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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.

Start-up Advice

Establishing A Start-Up Business And The Challenges Of Internationalising

The business plan can then unfold to secure resources needed to meet international demand and, with enough foresight and planning, make the business a profitable entity in both local and international markets.

Martha Jameson

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To begin, a start-up is a business looking to establish a product or service for the first time. They’re perceived as young companies initiating a start within their local economies with the solid intent of providing something new for consumers. Once established in local markets, start-ups can then initialise global expansion creating a broader market for their product. The process of establishing a company does not come easily however; and to succeed an entrepreneur must be readily prepared for the challenges ahead.

The first and foremost part of establishing a company, is defining the company’s inner vision. The inner vision covers what the company desires to offer their consumers, the values they look to instill in their employees to provide the consumable or service, the objectives that necessitate the company’s promise, and directives or order necessary to progress the company path. The inner vision serves as the company’s foundation, a game plan or playbook used to project them into the world of entrepreneurship.

Once a company understands their vision, they can then look to the markets to analyse the need or value of what they have to offer.

Related: Attention Black Entrepreneurs: Start-Up Funding From Government Grants & Funds

Market analysis is the second set to establishment. One must look to the market first to see what the demand is. Where there’s demand, there’s consumers. This step is often overlooked in the initialisation process, and tends to be where most companies falter. There’s more enthusiasm involved in just jumping into the market, than there is taking the necessary step back to view the market pragmatically.

“Thus, companies may fail to offer something new or better than what already exists in the economy. Market analysis grants a business the foresight necessary to gain a stable foothold, and permits an entrepreneur the chance to tailor the company vision and goals to consumer demand,” says Amanda Jicks, an entrepreneur from WriteMyX.

Once entrepreneur understands what’s available and necessary, the company can then project their personal goals on the market. What do they bring to the market, how does their provision differ from what competitor might have to offer. This analytical groundwork allows the a company to establish the foundations they’re going to lay and process further projections for future growth.

After the goals are set into the company’s plan, an entrepreneur must then culminate the resources that will  get the company off the ground. This, of course, is establishing the production necessary for consumables or company attendance necessary for services, obtaining the funds to create and employ, calculating and providing for the costs of advertising and branding to get the company’s name out into the market as a profitable entity.

Local Markets lay down the baseline and a company should secure their local market before seeking expansion into the global or international market. Security within the local market grants companies a better means to attain the provisions necessary for growth.

“To further the foothold analogy, picture the entrepreneur as a base jumper. An experienced base jumper isn’t going to approach the cliff underprepared. They would know the site lept from, the best place to sink their line into the cliff’s face, the “foothold” that secures the line for the jump,” says Nolan Harris, a business writer at 1Day2Write and OriginWritings.

Related: 21 Steps To Start-Up Success

When a company is secure in their local market, they can then consider expansion and better face the challenges that accompany expanding into the international market. These challenges range from product or service alterations that may be necessitated due to import/export technicalities. Language barriers that may arise when promoting or branding beyond the local market.

Language barriers that may occur when communicating with the company’s customers. There’s also the cost of provision when considering international expansion. International expansion can be perceived as a daunting risk if the company isn’t ready to provide and may, in fact, not be the correct direction for all start-ups. But, if internationalisation is a goal the entrepreneur should initiate the launch with the same analytical approach used for the local markets; as the need and demand may differ from local market projections. The business plan can then unfold to secure resources needed to meet international demand and, with enough foresight and planning, make the business a profitable entity in both local and international markets.

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Start-up Advice

7 Top Lessons You Can Learn From The US Cannabis Market

The benefit of not being the first country to start the process of legalising weed, is that we can learn from the mistakes and pitfalls US entrepreneurs made when cannabis became legal in their states.

Nicole Crampton

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US entrepreneurs have already launched and successfully grown their recreational cannabis businesses. It wasn’t a flawless transition in some states from illegal to legal, they made mistakes and focused on underperforming strategies or on not hiring the right experts.

