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SPONTANEOUS STARTUPS (PART 2): Learn from a real $300 million example

Spontaneous Startups just happen. Often very well.

Today I'll share an amazing example of a real new enterprise that spontaneously rose from nothing to sales of over $300 million (and climbing).

EXAMPLE

The startup is Wayfair.

Its on-line service sells "everything for the home."

Why don't you know about them? That's part of their story and it's a clever one, filled with excitement, risk and extraordinary success.

I highly recommend you read the well written story (just click on the Wayfair link above) in which the two founders, Niraj Shah and Steve Conine, tell how they moved from startup idea to startup idea until one day they found a very special idea for their new enterprise would become Mayfair. It simply "occurred to them".

As you dissect this amazing saga (it took years and a lot of hard work), keep the following characteristics in mind, they'll help you glean extra value from your thinking, they will generate things to apply to your own startup:

• Stalled with several startups, bailed (wisely) one after the other, until they got The Big Idea.
• Took no venture capital until success was very clear, years after starting.
• Stayed focused, did not get distracted during early formation years.
• Looked and looked and looked for a better idea than the one they had at the moment.
• Techies made the move to marketing savvy as a natural consequence of their processing of ideas.
• Settled on a very simple idea, yet one with huge potential.
• Bold vision: "determined to think big -- really big."
• Flanking Strategy: moved into uncontested territory, a new market not yet dominated by a Gorilla.
• Profitable from Month One.
• Quick to follow successful step after successful step (and to not repeat failures).
• Creative with cash flow management.
• Learned how to do the (retail merchandise) business by doing it.
• Avoided attacking Gorillas.
• Figured out what customers were frustrated with, solved that problem.

I'll leave the rest of the story thinking up to you. Read, think and repeat several times how you analyse this Wayfair story. Each reading offers to you the chance to glean a fine harvest of stimulating ideas for how to do a Spontaneous Startup.

BOTTOM LINE: Wayfair is a find example of how to do a Spontaneous Startup. You can do the same. Study the process the founders went through. That is where the low hanging fruit is waiting for you. When you "get it", you'll know the secrets that made serial entrepreneurs serial winners. And you'll be able to use your idea to build an unfair competitive advantage.

I wish you The Best on your Adventure!

SPONTANEOUS STARTUPS: They just happen (and often do, well)

Spontaneous Startups are a special class of new enterprise.

They are the ones that just happen.

One or two people. No business plan, no MBA, no VC money, no whatever else, just that sudden "Hey, why don't we do XYZ?!" And they go do it. Often very well.

I've recently realized there are a lot of amazing entrepreneurs out there who "didn't have a clue" about what they were getting into. Something triggered in their brain one day and presto! Out came a clever idea that became a clever new enteprise.

They are so fresh and different from the classical venture capital backed startup to IPO model that I had to pause and dwell upon them. Like a breath of fresh Spring air, I found them stimulating and inspiring.

My research has revealed so many of these Spontaneous Startups that I decided today to reflect on them for you and supply a real example to think about.

SPONTANEOUS STARTUP IS

Here is what makes a Spontaneous Startup so special:

• Sudden. There is no gradual effort leading up to the formation of The Idea for the new enterprise. It springs up with a loud "Surprise!"
• Wherever. The Idea can occur anywhere. On a plane, in a classroom or shower, watching television, during a sporting event, even on the job as you work.
• Instantly compelling. The Idea is immediately appealing to the founders who sense it is will also be appealing to many paying customers.
• Personal Product/Service. Sports clothing, baby seats, racing bicycle parts, casual digital games and other ideas resonate naturally with the founders.
• Mostly consumer. Industrial startups can be born as Spontaneous Startups, but most are ideas about selling something to ordinary people (or they are about supplying a product/service free to end users and making money via the classical Internet advertising business model).
• Clever. Something is triggered that jumps out as at least novel, or very new, if not extraordinary.
• No Special Education. While founders of this kind of startup range from high school dropouts to PhDs, the founders appear to include relatively high portion of people with no college education.
• Venture Capital Missing. Founders got started with their own savings, typically in the form of going without salary. They begin work in their homes and rented apartments. Cash is precious.
• Quick Time to Launch First Product. Months rather than years are consumed to get from start to first sales.
• Quick to Profit, Mostly. Most are profitable after a few months of first sales. Exceptions are in Internet centric businesses (e.g. mobile photo sharing: Instagram) which race to be first to get the gorilla share of end users in the new market category.
• Hyper Growth, Mostly. The first product/service catches on and spreads like wildfire, with sales following with the same remarkable growth. Exceptions like Linkedin do seem to require decades to get established before the hyper growth occurs, and thus have to get additional funding from wealthy angels.
• Friends Do It. The founders and early core of employees are friends. They may have worked together, but more are simply social friends, often very close friends.

