Lean startups 101

June 3, 2010

In venture capital and tech incubator circles, the concept of lean startups is all the rage. We’re fans of the idea, and think it has merit well-beyond Silicon Valley.

The basic idea behind the lean startup approach is to get a product into the hands of customers as quickly and inexpensively as possible, find out what customers think of your product, and then modify that product as needed.  The point is to find out if there’s a match between your product and what the market wants, with as little risk as possible. Here are a few lean startup tactics:

1. Design a minimum viable product.  Hold off on all the bells and whistles you’ve envisioned. Strip your design down to the bare essentials you’ll need to determine whether customers will like / use / buy your product.  By sticking with this minimum viable product, you can determine the fit between what you’ve got and what customers want faster and cheaper.

2. Develop quickly and inexpensively. Making lipsticks, t-shirts or beverages? Start with “stock “materials, like applicators or bottles, to avoid time consuming and costly production set-up. Customize later, once you’ve proven that customers want what you’ve got. Building an online community? Use a platform like Ning that’s free or at least cheap; if customers love it, you can build a custom site down the road.

3. Change on the run. It’s pretty rare for founders to dream up a winning product from the sidelines. More often, it’s necessary to make a series of modifications in reaction to the way customers react to initial offerings. That could mean changing or adding features, pricing, positioning, distribution, etc. One of the keys to doing this well is to set performance targets (we want to sell at least 1,000 units per week by the end of a three month test), measure actual results (we only reached 500 units; customer surveys showed we need to switch our pricing from subscription to a la carte) and then decide whether / how to proceed (change pricing policies).

Lean startups and bootstrapping work well together. For example, both tend to advocate getting a product to market first, and then raising capital for expansion—as opposed to raising a lot of money for design and development, which often takes longer and hampers flexibility.


Liz Lange interview: Bootstrapping in practice

May 19, 2010

Liz Lange launched her eponymous line of fashionable maternity clothing in 1997. Within eight years, the company grew to over $10 million in revenues, secured partnerships with Target and Nike, and established a cult following said to include the likes of Cindy Crawford, Gwyneth Paltrow and Kate Winslet. In the process she changed the way women, retailers and the media think about maternity wear, despite the fact that industry experts told her it would never work. Liz Lange also bootstrapped her way to success. Here’s how she did it:

UpStart:  “How did you build a multi-million dollar brand with limited startup capital?”

Liz Lange: “I started with no money and eventually borrowed $50,000. Initially, I did everything myself. I waited on every customer. I packed the FedEx boxes. I was the fit model. I did my own PR by calling editors to write about my business. To avoid getting stuck with unsold inventory, I produced all my clothing to order. And before opening a retail store, I just had a small office where customers could see me by appointment.”

UpStart: “Did you find that there were advantages to bootstrapping the way you did?”

Liz Lange: “Starting with limited capital helped me become successful. In the end, let’s face it, most businesses are thrift businesses, even the supposedly glamorous ones. Starting with less taught me to operate the business efficiently, and those lessons stayed with me throughout good times and bad.

“I had to be very smart about what I did and didn’t spend on, and that led me to make smart decisions. I also had to focus on the bottom line from the very beginning, as opposed to startups that raise a lot of capital and tend to lose sight of the bottom line in favor of generating revenue.

“Since I had to do almost everything myself, I understood every aspect of my business and got direct feedback about the needs of my customers. Even after I could afford to delegate, I made it a point to interact with customers personally, even if only via e-mail, as I had learned the value of staying connected to them. Plus, doing everything myself ensured that everything was done well. Nobody has more passion about their work than a founder. It’s your baby, after all.”

5 things to look for in a startup idea, for bootstrappers

May 6, 2010

What types of ideas are best suited to bootstrapping? (We’ll get to “how to bootstrap” in a separate post). Here are a few things to look for:

1. Low startup costs. Look for ideas you can launch without writing big checks. For example, it tends to cost less to start a company that sells services than one that sells products. Want to sell a line of baby food? You’ll need to create product formulations that meet FDA standards, and design packaging that stands out on store shelves. Also, you may have to produce more than you want at first, to meet supplier minimums and be prepared for customer reorders. Want to start a consulting firm? You can probably get started with a simple website and business cards.

2. Low marketing costs. If possible, find companies that reach customers without the need for large marketing budgets. For example, one of my clients has a $3 million revenue business and has never spent a penny on marketing. She sells hospitality services that cost over $100,000 per year. The universe of potential clients is fairly small, so she networks her way in the door, gives a sales pitch in person, and (sometimes) walks away with a big fat contract.

3. Proven demand. Forget “if we build it, they will come”. Instead, make sure you can sell it before you build it. There are a few ways to do that. The best way is to get customers to commit to making purchases in advance. Alternatively, you can work closely with one large customer when developing your product or service, so you can build their needs into your design. Can’t do that? Copy something that’s already selling.

4. Simple operations. Pursue ideas that don’t require large teams, wide varieties of products, or other factors that make operations difficult. Instead, find businesses where you sell one type of product or service to one type of customer, at least at the start.

5. Quick break-even. Seek opportunities that will let you get a product or service to market quickly, get cash flowing in the door, and reach profitability within a few months. Beware of ideas that require critical mass, before you can start generating revenue, like advertising supported websites or marketplaces. Also, watch out for startup ideas that entail long, unpredictable development cycles, or high levels of overhead.

