Did Compass find the cure for internet startup cancer?
We'll share the golden nugget of their E-commerce GenomeTM study below, but you should know up front that it has to do with the stages of business development.
There are two schools of thought on the stages a small business goes through and how to plan for them. Picking the right version of these stages can be crucial in helping you fight the startup cancer Compass has identified.
Exploring the Stages of Business Development
The first is the more traditional model which we'll refer to as the HBR (Harvard Business Review) Model. This model starts with product validation and usually includes a lengthy business plan like you might be required to write at, say, Harvard Business School.
The second is what we'll call the Lean Startup Model which starts with a market and tries to build a product that market needs. Instead of a bookish business plan, the Lean Startup Model begins with a one-pager based on the Business Model Canvas and relies on tests, validation, and iteration at every step.
The fact that our company is named Lean Labs indicates which model we think is best, but that doesn't mean that the HBR Model isn't a valid approach.
The HBR Model vs. The Lean Startup Model
Let's take a deeper look at both and then discuss how the E-commerce GenomeTM study shines a spotlight on a single growth stage mistake which sinks three out of four startups.
The HBR Model's 5 Stages
We're providing a summary below, but you can read their detailed model here.
Companies in the Existence stage are attempting to validate that their product or service can expand beyond a pilot or single key customer. The owner is the business. He or she does everything. "In this stage, the main problems of the business are obtaining customers and delivering the product or service contracted for."
Stage 2 companies are able to satisfy customers enough to keep them. In the Survival stage, owners are now trying to find a path to profitability. "In reaching this stage, the business has demonstrated that it is a workable business entity."
Success stage businesses have attained true economic health. The company begins to gain an identity apart from the owner as managers handle the day-to-day activities. "The decision facing owners at this stage is whether to exploit the company’s accomplishments and expand or keep the company stable and profitable, providing a base for alternative owner activities."
This is a rapid-growth stage. The company has reinvested its profits and taken risks to reach a new level. The company will either grow into Resource Maturity or fall back into the Success stage. "In this stage, the key problems are how to grow rapidly and how to finance that growth."
5. Resource Maturity
Stage 5 businesses have seen significant dividends from the Take-Off risk stage and are now stabilizing resources by eliminating inefficiencies and developing successful long-term strategies. "The greatest concerns of a company entering this stage are, first, to consolidate and control the financial gains brought on by rapid growth and, second, to retain the advantages of small size, including flexibility of response and the entrepreneurial spirit."
The Lean Startup Model's 4 Stages
We've done some of our own customizations on this model which relies heavily on Eric Reis' Lean Startup, and Ash Maurya's Running Lean. You'll notice some similarities to The HBR Model, but there are some critical differences, which we'll highlight below.
1. Customer Development
In the words of Seth Godin "Don't find customers for your products, find products for your customers."
Start by finding a market and having conversations. Find out who your customers are and what headaches they're experiencing. What's the gap in the market? Then determine not only how you are going to fill that gap better than anyone else, but how you're going to let people know that you filled this gap. Determine which words, messages, and stories alert the customer base that you've solved their problem.
2. Problem Solution Fit
Now that you've identified a solution, you have to validate that people will actually pay you for it, continue paying you for it, and refer others who will pay you for it. The best way to know if you've arrived at a Problem Solution Fit is if your Net Promoter Score is 75+. Then you're in the category of a must-have product. When you ask your customers "How would you feel if our product/service didn't exist?" the response has to be "Very disappointed." At this point, you know you've found the right solution for their problem.
3. Product Market Fit
NOTE: It is crucial that you don't make the mistake of skipping steps 1 & 2.
This is one of the flaws we see in The HBR Model. They skip step 1.
Now it's time to find the right market for your product. This is a fishing expedition. You're going to waste a lot of bait to find the right school of fish, and that's OK.
This is exploring, not implementing. The goal here is to find the sweet spot where you get the market to ask you for the product instead of you always pushing it to the market. And you have to find a way to do this at a reasonable cost and achieve a balance of profitability.
In this stage, you start investing in an amazing website, refining the buyer journey, producing lead magnets, blueprinting an on-boarding path, etc. This is the stage when a partner like us can make a huge impact. The Product Market Fit stage is where we start with our clients.
By now, customers are finding your product and buying it. You have the right bait, and you know where the fish are. Now it's time to 10x your results. In the Scale stage, you'll optimize for every nickel you can on the cost of customer acquisition (CPA). You're going to put that bait everywhere you can put it to catch the most fish. You'll make the funnel as big as you can make it, while simultaneously optimizing your marketing systems for performance.
The Cure For Startup Cancer: Don't Scale Prematurely
Here's the golden nugget from the E-commerce GenomeTM study.
74% of high growth internet startups fail due to premature scaling.
This is huge.
That number should put "DON'T SCALE PREMATURELY" on the top of the priority list for every founder and investor.
Write it on your windshield. Tattoo it on your arm. Rearrange the letters on your keyboard to spell it out. (You'll have to borrow a couple of letters from your co-founder's keyboard, but it'll be worth it.)
It's the reason you have to nail the stages of business growth in the right order -- listen to the market, identify a pain point and gap, develop a solution, validate the solution, find the right bait for the right school of fish, refine a seamless customer journey, THEN SCALE.
We've given you an overview of The Lean Startup Method, and strong evidence to support just how crucial following the process is. On a subject this important, don't take this overview and run with it. Do a little more digging.
Lean Labs founder Kevin Barber has organized the findings of the experts in Lean Startup methodology and his own first-hand experience into a single, free eBook. It's a valuable next step in your battle with Startup cancer. Download 10 Steps To A Lean Launch now.