 EXAMPLE OF A REAL SPONTANEOUS STARTUP

I have a real Spontaneous Startup for you to think about. It was born in Norway and is thriving. It is Onepiece.

Here is their story, from the startup's spontaneous beginning.

Early one Sunday morning in 2007, Henrik, Knut and Thomas, three Norwegians in their twenties, fantasized about the ultimate chill-out wear that would be perfect for a lazy day at home.

They all agreed on the merits of the sweatsuit for recovering from a night on the town. "But without the tight waistband and the pressure to go jogging," Thomas said. Knut had been staring at a light bulb when, eureka, it all became clear:
"Why not sew together a hooded sweatshirt and a pair of sweatpants? Let's make it so big that no one in their right mind would think of working out."
"If we can skip the waistband, I'm all for it," said Thomas. "But how are we going to get into it?"
"No sweat," replied Henrik, "we'll just put in a big zipper."

And with that the OnePiece Jump In was born. The three friends dropped everything and invested all their savings to realize an idea they believed was unique and brilliant. They made the loose-fitting, all-in-one hooded sweatsuits in soft, thick cotton fleece in a wide variety of colours and patterns.

For two years they sold the OnePiece to friends and marketed it to high-school seniors in Norway. Then, in autumn 2009, some bloggers wrote about how much they loved the OnePiece, which triggered other bloggers to rant about how much they hated it. Fuelled by massive debate in social media, the OnePiece Jump in became a huge trend in Scandinavia in 2010, and is now catching on in England and other European countries.

"We were as surprised as anyone when people started wearing the OnePiece at clubs and it became a fashion and lifestyle statement," says Thomas, who has left university to devote all his time and energy to the OnePiece. "I think that the versatility of our jumpsuit and the fact that it is extremely comfortable are the main reasons for its success."

Even as the OnePiece wave hits country after country, gaining a foothold, Knut, Thomas and Henrik are busy developing new ideas and concepts. To be sure, the OnePiece won't be their last innovative fashion item.

BOTTOM LINE: The class of new enterprise known as Spontaneous Startup is large and filled with exciting fresh business ideas. This kind of startup is able to be created by nearly anyone. The specialness of a Spontaneous Startup opens doors for many budding entrepreneurs looking for a way to do a real startup. The ones that succeed seem to be intuitively able to build unfair competitive advantages (which says a lot about the intuitive brains of the founders of this class of startup). Think about a Spontaneous Startup for your own new enterprise. It may be just what you are looking for.

I wish you The Best on your Adventure!

FINDING AN OPENING FOR A STARTUP: Blaze alternate trails

"Where do you begin when looking for an idea for a startup?" is a question that I often get from first-timer entrepreneurs.

One way is to start with a problem, then look for an alternative path to solving it. Research shows it much wiser to flank into uncontested territory than to attack the existing market leaders head-on.

EXAMPLE: Doximity.com

I found the insighful analysis of what one entrepreneur did to find an opening for a startup (March 26, 2012 Investor's Business Daily):

1. Ease their pain
       "15 billion faxes are sent annually from doctor's office to doctor's office." So says Doximity.com founder Jeff Tangney. The fact that sharp professionals rely on decades-old technology amazed the entrepreneur.
       With Doximity, CEO Tangney created a social network for physicians. "They can't really use the same tools we do" beause of patient confidentiality issues, he said.
2. Clear hurdles
       Tangney aimed to make Doximity as simple as Facebook, but as confidential as a closed-door discussion through stringent encryption techniques. "We're taking the best Silicon Valley has to offer to health care," he said. "Our goal is to make it effortless."
       Since launching the site in 2010, Doximity has added 8% of the country's physicians as active users.
3. Increase the chatter.
       Doximity members can send secure faxes from the Web, iPhone or Android. Members also get second opinions and give referrals through virtual curbide consultations.

