Many startup business owners are being sold the idea that once they gain market approval, they should dump as much money as possible into a commercial product to see if it will sink or swim.
Many Startup business owners are being misled.
The narrative generally goes something like this:
Mary has an idea for a software product. Mary feels like the idea has legs but isn't sure that it'll float. So instead of jumping in head first and trying to create a business from scratch, she’s been advised that she should raise a small amount of money and build a Minimum Viable Product (MVP).
An MVP is the most basic version of the product possible. It shows how the idea works, sans the bells and whistles.
With an MVP Mary can test the market and demonstrate the idea to seed investors and maybe even make a few sales. If the feedback is positive, Mary will have the confidence that there is demand for her product and she can take the next step to invest in actually building the full product and a business around it.
Traditional startup thinking would now have Mary raise as much money as possible, build an amazing product and aggressively engage in customer acquisition.
She would enter a long phase of burning through cash in the hope that, at some point in the future, she is able to have enough customers to either turn a profit or become a takeover target.
When things go wrong
This is where things often go wrong for startups. They underestimate the cost of acquiring customers, they over estimate the number of customers they will attract, and they often fail to consider the support and administration costs associated with the customers that they do acquire.
At some stage all the original investment will be spent and Mary will need to raise more capital, dilute shareholders or wind the business up.
It’s at this point that we need to put the brakes on and reconsider the plan. We need to rethink how startups manage this growth phase, because flash-in-the-pan thinking has a very low likelihood of success.
No matter how good Mary’s idea is, the encouragement to risk it all is dangerous - it’s neither smart nor sustainable. What we need to do is retake control over our ideas and focus more on a concept that doesn't get much attention in the startup world: profitability.
Definining what's viable
Having built a Minimum Viable Product, Mary needs to focus on building a Minimum Viable Business. This means that she could potentially raise less money and spend only enough money on product development to create something that she could sell.
Rather then chasing customer volume she could build a captive audience of quality customers that are paying a correct price for her product that reflects the true sales and support costs. Rather then burning through investor money at a rate of knots, she could nurture their investment by building a business that has the kind of longevity that only a profitable company can provide. She would have built a Minimum Viable Business that can now demonstrate that it can stand on its own two feet and from here she can safely raise money for growth, without fearing insolvency.
The ‘Silicon Valley’ portrait of the startup world is sexy and electric, and for good reason. In Wellington we have an impressive array of brilliant people with excellent ideas and the commitment and passion to get them realised. We have fertile conditions for new companies to launch, and lots of support to get them off the ground. We have a DIY mentality, are brave enough to take risks, and are looking at a brilliant opportunity for business owners to make it big.
However, there’s a worry that people new to the business world are being encouraged to make rash decisions.
Launching a startup does not mean you have to risk losing everything. Done correctly, and with intelligence, startup ideas can take it slow and make sustainable business decisions to secure long-term profits. This gives investors more confidence and gives a business more likelihood of success.
I’ve seen too many good ideas fail because of hotheaded decision making. Let’s not move from MVP to sink-or- swim. Let’s focus on achieving a Minimum Viable Business, so that startup owners and investors can look forward to a future that is not only sustainable but profitable.
The writer is a founder of Wellington-based Touchtech, a solutions provider for web services that power online tools for apps.
Idealog has been covering the most interesting people, businesses and issues from the fields of innovation, design, technology and urban development for over 12 years. And we're asking for your support so we can keep telling those stories, inspire more entrepreneurs to start their own businesses and keep pushing New Zealand forward. Give over $5 a month and you will not only be supporting New Zealand innovation, but you’ll also receive a print subscription, an Idealog t-shirt and a copy of the new book by David Downs and Dr. Michelle Dickinson, No. 8 Recharged (while stocks last).