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Start-up Advice

Getting to Product-Market Fit

Lean entrepreneurship in five easy steps.

Paul Smith

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1. Sketch out your business model

The first step to getting to product-market fit is to sketch out your business model. Blank’s students use a business model canvas taken from the book Business Model Generation by Alexander Osterwalder. For each part of the canvas students need to answer a few fundamental questions.

  • Value proposition (or product offering).Every business has a value proposition or product offering to attract customers. Google’s value proposition is a fast and relevant free search, with targeted ads and monetising content; Skype’s is free Internet and video calling and cheap calls to phones (Skypeout). What value proposition or product offering are you going  to sell?
  • Customer Segment (or target market).Every business needs a customer or multiple customer segments to sell to. Skype is used by web users who want to call phones; Nintendo Wii is targeted at casual video game users. What customer segment do you plan to sell to?
  • Customer Relationships.A customer relationship refers to how your business will acquire and retain customers. This includes marketing and sales activities, as well as any activities that are used to retain customers, such as customer service. Coca-Cola uses traditional media advertising and excellent distribution to attract new customers and retains old customers by maintaining top of mind awareness. Facebook uses referral emails to attract new users and online advertising to attract new advertisers. How do you plan on attracting new customers? What will each new customer cost? How will your business retain new customers? How much will it cost?
  • Distribution Channels.A distribution channel refers to how you will get the product or service to the customer. This may be through a sales force, web sales, and retail stores or through distributors. Kalahari.net uses an online store and a courier company to get the product to the customer. Gillette uses retail stores to sell their razors and blades. How do you plan on distributing your product or service to the customer?
  • Revenue Stream.The revenue stream of a business model refers to how the business charges for its products and services and what price the business charges for its product or service. Common revenue streams include: sales of physical goods, rental, subscription fees, licensing agreements, and advertising and brokerage fees. For example, Pick n Pay or Spar make their money from sales of goods, while gyms and golf clubs charge a monthly or yearly fee. How do you plan on charging for your product or service? And how will you price your product or service?
  • Key Resources.Key resources are the employees, financial capital and physical resources that a business needs to function. There are four common types of key resources: human, financial, intellectual and physical resources. For example, Makro and Game require employees, all the equipment found in a retail store, as well as all the resources to manage the supply chain. Facebook requires programmers, servers and buildings to run the website. What key resources will your business need to get started?
  • Key Activities.Key activities are the essential activities a company needs to create and deliver the product or service to the customer. A newspaper’s key activities would include writing, producing and distributing the newspaper, while Skype’s key activity would be software development. What key activities must your business perform to create and deliver the product or service?
  • Key Partners. Key partners are the principal relationships with other organisations that make the business model work. These relationships may include joint venture partners, supplier relationships or strategic alliances. For example, Apple’s key partners for the iPhone include manufacturing companies and App developers. What key partners does your business need to create and deliver the product or service?
  • Cost Structure.The cost structure refers to all costs that are incurred when operating the business. When doing projects, costs are usually divided up into fixed and variable costs. What are your business’s fixed and variable costs?

2. Test your business model

Once you have laid out your business model you need to prove the idea will work in the real world. The idea is to have a plan that is based on facts and not guesswork, and to test the business model as quickly and with as little money as possible.

This is best done with the use of learning experiments. And the secret to running a great learning experiment is to ’think small’. Small experiments that are cheaper and quicker to run are generally better. There are four types of learning experiments that can be used to test if your business model will work:

  • Interviews: Talking to potential customers, industry experts, thought leaders, suppliers, adjacent competitors and potential partners. This will give you quick insight into the realities of your industry or market.
  • Personal selling: Pitching your product or service to potential customers using PowerPoint presentations or a prototype will give you a fair indication of how many potential customers will actually become real customers when the business launches. This process will also give you valuable feedback on how your product or service needs to change to meet customer needs.
  • Marketing campaigns: You can test whether the customer will buy your product by running Facebook Ads and Google Adword campaigns to see if people will click on the advert or not. If customers click on the advert in large enough numbers it means there may be a market for your product. If not, time to change your business model.
  • Minimum Viable Product: A minimum viable product is a small, cheap product that can be built quickly to find out if customers are interested in buying and using your product. In the case of web start-ups, this may be a page that gives some information about the product and asks customers to pre-register for service. In the case of physical products, this may be a building, a prototype or a small feature version of the product. Doing this will give instant insight into whether people want your product or not.

Learning experiments have the advantage of being low cost, and low risk, allowing you to get a good idea of the potential demand for your product before investing large amounts of money and time. Learning experiments also unearth unforeseen obstacles and challenges that can never be planned for.