 That is a simple example of how one entrepreneur moved from big problem to clever solution. The result is a successful startup.

BOTTOM LINE: When looking for an opening to get a fresh company started, look for as large a problem as you can find (I did not say "most complex problem").

Then find the point of pain (exasperation, frustration, anger, disappointment, etc.).

Start thinking up ways to reduce the pain. Keep inventing alternatives to the existing solution (avoid words like "quicker, better, cheaper" because "er" words have no staying power).

When you find an alternative solution that could touch a lot of potential customers, figure out how to build and launch that solution (that's your business plan).

When you build a solution that is exciting ("compelling to customers"), the customers will email, Tweet, and phone the buzz around the planet about your wonderful solution. That's how serial entreperneurs do it. So can you. It is central to building an unfair competitive advantage.

I wish you The Best on your Adventure!

TWIST YOUR STARTUP IDEA UNTIL IT SOLVES A BIG PROBLEM: "Better" is living death

This past week I was working with teams of four or five techies in my startup Entrepreneurship class at Cornell University.

What struck me was how tricky it is to get techies to see the difference between "better" and "BIG".

Great startups find BIG problems to solve.

Companies that get started and go sideways focus on making something BETTER.

Words ending in "er" are four letter words to VCs and experienced startup employees: faster, better, cheaper are not firing up their eagerness to join your new enterprise.

The founders who focus on solving a basic problem that ails a huge number of people produce the great startups. That takes courage and conviction, confidence and determination. There is a lot of emotion in making that decision.

To test your idea, ask yourself "Has this been done before?" Then ask "What that is similar has been done before?" Great ideas for startups find that idea is fresh, new, has not been done before. And the similar solutions are old generations of clunky solutions. You want to move from a ho-hum idea on to one that is very exciting, that has a lot of "WOW!" in it.

TWIST YOUR IDEA : 

Use your first idea to begin a process of altering it week after week, twisting it into different forms that solve different problems. That twisting process will advance your initial idea, most likely shifting it to focus on a very different problem to solve. That is what serial entrepreneurs are terrific at doing.

EXAMPLE:

Here is an example for you to think about: "Build a better game" is not going to lead your startup to greatness. But as you ponder building new games, you realize there is big decision you have to make: On what devices (computers, game boxes, smartphones, pads) should your game run on? It is a lot of work to make a game run on one operating system and one device. How about a dozen in various combinations? Now that is a BIG problem needing a solution.

So how about creating a language that can be used to build one game that works on the many different devices?

Sounds great!

But hard to do (good barrier to competitors).

That is Exciting!

And yes, there is a startup that is focused on doing just what I have mentioned. It is Game Closure. The company has built HTML5. It is a set of standards that lets Web browsers understand animations, videos, graphics, and other multimedia content without the need to download a plug-in like Adobe's Flash.

You can imagine how you might have come up with this idea yourself: as a game developer you grew frustrated at the basic problem of cross platform game playing software coding. You set out to solve it with a couple of ways, tried a few in the lab, kept on thinking and twisting your idea, and then "presto!" you get the idea that we have just discussed.

That is how to move from an initial idea to a great idea. Twist your first idea round and round until it transforms into a solution for a really BIG problem.

That is how you attract the great people and great financial backers.

BOTTOM LINE: Beginning with your initial idea, start twisting it and keep on going until it becomes -- in its transformed shape -- a solution to a BIG problem. That will be the foundation for building an unfair competitive advantage. It is how serial entrepreneurs do it. So can you.

I wish you The Best on your Adventure!

THREE BASIC HARD-KNOCK SCHOOL LESSONS FOR STARTUP CEOS

Streetsmart CEOs learn lessons from the struggles of others.