How to approach angel investors

May 5, 2010

Once you’re truly ready to raise an angel round, craft a plan for who you’ll go after, and in what order. Keep in mind the whole process typically takes three to six months. Here are some pointers:

Fans of yours. Start by approaching people in your inner circle, including friends, former colleagues, and family members. If you’ve established their trust over the course or a long term, in-depth relationship, and if they have ample liquid assets, they’ll be the easiest people to get on-board. Get them to write checks, but tell them you won’t spend any of their money until you hit a pre-determined minimum amount. For example, if you are raising $500,000, set a minimum at $300,000. That way the first investors won’t have to worry that you’ll burn through their money, fail to raise more, and get yourself halfway pregnant.

Fans of your space. As you begin to network beyond people you know, find angels who are industry insiders – people who share your insights into the market. They’re already believers in the opportunity, so you’ll just have to convince them you’ve got the right team and approach. Entrepreneurs who have build and sold companies in related fields are also particularly attractive, because they understand both the market and the startup process. Best of all, these people aren’t just check-writers – they are “smart money” investors who can help you build your business, by advising you on strategy, and making introductions to potential suppliers, customers, distribution partners, employees, etc. To find these people, you’ll have to do a lot of networking. Angelsoft.net can help. So can venture capitalists, who tend to have great contacts in areas related to their investment focus.

Known lead. Once you’ve raised at least 15 – 25 percent of your round, it’s time to go after the big-kahuna:  A person who is widely recognized as one of the foremost experts in your field, willing to put their money and reputation on the line. This could be the CEO of a company in an area related to yours, a high-profile professor of entrepreneurship, a venture capitalist investing their personal funds on the side, someone in a leadership position at an angel network, or a super-angel like Ron Conway who has made investments in over 75 startups. This person’s involvement will put a stamp of approval on both your startup, and the deal you are pitching (no more questions about valuation after this person invests).

Angel networks. Angel networks, like New York Angels, the Band of Angels, or Common Angels, are getting more and more sophisticated in the way they assess and negotiate investment opportunities. They are tough nuts to crack, but you’ll vastly improve your chances if you have a good amount of your round raised, and a known lead involved. The beauty of the angel networks is that when you pitch them, you’ll get in front of a dozen or more people, each with a big checkbook. If you get one to bite, you’ll likely get others, and you may even be able to close your entire round.

Fillers. If you are just a bit short of closing your round, don’t give up. You’ve already done the toughest part, so get the round completed (or even over-subscribed, meaning you raise more than your target). At this point, broaden your reach to include trust-funders, investment bankers, hedge fund moguls, and others with ample means.

What tactics have helped you raise angel capital? Please share comments…

4 things to consider before you ride on the wings of angels

May 5, 2010

Before you seek financing from angel investors or angel networks, make sure the fit is right. If you or one of your co-founders has built a business before, sold it, and made profits for your investors, you can probably break the rules. Otherwise, take note of the following guidelines:

1.) What stage are you at? In general, your chances of raising angel funding are much greater if you’ve already got a product developed. It doesn’t have to be full-blown, but the most critical features should be operational. Get that product created any way you can – with financing from your savings, your credit cards, or from friends and family, by giving away equity to partners, by bartering for services – whatever it takes. Just have it up and running.

2.) What’s the money for? As per the paragraph above, many angels are reluctant to spend money to help you build your site. They’d rather see you put their money towards proving customers want your product. Use angel money to find out what percentage of people who see your product use it, pay for it, stick with it, and tell friends about it. Have quantifiable targets in mind, and measure your results.

3.) How much do you need?  An angel round is typically between $100,000 and $750,000, and individual angels tend to write checks for $25,000 to $100,000 each. Looking for less? Go back to friends, family, savings, etc. Looking for more? Either find a way to make do with less, or take a shot at raising venture capital.

4.) What’s your exit strategy? Your rich Uncle may invest because he loves you, but angels have other goals in mind. Yes, many angels get off on helping to create new business, but for the most part they are economic animals. They want a return on their investments. How and when will you turn their $25,000 into a much bigger amount of cash? You can’t know for sure, but have a reasonable hypothesis in mind before you pitch.

Caught on film: BootStrapper in the wild

November 6, 2009

One of my clients just wrote me an email that warmed the cockles of my heart (though it could just be I’ve eaten too much bacon this week).

We worked together to craft a business plan for him on a business to business service . The plan helped him focus his strategy, and develop a roadmap for moving forward. He was torn between whether to bootstrap, or raise capital to grow faster. He pitched to several angel investor groups, and got through three rounds of grilling before hearing those dreaded words:  “We’d like to see some more traction before we commit”.

At that point, it seemed the best choice was to stop spending time trying to raise money, and start spending more time closing sales.  Here’s an email he sent me today:

“The investor thing was not panning out as quickly as I had hoped, but maybe that was a blessing in disguise. (It also took time away from my focus on customers).  I (re-focused), and damn is it rolling now!!!  I’ve signed some GREAT exclusive contracts and all is going great. Moving from 0-60mph right now. The time spent with you was invaluable to my success. The structure and focus you gave to me during our sessions was a catalyst in this next generation of my business endeavor.”

All the credit goes to him (yes you, “Pablo”). You’re a text-book example of how drive, tenacity and resourcefulness lead to success, even with limited capital. You are my bootstrap hero of the week. Kudos.

Lottery vs. venture capital

October 20, 2009

I was just reading in Crain’s that only 19 companies in the NY-metro area closed early-stage venture capital funding last quarter. 19!!!

That got me thinking, are you better off playing the lottery? The numbers aren’t apples to apples, but just for fun, consider this:

  • 1,600 people per year in the U.S. win at least $1 million in the lottery.
  • 483 companies raised seed stage VC funding in 2008, and another 1,072 got early stage funding.

Not far off!! So, unless you’re sure you’ve got the right stuff (e.g. team with previous startup wins, chance to generate $100 million+, significant traction to date, a network of vc contacts, etc.) – stick to bootstrapping or angel funding through your early stages.