3. Improve your business model using real world feedback

Every business model has a number of assumptions or best guesses: unforeseen obstacles, non-compliant customers, hidden costs. As new knowledge comes in from your tests, you need to change and adapt your business model to find what works in the real world.

A number of studies by leading researchers have shown that successful entrepreneurs seldom succeed with their first idea. In one study, Harvard Professor Amar Bhide looked at 100 of the most successful start-ups in the USA and found that 67% of them had radically changed their original business idea before succeeding. It is, however, not easy to fundamentally alter the strategy of your company.

It is often painful and no one likes to be wrong. But the research shows that the ability to change your business model when real world feedback says you are wrong is the mark of a great entrepreneur.

A famous example is Evan Williams, the founder of Twitter and blogger. Both companies were ideas that changed radically. When Williams started Pyralabs, a project management software company, he found that customers were particularly attracted to the note-taking feature.

Using real world feedback, Williams abandoned the project management software idea and launched blogger, which was later sold to Google. Similarly, Twitter was founded as a spinoff of Odeo, a failing podcasting software business.

When developing your business idea it’s important to take note of the real world feedback, and use the feedback to adapt your business model to what the marketplace wants. Adapt and change price points, product features, delivery channels, and marketing propositions until your business idea evolves into something that can become the next big thing.

4. Only start building your business once you have reached product-market fit

Traditional theories of entrepreneurship go as follows. Entrepreneur finds an opportunity, writes a business plan, raises funds, gathers a team and then gets on with the task of building the business, using the plan as a guideline.

This model is fine in the predictable world of known business models, known markets and known products, but in the uncertain world of new ideas, new businesses models, new products and new markets this method usually spells disaster.

Researchers call this type of disaster ‘premature scaling’. A business is considered to be scaling prematurely when it starts spending money on growing the business (ie. advertising, hiring employees, expansion infrastructure) before it has proved all of the assumptions of the business plan.

For example, WebVan, one of the famous dot.com era’s most spectacular flameouts started to expand its operations even though a number of the assumptions in its business plan were wrong. Customers cost more to acquire than originally planned, the customer retention rate was lower than planned and delivery costs were higher.

Even so, the company signed a R7 billion deal to expand by adding 24 distribution centres.

The result: bankruptcy in two years and R5,6 billion wasted. The reason: WebVan started to expand before testing all of the assumptions in its business plan. They scaled prematurely. When you are setting out on your start-up journey, ensure that you don’t start spending money on marketing, hiring and growth until you are sure that all of the assumptions in your business model have been tested and proved, and you have reached product-market fit.

5. Company building

With a proven business model, it is now time for the business to scale. On a graph, this usually appears in the form of a 45 degree growth line. It is time to let the world know about your product. This means launching a PR blitz, ramping up your marketing and sales activities and ensuring that you increase your business capacity to meet the flood of new customers.

By this stage, your business should have found a consistent and predictable way to acquire and retain new customers, while making a profit. However, many businesses fail in the growth stage by not managing the growth process properly.

Three areas must be managed in conjunction with each other: the rate at which new customers are acquired, the capacity to deliver the service and product to the customer and the business’s finances.

Too much investment in capacity and no customers leads to cash flow issues as seen in the WebVan case; too many customers and no capacity leads to angry customers. This is part of the reason Friendster (one of the first movers in the social networking space) didn’t become Facebook.

It acquired too many new customers, more than the site’s infrastructure could handle. The site crashed a number of times, and customers became irritated. The key to successful growth is balancing the rate of customer acquisition with building the business capacity to deliver the company’s products and services.

Paul Smith is a writer and startup scientist. He currently manages an accelerator, Ignitor, which helps entrepreneurs start and grow their businesses. Ignitor has developed a new model that significantly improves early stage start-ups odds of success. His primary research interests include understanding the behaviours of expert entrepreneurs, as well as, how to most effectively support high potential start-ups. Follow him on Twitter and visit his website.

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Start-up Advice

Which eCommerce Platform Should You Build Your Store On?

This is an important decision to make and with so many options out there it can become a bit overwhelming and confusing to decide which platform is the best option for you. So which platforms are best suited for a South African eCommerce entrepreneur?

Warrick Kernes

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Having owned and run websites using XCart, Magento, Shopify and WordPress, I’ve made enough mistakes and learnt enough lessons along the way to be able to help guide you to make the right decision about which platform is right for you…

When looking for options you’ll come across platforms like Prestashop, WordPress, WIX, Shopify, Squarespace, OpenCart, Magento, Shopstar, OneCart, ShopOn, LiquidBox, BigCommerce and endless more. All of which are trying to convince you that their platform is the best for you to use.

