Tech entrepreneurs love data. That makes sense but in a startup there is no reliable source of data. Every decision is made with a hundred unknowns. Instead of seeking false assurance in benchmarks and the like, keep it simple and flexible. Remember that everything is an experiment.
I spent a couple of hours on Thursday last listening to two early stage entrepreneurs. It was in a virtual board format run by Edinburgh Innovations. One company had leapt forward since I last saw them by winning their first big overseas contract. The other had slowed down as a free competitor emerged in a key market area. I could come back in two months and the roles might be reversed again.
On the train home I chatted with a good friend and experienced entrepreneur who is working on a new business idea. His challenges were the same as the newbies we had seen earlier. Is there a market for this product? How should he price it? What features are needed for an MVP?
His solution was natural and right. Get out and experiment with potential customers. The idea of a startup experiment crystallised in Eric Ries famous book The Lean Startup. Its a strong concept and has found many uses. Yet it only begins to describe the experimental nature of a new business with a new product aimed at solving a new problem. In this world everything is an experiment.
Product and Market
The experiment idea is built around testing for product market fit. For most startups product and market are the twin obsessions. That is as it should be. There is no other way of validating your idea. You must build some sort of product and find some people willing to pay for it.
The hard part is judging the outcome of these experiments. Have you found a real market or just a few early adopters? Which features do you need to expand you customer base? Will big companies pay more for your product?
In every case you are making choices based on limited data. But those decisions are life and death for your business. Its easy to forget all the other unknowns that affect your chances of success.
The biggest distraction from your focus is not uncertainty about product or market. Its money. How much runway do you have? When will your next round close? Which investors do you want to work with? How fast will sales turn into cash flow? Can you meet the payroll next month? Is it worth pursuing that large but slow enterprise customer?
None of this feels much like an experiment. Don’t be deceived:
Investors will tell you they invest in teams above all. Getting to MVP, raising money, growing all depend on finding and building a team. Chances are everyone in that team is an experiment of sorts.
Many founders have never run a business before. A fair number have never built or sold a product either. Even an experienced entrepreneur may be new to the market. And as the business grows, the role of CEO is quite different from that of entrepreneur.
Everyone you hire brings some of the same edge. Its one of the reasons why early stage companies are keen on “proven” performers in areas like sales. Trouble is no-one is proven in this situation. You don’t know the exact job definition. You don’t know who you are selling to, what you are building or the answers to a thousand other questions.
That’s why I prize the ability to listen, learn and grow above having a CV that ticks all the boxes.
Between solid evidence and pure guesswork
So at every moment you have a series of experiments running in product, market, money and people. They all interact with each other in multiple ways. No matter how well you design your starting hypotheses, you are not going to know for sure what is working and what is not.
Some things can be so messy they feel like a complete guess. That’s not a comfortable feeling so you bury yourself in all sorts of data. And find that there is no clear evidence. How do you make decisions in that environment?
What not to do
One temptation is to reach for benchmarks. Google is a great management consultant as well as a top doctor. A quick search seems to tell you what is expected of a startup SaaS business.
I am not a fan of benchmarking. To be specific, I hate using benchmarks to set targets. Its negative and counter productive.
Don’t get me wrong. If you can find a proper, comparable data source (not easy!) then comparing your outcomes to that source can be useful. But only as a way to ask the right questions. As soon as it becomes something to aim at, you are damaging your business.
The Chairman's View
There is no data led, evidence based solution to big strategic choices. This is true however big and established your business. Roger L Martin explains this in the Big Lie of Strategic Planning. If that is too academic for you watch this 3 minute video about Honda instead.
In an early stage SaaS or any startup every choice is a big one so everything becomes an experiment. You are in the world of emergent strategy. This is fancy language for making decisions based on three things:
A startup is not a comfortable or safe environment. You have to stay focused and flexible. There is no formula. Build a strategy based on conscious choice. Keep it simple but never believe it is perfect or even right. Be prepared to change in response to new learning from all those experiments.
Kenny Fraser is the Director of Sunstone Communication and a personal investor in startups.