It often happens that entrepreneurs ask that question when attending events and meetings. They want a quick, accurate and succinct answer so they can move forward with their dreams.
Unfortunately, it all starts with the advertising presented to us by the mass media where the major ‘icons’ of the entrepreneurial market (Facebook, AirBnB, Twitter, etc.) are characterised as the starting point, raising millions of dollars in investment rounds.
In my experience, working for five years on our enterprise elMejorTrato, I made a mistake looking for investors and lost a few months, when in fact the focus and effort should have been completely different, below I’d like to share what we learned.
The core is to take the first step
At the beginning we thought that we needed foreign investment in order to take the first steps, because it is clear that the best goal is always thinking big! If we wanted to think big, we needed investments.
It was nothing further from reality. At some point, everyone started from scratch, as small, and with the current financial and economic crisis, this is the best time to do it. Even the largest companies in the world (Google, Yahoo, etc.) were once small.
Nowadays the vast majority of entrepreneurs do not have access, for one reason or another, to angel investors or venture capital; however, under no circumstances does this have to be the cause of failure for a startup.
Given this scenario, the beginning should be about developing a minimum viable product and then over time, refining it with market research. It is likely you won’t see the rapid growth possible with a startup with venture capital, but there is no doubt that this is a great way to begin.
How do you work with this approach? If you are a web startup, the main goal of the early stages is to develop a service online so that you can provide the basic functionality required by customers. The design, extra functionalities or any other additional aspects should not be taken into account during the first steps. The most important thing to focus on are the crucial elements that allow your service to work in the customer’s hands. Nothing more.
To exemplify this we can look at how Google began. Through a university task and without investment — since it was only an educational tool — a group of people designed the basic search functionalities: they created a square where anyone could enter words and nothing more. The performance was the differentiator, no other external aspects. At that time, if you remember, there were many search engine competitors, headed by AltaVista, which had not just millions, but hundreds of millions of dollars to invest in human resources and marketing, among other things. However, taking the first steps, what made Google stand out was the quality of the service it offered and the entrepreneurs, not the investment.
For more insights and details, I always like to recommend the book The Lean Startup by Eric Ries. However, there is nothing better than implementing and experiencing it for yourself, going out and learning along the way as you build your company. Learning from actually doing it is priceless, and cannot be learned with guides, tutorials or online videos.
Once you have developed the minimum viable product according to our original idea, it is time to move forward.
In the case of not having investment capital, it is essential to avoid being misguided by our ideas of what our customers “might” want. We must be as efficient as possible with our limited resources of time and dedication.
To take this forward, we must go out with an urgency, get away from the computer, and make contact with potential clients. You need to see how they interact with your minimum viable product, without bias, just by watching. This exercise is precious and something that took us months to understand, wasting a lot of time and effort. I recommend that you take the time to observe and understand how customers use your product or service, and actually create the spaces to do this, where you can ask everything you need.
There is no one that knows what your customers want and need better than the customers themselves.
The key at this stage of the venture is to grow together with your customers. The development and functionality of your online enterprise should be in direct relation to what customers demand.
A great example of this is 37Signals – an online management software — of which the development began for the founders’ internal use. As time passed, they improved it with users comments, suggestions and criticism. Finally the development became a multi-million dollar online service that not even Microsoft, with all its “unlimited” resources, was able to copy. Why? Because money could not buy the time and dedication that the founders invested to understand every detail of what their customers needed!
Finally, if, and only if, you have implemented the above two steps successfully, you can see how you start to generate an organic growth in your customers.
The next point I’ll mention cannot be implemented in all business models; however, it can be closely observed and implemented because the result is excellent.
In this type of scenario, where we start without external capital investment and grow with our customers, the ideal revenue model to use is subscription.
The subscription model is the key to growth, and the long-lasting life of a successful enterprise. It allows the enterprise to have visibility and to grow organically step by step, in the right direction, by charging small amounts of money, on a recurring basis, to customers for using the services we provide.
A prime example is Microsoft who sells the new Windows through subscription; asking people to pay US$10 dollars each month rather than a once-off US$450. For that US$10 month by month customers get access not only to the software, but also to all the improvements and updates they eventually include.
37Signals implements this monetization model, as does Mixergy (education resource for startups), Treehouse (online web design and programming teaching), PowToon (generator of online business presentations), Moz (software to implement SEO), among many other ventures, businesses and industries.
I purposely name above as many ventures as I can think of offhand to show how the subscription revenue model is entirely valid, and crucial, when creating a great startup without external investment and only with your own resources. So don’t fret if you don’t have external investment, developing, from the beginning, the necessary functionalities, next iterating and growing with your clients, all with the help of the monthly payments for our services is a great, and rewarding way to grow a young company.
Image: 401(k) 2013 via Flickr.