Saturday, May 19, 2007

3 Phases of a Start-up

We met with Randy Komissar from Kleiner Perkins last week. He gave us a lot of valuable advice about the 3 phases of a start-up.
  • Phase 1: demonstrate the value
  • Phase 2: demonstrate options for scaling
  • Phase 3: execute
Phase 1: demonstrate the value

In this phase, the start-up is trying to show investors that it has developed something valuable to customers. This phase is marked by a set of iterative tests designed to support or refute hypotheses about the business. Suppose I have an idea for a new business. That idea is really a hypothesis--that whatever I develop will be valuable to customers. I should come up with a prototype that I can begin testing with customers to validate that hypothesis.

The name of the game in this phase is to learn by getting real customer feedback as early and as often as possible. I run a series of iterative experiments where I test my hypotheses with customers. Each time I learn something from a customer, I should refine and tune my hypotheses. And my "business experiment" should be designed such that I am testing the core, fundamental elements of my new business idea as early as possible. That way, I learn early whether my idea, at its core, actually has value or is simply a waste of time. Over time, I can get into testing details of the idea (such as specific product features).

It matters less whether my hypotheses are right or wrong. What's more important is that I have hypotheses, and that I have the strength of character to accept real world feedback that supports--or refutes--my hypotheses. I want to fail early, fail often, and most importantly, fail inexpensively. Failure at this stage is really good. It means I've learned something and probably avoided costs. I want the feedback from customers that they dislike a planned product feature well before I sink costs into actually developing that feature.

You should strive to test your hypotheses in a "smart" way. You should brainstorm a list of potential hypotheses, and test them in order of likely success. This requires judgment, of course, but you can improve your chances of having good judgment by synthesizing input from experts and customers. By testing them in order of likely success (rather than randomly), you improve your chances of hitting on the right solution early (without burning through too many iterations, too much time, and too much money).

During this phase, I have the challenge of doing as many iterative experiments as possible, and tuning the hypotheses of my start-up idea, as cheaply as possible. That means that I should always be thinking, "What's the cheapest way for me to get the feedback that will tell me whether my hypothesis is right or wrong?" So I should defer committing resources--which means deferring hiring people and even building the product--until I know whether the hypothesis justifies the commitment of those resources. Try to engage potential employees on a contract basis rather than commit to hiring them during this phase. Build very lightweight prototypes of products to test with customers, until you've gotten feedback that justifies the commitment of development time and resources to the product.

You sort of know when you're ready to exit this phase of start-up development. You've been testing and iterating your product idea with multiple customers. You've now developed a pretty valuable prototype or product, and gotten a handful of customers very excited about your new product idea. You may have engaged a couple of customers to participate in a trial with your product. You haen't really generated significant revenue yet--in fact, you may not have any revenue at all. But you have some excited reference customers. Will blog about Phase 2 next time.

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