Here are three for your brain to cogitate on today:

1. Never sell Swiss Army knives. The new Galaxy Note is a "phone-tablet hybrid" making its debut. What are reviewers saying about the device? Here are one harsh declaration: "makes you look like your're talking into a piece of toast." And it is seen as "all of the above", meaning it is mixing smart phone with tablet with mobile device. In other words, it combines a lot of gadgets into one device. What is a Swiss Army knife used for? After opening all the gadgets, the user sets it on the desk and soon it is a great paperweight. Period. End of wonder. What does your product need? That is simple: it must have Focus + Wow! One thing done with wonder. You win. Swiss Army knife products lose.
2. Winning Number 2 companies (Chimpanzees) have to be radically different to thrive. RIM's Blackberry is a great example. What does it need to do? Not be better than or similar to the iPhone. No. Instead be crisply different. Let Apple sell to kids. Rim is "For adults only" or "Industrial strength". RIM's security is much stronger than Apple's. Corporations prefer that. So contrast the adult phone with the kid's phone. And thrive as a strong Number 2, a healthy Chimp existing in the shadow of a strong Gorilla. And try to pick a market for your startup that is not yet dominated by a Gorilla. In an early emerging startup market, if you begin to fall behind a leader, remember to strive to be clearly different.
3. Confidense with how your business model can make money trumps jumping off the cliff blindfolded. Pinterest has $37.5 million of venture capital invested in it. It's VCs are bragging that the startup's "monetization strategy isn't in the oven and i's not even off the baking table." Do you believe that? I don't. And neither do the VCs. They did not invest with their eyes closed. It is simple to calculate right now the amount of regular users needed by Pinterest to generate the annual revenue needed to create the huge value required for an IPO needed by the VCs to get rich. That is simple arithmetic, a simple Excel model to build. Sure, the precise method by which the company sets up the ads will be a work-in-action (think Facebook's on-going experiments and slap-backs by the privacy-sensitive Facebookers). So get out Excel and build your Business Model for your new enterprise. Investors (and smart potential employees) will be asking you "How will your startup make money?" The stronger your answer, the lower the risk and the higher the value of your startup will be to investor and talented employees. It's worth the hard work.

BOTTOM LINE: Watch, read, and listen to other entrepreneurs and innvators. Study the marketing wars. Then apply what you learn to your startup. It's how the Great Ones rose to success. It became part of their unfair advantage. You can do it too!

I wish you The Best on your Adventure!

"PROVE IT!!" IS THE NEW STARTUP MANTRA: Back to the Future circa 1970

"Prove it and then we'll consider investing."

"I want to see how the app catches on before I jump ship."

"We will get this thing launched and then figure out how to make it sensational."

Those are comments I've heard often from investors and talented people as 2012 begins to emerge.

To me they signal we have arrived in a fresh startup era, one that reminds me of the "good old days of the 1970s." Back then software startups were getting hot (and got even hotter when the personal computer ushered in the 1980s boom). Investors (not yet dubbed "venture capitalists") were cautious, wanting to see the software running before signing the check. That process launched a wave of successful startups running large applications and new databases. It became a tsunami as the PC followed Apple's arrival.

Central to the process was "Proof of Concept" followed by "First Product Launch". After those two steps, investors signed checks.

Today, I find many two and three man techie teams coding at night and on weekends. Often working remotely from each other, their friendships link them to the focused effort: get this thing up and running, then we'll find some seed money.

The good news for entrepreneurs is that this process opens the door for more ownership (percent). You take the risk for the earliest phase of the new enterprise and thus keep those seed round shares for yourself (e.g. Zuckerberg with Facebook.).

The bad news is that you have to finance the early stage by yourself. That reduces the number of people willing to join you. And it slows development time to market. And it makes it likely that you'll find a lot of competitors emerging the same way.

I'm back from Cornell University where I again saw this phenomena at work. It is here to stay. So plan on it.

BOTTOM LINE: We are in a fresh modification of the traditional process of launching a new enterprise. Investors are expecting to put money into potentially large deals only after they have shown success with an infant product or service. The "success" of the initial launch is what attracts the people with the money. It is tricky to do, partially because you need some friends to join you without being paid. Serial entrepreneurs know how to do this. You can figure it out. So get started, it will be a solid first step on your way to building an unfair competitive advantage.

I wish you The Best on your Adventure!

NEXT GENERATION STARTUPS: Use combinations to rise to the higher level

"We were thinking about using data on restaurants and parking to help diners have a more enjoyable dining experience. What do you think about that idea?"

This question opened a session with a first-time startup team yesterday evening (from my Cornell University class). From then on it was an intense workshop addressing the question "What can you make from this initial idea that can move it forward so it becomes a great idea for a great business?"