Reading international blogger reviews is helpful but they don’t account for how these website platforms perform in South Africa. They don’t review what the support is like in SA and which local software services are compatible. You see, these points are often neglected until you need them further down the line and only then find out how important it is that the platform you’re running your store on is made to work in SA.

Having worked with all the major website platforms I understand the importance of website support and how the site integrates with the local services which will make your life easier and your website better. Services like this include integrations into Rand (ZAR)  based payment gateways, integrations into local courier services, API connections into marketplaces like Takealot and Bid Or Buy, and API connections into price comparison sites too.

Related: 6 Steps To Building A Million-Dollar Ecommerce Site In 60 Days

The final factor to consider is the reputability of the website platform itself. There are many new and upcoming website platforms which I would love to support but when it comes to choosing a platform on which I’ll be building my business I need to know that I am going to be selecting a world-leading service provider.

So with this in mind I can help to narrow down your options to two platforms being WordPress with WooCommerce and Shopify. Which of these two is right for you will depend on how much you value your time.

Shopify will cost you $29 per month but the ease-of-use is such that even a novice can get a site live within a week. Operating WooCommerce on WordPress is complex for beginners and it will take you much longer to figure it all out before you can take your site live but the plus side is that it is free to use.

So ultimately you need to consider which of these two is right for you and your business but the most important thing is that you don’t spend any more time researching, take action and get started sooner rather than later so you can start to grow your online empire.

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Start-up Advice

6 Ways Starting A Business Is Like Raising A Child

Here are six ways that embarking on your own entrepreneurship journey is like raising a child.

Belinda Mountain

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While you may think work and parenting are worlds apart, when it comes to starting a business versus having a baby, the two have more in common than you think.

After all, both involve bringing something new into the world, preparing for the unexpected, and riding the storm when things don’t go as planned. Here are six ways that embarking on your own entrepreneurship journey is like raising a child:

1. It involves new expenses

From nappies and school fees to food and clothing, there are a whole lot of new expenses involved when it comes to kids. In the same way, starting a business also involves various costs – whether it’s paying accounting fees, setting up your website, buying stock or employing people. In both instances, having a good financial plan in place can go a long way to help you manage these expenses.

Related: How To Start A Business With No Money

2. It’s an emotional rollercoaster

Parenting invariably means you’ll experience every emotion under the sun, from unmatched joy when they’re born, to frustration at toddler tantrums, to wonder at seeing their little personalities develop. The same goes for a new business: Expect a range of emotions, from the highs of getting your first customer, to the satisfaction of making a profit, to anxiety if the market doesn’t respond to your product as you envisioned.

3. Expect the unexpected

Few things are as unpredictable as babies: One minute they’re gurgling contentedly, the next minute they’re crying for reasons you may or may not know. Just like babies, businesses can be highly unpredictable too. Product prototypes can fail and cause delays, employees get sick, an unforeseen tax bill could arrive on your desk – you’ll need to get comfortable with expecting the unexpected. And, if you run your business full time, you’ll need to bid farewell to your predictable monthly paycheque too (at least in the beginning).

4. It requires stamina

Late night feeds, helping your child with homework, washing, cooking, cleaning, answering all their burning questions – there’s no parenting “off” switch. In the same way, being an entrepreneur means it’s hard to stop thinking about your business at the end of the day as you would with a regular 9 to 5. This constant call for attention means it’s crucial to schedule in some downtime for yourself so that you get time to decompress and refresh.

Related: What Business Should You Start In Africa?

 5. You’ll need safeguards in place

While their immune systems are immature, young children get sick, which typically involves trips to the doctor, medication and possibly even the odd hospital stay. Having a good medical aid means you’ll be financially prepared for these intermittent expenses. And, just as you should ensure your child has the right medical cover, your business and your employees should also be covered properly. Fedhealth is one example of a medical aid that specialises in providing medical cover for SMMEs.

6. Love will get you through

As hard as parenting can be, the enduring love most parents have for their children means they keep caring for them day after day, no matter how exhausting it is. Similarly, if you love the industry your business is in and the work you do, you’ll have the fortitude to keep at it over the long term.

Both parenting and starting a business are hard work, but they’re hugely rewarding too. With both of them, it’s true that what you put in, you get out. Seeing your child grow into a well-adjusted, caring adult can be as satisfying as watching your business mature into a something that’s profitable and self-sustaining. Upon reaching these milestones, most people will agree that the journey to get there is definitely worthwhile.

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Start-up Advice

Start-ups Need More Than Money To Succeed – They Need Smart Money

Start-ups need investors who bring not only cash to the table, but also their networks and business acumen.

Max Lyadvinsky

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Ask any start-up what the single most important element to success is and – more often than not – the answer will be money. Financing always ranks as a high priority for the small fish trying to make it happen in the big pond of business – but often discussed with less fanfare is where this cash comes from and what will come with it. These are actually the most important details to a start-up.

