The first five years in the life of any business are the most treacherous. Even some of the largest and most successful start-ups in this world had to start somewhere and seek funding from investors.
So what do organisations such as Uber, Aibnb or Palantir do right or differently when raising capital? Why do their business models seem smarter than others in their category?
Here are some of the take aways and expectations that I have captured from both pieces of insights.
- Customer Market. Start-ups must understand addressable, available and target markets really well in order to determine who will be their most likely buyers. If the market is large and crowded, but under-performing and therefore in need of new sources of value, and some new entrants are already showing the right level of traction, a new venture will definitely have a chance to be listened to.
- Customer Discovery. Investors recognise that until a product is out there, no one really knows if a customer segment will see the difference between the new product offered and other options in the market. However, a well thought through customer discovery process with a good response rate can make investors curious to know more.
- Business Model & Monetisation. Today’s business model designs seem to favour digital platforms as the assets of choice to build next-generation offerings. The most successful models unbundle existing value chains and recompile them, focusing on a single key vertical or a specific customer experience, and then replicate it. The development of multiple revenue models is seen as necessary to ensure some level of flexibility if one model does not reach a large enough size.
- A World-Class Presentation. Young technology-led start-ups should not underestimate the power of storytelling and taking listeners on a journey of discovery and enchantment. Good pitches reframe and present to investors a better future that generates high returns. They also reveal the dreams, aspirations, values and purpose of the founders. But this needs to be kept focused, short and targeted.
- Timing & Expertise. The timing of an innovation and the investors’ expertise in a sector are both crucial. As described in yesterday’s insight, since investor rejection often occurs during investor-pitches, would you risk presenting your project to investors that have no interest in or knowledge of what you have to offer?
- Growth Rate of Your Customer Engagement. As noted earlier, many start-ups today are enabled by real-time platforms or marketplaces that support direct engagements with customers. While, usage monitoring is an important metric, first-time or accidental one-time users are less relevant. Customer engagement volumetrics should focus on active users and how quickly these individuals are being acquired over a period of time, as such information is often linked to the ease of use, simplicity or distribution dynamics of the platform. YouTube is a good example of fast customer engagement.
- A Strong Founding Team. A team of founders, who knows each other well, has worked together in the past and who can support one another, definitely helps. This means that the team has already gone through the ups and downs of effective team building and knows each member’s strengths and weaknesses. It also implies a certain ease of communication and a pre-established culture based on common values and believes.
- The Right Balance Between Disruption & Adoption. To succeed, start-ups have to be perceived as different. They also must demonstrate an ability to execute extremely well. Whilst disruption is a core part of what makes them unique, successful ventures usually concentrate on an existing market and grab mindshare from existing customer groups. The first time around, they avoid focusing their attention on propositions targeted at new markets in order to optimise cash usage and expenditure. The established knowledge of a core market and the re-use of existing assets can actually drive capital efficiencies. Airbnb’s case is an interesting one. The Airbnb proposition was actually based on known market criteria. Airbnb, however, delivered a better product at a better price, with more advanced online discovery and execution capabilities. Uber did too.
Whilst the pitch part of building a start-up is important, there are a series of reasons why start-ups succeed. Bill Gross describes them well in this useful TED talk.
Is it impossible now to imagine life without an Airbnb, LinkedIn, or YouTube? Yet at the start, they were just like any other small business. They had founders with a vision for what things could become once their idea became a reality. And they built on those ideas, gaining momentum and getting funding to continue to grow. We know (but often forget in the face of success) that it can be a bumpy road, especially in the first five years.