Most startups begin that way (vague, weak first idea) and the founders have the determination and intuition that drives them to start changing the first idea so it becomes something much more compelling ("cool") to a vast majority of end users and customers ("scaleable").

But that is not easy. Yet serial entrepreneurs can do it swiftly and very effectively.

So let's get you to understand the process the veterans use to lift their first idea up to "the next level".

DIALOGUE:

• "We are going to use data to help diners know how long the wait time is before getting a table and help them find a parking space. We see our expertise being in allocation of scarcity."
• Q: You must focus on either helping a restaurant or a the dining person. Which do you want:
  • A: Let's focus on helping the restaurants.
• Q: What is The Big Problem you are going to solve for restaurants?
  • A: Diners not frustrated.
• Q: Isn't that a non-problem for restaurants that are constantly selling all the seats every dining time?
  • A: Yes, well, then we have to help the other restaurants, the not-full places.
• Q: How could you help the underperforming restaurants fill more seats?
  • We could use their customer data to email and advertise to their Ideal Customers.
• Q: How about using operations research technology to analyse the patterns of booking reservations (like hotels do), predict the outcome (unless action is taken), and send out email alerts (to smart phones, PCs, pads) that a bargin (e.g. for next Tuesday Lunch is a 2:1 free desert)or other discount/coupon)?
  • A: Cool, and we could help them find the place on a map!
• Q: What could you do for people visiting a resort area and looking at the last minute for a place for dinner?
  • A: We could use location based technology to alert their quiries of Google Maps about local restaurants are nearby. Instant find, instant (automated) booking, walk in to your seats!
• Q: What could you do for a hockey game fan?
  • A: Well we could reserve a parking space, give Best Driving directions, and maybe suggest near-by restaurants!
• Q: Anything else for the sports fan?
  • A: We could offer near-by lodging and maybe discounts booked through us!

And so on the discussion went.

Notice how the movement went to using existing technologies to build a more focused, more compelling service.

The end result was a combination of Google + FourSquare + Open Table + Groupon. It was very different than the initial idea.

BOTTOM LINE: Serial entrepreneurs move swiftly from initial idea ("dream", "vision") to focus, add value, increase complexity and emerge with a loud "WOW!" idea for the new enterprise. Combinations of existing business models, technologies and marketing methods transform a weak first idea into a more powerful one. As more work is done (in secret), the idea grows more and more powerful. The serial entrepreneur does not stop until he has a plan that he is confident can be executed to deliver a powerful unfair competitive advantage. When you can do that with an idea, you'll have advanced into the halls of those few who can become serial entrepreneurs. It is worth the hard work and brain straining.

I wish you The Best on your Adventure!

STARTUP IDEA: Move into uncontested new space (Flanking)

"The market is flooded, a gorilla already exits, what should we do instead?" is a question I often am asked.

Let's pick that conumdrum apart to generate a simple answer and get you out of The Wilderness of Undistinguished Startups.

Start with a quick read of today's blog from TechCrunch about Vidyard.

Note the following:

• Market for videos dominated by YouTube
• Alternatives to YouTube are expensive
• New uncontested (no Gorilla yet) market is open: "an affordable way for businesses to host videos that can be viewed either on a landing page or via an embeddable player."
• New market has huge potential (number of businesses)
• Business model (monetization) is simple and proven: "To monetize, Vidyard is using a freemium model"
• Vidyard focuses on a single weakness in the Gorilla: "Basically, Vidyard is offering a service that’s very similar to YouTube, but without that link to a third-party portal." Yes, there are other features, but this is the weakness that is difficult for the Gorilla to quickly overcome, thus giving the startup an opening.
• Technology team can deliver what marketing team wants (Vidyard hopes).

I don't know enough yet about the experience of the Core Team, but the above is enough to make my point for the day: When the market is flooded, when a Gorilla dominates, then find an overlooked (often related market) and put everything you have into pursuing it. That's what world-class marketing minds call The Flanking Strategy. It avoids the Gorilla, appeals to a large market, and gives the startup a great chance of becomming its Gorilla.

BOTTOM LINE: Look for large overlooked markets when you face a Gorilla dominating a major market. Focus all you have on something the Gorilla cannot respond to quickly, something customers are begging for, and then go for it. Serial entrepreneurs do it. So can you. It's how most great startups become great, building their unfair advantages.