That is not to say that money is not important. In fact, the second most common reason for start-up failure is lack of funding, according to CB Insights. Although, perhaps ironically enough, the top reason for start-up failure is lack of market need – a problem which could have been identified and avoided by investors who bring money with direction and money with experience.

Start-ups don’t just need money, they need smart money.

Start-ups need investors who bring not only cash to the table, but also their networks and business acumen. Essentially, they bring experience and direction to outfits that are usually inexperienced or directionless. So, let’s talk smart money and the start-up.

What is smart money?

“Smart money” refers to investors who are simply more intuitive and aware of market movements and business health. The Financial Times describes “smart money” as “sophisticated investors who tend to pick the right moment to buy or sell assets because they can identify trends and opportunities before others do.” These investors calculate based on history and profit and invest accordingly. Where they go, other investors follow.

These business heavyweights are invaluable to a startup because they put more than simply their money where their mouth is; they also invest their expertise. A start-up could have all the money in the world but it will fail more without the proper business direction and market placement.

Smart money works best for start-ups when nascent businesses pair with investors who provide a holistic approach to business. They can help in hiring the best talent, attracting interest from the most relevant stakeholders, securing a continuous presence in the press, avoiding pitfalls and, ultimately, fulfilling ambitions.

There are more than a few ways that money can be termed as smart. Perhaps the cash infusion also comes with experts in thought leadership and strategy, or executional capacity, or the ability to increase sales and raise funds. Whatever the method, smart money brings something more to the table than dollars. This becomes abundantly clear when conducting post-mortems of the startups which have failed.

Related: Government Funding And Grants For Small Businesses

Why do start-ups fail?

Start-ups fail all the time – and it is important to understand why. As mentioned above, the top reason start-ups fail is simply the lack of market need. Tackling problems that are interesting to solve rather than those that serve a market need is the most common issue start-ups cite for their downfall. The next most common reason for start-up failure, as likely predicted, is money. Smart or not, money does need to flow into any start-up to make it possible. Meanwhile, the third most common reason for startup collapse was team composition. More to the point: Start-ups need to comprise a diverse team with different skill sets.

These top three reasons for start-up failure could be solved with the right management approach from the top down. Each of these reasons can be addressed with smart money. The right business and management structure will allow the right hires to be made and course to be charted. Smart investors can identify the right people for your team and help you to hire staff who will take the business to the next level.

While start-ups think money is the key, it is not the end-all and be-all for their potential success. They need skills and networks. Business and innovation expert Rosemarie Truman explained this misunderstanding best: “A common mistake entrepreneurs make in their struggle to find funding is focusing too much on getting the money under specific terms and not paying enough attention to who is providing the funds.”

Show me the (smart) money

Savvy entrepreneurs recognise their businesses need more than cash to be successful – especially those at the top. Alibaba chief executive officer Jack Ma, who ranks as one of the richest people in the world, described the need for smart hires and smart staff as thus: “At first, I knew nothing about technology. I knew nothing about management. But, the thing is, you don’t have to know a lot of things. You have to find the people who are smarter than you are.”

Smart business owners want to work with investors who provide not just money but also their expertise, time and access to networks – and this is especially important for businesses looking to scale. The proof is in the research: Take for example a paper by Morten Sorensen, professor of finance at Copenhagen Business School, about venture capital and its impact on an overall business. Sorensen found that companies funded by more experienced venture capital funds were more likely to go public, and also that more experienced venture capital funds invest in better companies, leading to better long-term business health.

So, the question then becomes: Where does one access smart money? The answer will depend on whom is asked, but startups that have survived and later grown into viable businesses are a good place to start. The founders of collaborative blogging platform Niume, Daniel Gennaoui and Francesco Facca, have this advice for start-ups who are on the hunt for smart money:

“First, you need a strong founding team with complementary skills that can actually deliver on their promises. Second, you need a working minimum viable product (MVP), showing that there is traction and interest for the product and people willing to use and pay for it,” the founders said. “The actual amount they invest is far less important than the value they bring to your company.”

It is also worth noting that crowdfunding can be considered a form of smart money, as it brings an ecosystem of partners who will help to scale and countless brand ambassadors who have invested their hard-earned cash.

Related: The DTI Funding Guide You’ve Been Looking For: The What And How

It’s simply more than capital

Gaining start-up finance is not only venture capital or crowdfunding – it should also provide an ecosystem of business management and be viewed as such. It’s simply wrong to think funding is only funding. Start-ups can have all the money in the world but will fail more often than not without the proper business direction and market placement. Those who want to make a lasting impression in their given field need the guidance and support smart money brings.

This article was originally posted here on Entrepreneur.com.

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