the sacrifice of your competitors). That is when you begin to accelerate and your sales begin climbing more and more rapidly, day after day.
• Lock in the great strategic partnerships. Your strong position as gorilla makes it much easier to sign the deals with the partners you need to further strengthen your emerging dominance. Suppliers will start seeking you and offer preferred terms. Distribution channels will open up in markets around the world where shelf/web space was blocking you. Your emails and phone calls will be answered by the finest giant corporations. As you issue the press announcement of each signing, your competition will feel more and more demoralized.
• Grow your market share. This is the big one: you begin to sense the market is hot, your company is leading, everything is going your way. Sales are shifting from small to medium size, the rate of climb is accelerating. Your simple data tells you that you are taking a greater and greater percentage share of market. You see your competitors trying to copy you, trying desperately to keep up with your success.

BOTTOM LINE: Aim to become the gorilla of a new space. That is the purpose of your startup. As you set out to achieve that, you'll find a trail of events more and more favorable to you. Each will add to your pattern of emerging as the dominant company, the gorilla, of this new space. The acceleration will leave your competitors behind. They will increasingly be demoralized. And so on it will go. By that time you'll appreciate the importance of how you got there: by building an unfair competitive advantage.

BECOMING A STARTUP GORILLA: What, Why, Who, How (1 of 4)

Google, Baidu, Netease, Cisco, are in different countries, compete in different market categories and are lead by different styles of management.

But all of them have one thing in common: they are startups that became gorillas of a new market category.

Now they are brands respected around the globe, public corporations profitable and growing.

That is your objective as a startup: to become the gorilla of a new category.

In this series I'll explore what a startup gorilla is, why it is important to become one, who does that and how it is done.

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A startup begins as a fledgling, a weak infant daily in danger of dying, but with hope of growing up to become strong and emerge as a great enterprise.

Greatness arrives when the world respects what the infant startup has grown into.

That greatness is measured in the following ways:

• Dominates a new category. The startup enters a highly competitive turmoil of competing enterprises, mostly private startups, some giant corporations. It emerges from the fray as more than the leader. It triumphs as the dominant company in the new category. EXAMPLE: Google in Internet search.
• Number one with share of market 30% or more. The competitive battle for a share of a new market category (e.g. mobile phones) ends up with the same mix: One gorilla (with around 30% SOM), two chimpanzees (with half that share each, 15% plus or minus) and then a dozen starving monkeys (with small single digit percentage SOM). EXAMPLE: Nokia (35%), Samsung (16%), Motorola (11%) and the rest each with 3-6% each.
• Gorillas dominate even though others can lead for a time. Today a good example is HP leading Dell in personal computers. Or Facebook (unprofitable) is overtaking MySpace (profitable) in number of end users. The gorillas continue to dominate but the by-now-large-growing market is bending in the direction the leader is going. The gorilla simply does a me-too copy-cat strategy, mimicking the clever moves of the leader, staying not far behind the changes of the leader. Thus the gorilla remains the leader.
• Customers see the brand of the gorilla as best choice, as number one. Customers accept the gorilla's brand by acknowledging that it is largest in the new category and thus is the best default choice. The competing chimpanzees have to offer something significantly different and of significantly greater value in order to get customers to switch from purchasing what the gorilla offers. EXAMPLE: Apple's iPhone.

BOTTOM LINE: The dream of a startup is to become the gorilla of a new market category. Fulfilling that objective adds up to a billion dollar IPO. It is what eagerly attracts investors, employees and the media. Studying how to get there is well worth the pain and time. Like anything worth doing, it is not easy to figure out. And when you do, you still have to do it ("executing your plan"). That also is hard to do. But if you prepare to become a startup gorilla, you'll be starting off on the right foot. You'll be able to focus your tiny amount of resources on a new category with the right objective. That wisdom of yours will prepare you to build a competitive advantage so powerful that it becomes unfair (ask your competition) and propels you to become the gorilla of the new category.