I wish you The Best on your Adventure!

INSIDE ZYNGA'S BUSINESS MODEL: Lesson = learn how your biz model works and work with reality instead of dreams

When you examine the IPO prospectus of Zynga (S-1) and dig into the numbers you can discover how their cash flow works, where their profit comes from. That is what a "business model" is all about.

Your objective should be to build a startup business plan that is not based on dreams ("Forget them, worthless bplan," says the VC), rather it is founded on fact-based reality (workable, financeable and exciting). That's your lesson for today. A realistic bplan is built on a realistic business model. That attracts the best people, money and end users, and then customers run to make money with you.

A quick summary of the inside secrets of how the Zynga business model works was done by Douglas MacMillan and Brand Stone of Bloomberg Business Week. It reveals that less than 1 percent of Zynga's game players produce a quarter and half of its revenue ($ paid for virtual game items). Las Vegas refers to them as "whales." So does Zynga.

Knowing such realistic facts separates the dreamers from the realists. The latter get the money and get going.

Your business plan must be built on the realism of the industry you are marketing to. When you do that, the VCs and potential employees will be very confident of the future of your new enterprise.

Avoid the "we are completely different" tendency, few startups in an industry have radically different business models. VCs are wary of such new enterprises, as are experienced startup workers. If you must be radically different, then base it on different economic reality and flank into a different, uncontested, market segment.

BOTTOM LINE: Build the engine of your new enterprise to be as realistic a business model as you can. Avoid dreams and guesses. Declare your future with confidence based on facts. Show your income statement with assurance that it is driven by your realistic business model. When you use realism to build your business model, you'll have the foundation to on which to construct an unfair competitive advantage.

I wish you The Best on your Adventure!

START-UP CEOS CAN TAKE ADVANTAGE OF IPO MANIA: Understand the underlying economics and use it to your advantage

This is the pattern of the wave that start-ups ride, from birth to peak to bust. It was documented by the late MIT Professor Kindleberger, based on his research from tulip mania to modern times.

The wild IPOs of LinkedIn and then Yandex are signs of the Mania phase in action. You should already know the numbers and valuations, so let's move on to the point of this blog.

What can entrepreneurs do to take advantage of such as wave? Here are some tips from serial entrepreneurs:

• The now-rich VCs are racing to get fresh money (before the bubble pops) to invest. Look for recent funds raised and go after the green cash, it's eagerly looking for the next great thing.
• The IPOs have spawned rich individuals with lots of cash in their hands. Some have worked more than a decade to get rich and will now "stop working" and do something else. They often become the new wave of angel investors. Read the IPO documents to find the names of the large individual shareholders. Knock on their doors (yes, at their homes) and pitch your deal to them. Great start-ups have gotten going that way.
• High IPO valuations favor start-ups. $8 billion Yandex and $4 billion LinkedIn are the balloons lifting the numbers higher and higher. Investors are looking for "really big deals". Your forecasted numbers must support their dreams. Your sales and valuation in five years has to be very large. Spend time, do your homework, generate large numbers. Change your business model if you have to.
• Be bold. This is not a time to be "conservative" or cautious. Use the same confident language the VCs and super angels are using.
• Be confident. This is time to choose which great investor you want for your next round. All of them are eagerly looking for a great start-up. They are intensely competitive with each other. Get them competing for your deal. Such competition is the entrepreneur's best friend.
• Be smart. Plan your campaign to raise your funding. Choose your investors carefully. Select only the best. Prepare for intense, fast negotiations.

All of this requires a lot of work by you. The numbers have to be generated. Yes, they are dream numbers, but hey, so were the numbers shouted out by founders of Facebook, Google, and Yandex when they got their first money. So come to presentations with investors prepared to talk about "How large could this business get?" The larger the better. It's your business, you know better than investors how large it could become.

BOTTOM LINE: Take advantage of the current IPO boom. Use its energy and underlying wealth creation economics to get the deal you want for your next round of financing. Do your homework. Generate your numbers for sales, customers, etc. Prepare your discussion about how large the business could become. Then get investors competing for your deal. When you can do that, you'll be well on your way to building an unfair competitive advantage.

I wish you The Best on your Adventure!