The bright side is, you can learn from their pitfalls, ensure your business has a competitive advantage and that you are prepared for the major shifts the US cannabis market experienced.

Since the South African Cannabis Industry will undoubtably have 24 months to wait until any legalisation progress is made, you can start preparing your cannabis related business and strategising how to incorporate the following lessons:

Lesson 1: Don’t be the first

Under normal circumstances you would want to be the first to break grown on a new industry, because the early bird doesn’t have competition yet, develops a relationship with customers and is the only supplier until another business gets up and running.

So then why shouldn’t you be first? The answer is “There is a difference between pioneers and settlers. Pioneers got arrows and settlers got land,” says Christian Hageseth, founder and CEO of Denver’s Green Man Cannabis, a retail and grow operation well-known for its connoisseur grade craft cannabis, and for ONE Cannabis, a cannabis business franchise.

“I’m much more interested in being a settler in the cannabis industry. You don’t know how regulators or banks are going to react as legalisation changes, so it’s beneficial to not be the first to market.”

Lesson 2: Make a proper transition from the black-market to the legal market

marijuana-legal-market

In the US Market those transitioning from black-market to the legal market found there were rules and regulations they weren’t even aware of, which made it difficult for them to stay compliant. If you’re undertaking the same transition, there are a few things you’ll need to keep top of mind:

  • There will be regulations and legislations that you aren’t aware of that you need to be compliant with.
  • You will now be operating in a tightly-regulated space with tax and banking restrictions, business owners can find themselves entirely unprepared for the pressures of keeping a legal operation in the red.
  • You’ll need to keep detailed financial and accounting records to ensure your business remains compliant and sustainable.

Related: 10 Cannabis Business Opportunities You Can Start From Home

Lesson 3: Hire the right experts

Navigating the still-forming cannabis industry can be challenging. In the US cannabis industry entrepreneurs thought they could navigate it themselves or were scammed by con artists pretending to be experts.

To ensure your business remains sustainable and compliant here is some advice on what to look for in your experts:

“It’s in your best interest to find an accountant who has been through an audit or two with a marijuana company. If you don’t file your taxes the right way from the start, your business can get very far behind,” says Hageseth.

“Your business will greatly depend on the legislation in your market, so work with a lawyer who is well versed in several cannabis markets and regulatory frameworks in order to best protect your business,” says Chloe Villano, founder of Denver-based Clover Leaf University.

Ensure you’re hiring a legitimate expert

A common misstep made by US entrepreneurs is hiring amateurs posing as experts. Scammers see the opportunity to benefit off your business by misrepresenting themselves as experts in the cannabis industry.

Keep on the lookout, they’ll tell you everything you want to hear, but don’t have anything to deliver or back it up. Do your due diligence to ensure your business is working with a competent advisor and isn’t being misled by a scam artist.

Lesson 4: You don’t need to grow or sell weed to make money

In the US, the price of marijuana skyrocketed just after it was legalised. According to Forbes the average wholesale cost of cannabis in Colorado dropped from $3 500 per 0.45kg’s at the start of legalisation in 2013, to roughly $1 012 per 0.45kg’s in 2018.

This is because sellers were adjusting their prices based on demand. As more competition enters the market, experts are predicting the price of cannabis to plummet. In Oregon, marijuana is already selling at $50 per 0.45kg’s, which is driving some cultivators out of business.

If you consider the above trend, growing and selling weed directly could be one of the least profitable approaches. In the US, there are very high barriers of entry to growing and selling cannabis that include applications, lawyers, security compliance, tax fees, audits, your inability to claim business expenses, and the constantly changing regulations.

For example: On 1 July 2018 in California, the packaging and testing standards for cannabis were changed. Every dispensary had to throw out all of their products that didn’t meet these new regulations. This cost entrepreneurs millions in inventory and a few weeks later the state changed the regulations back.

You can still make a profit from the marijuana industry, without actually selling or growing it yourself.

Related: The Ultimate 101 List Of Business Ideas To Start Your Own Business In South Africa

Lesson 5: What you need to know about pricing

weed-pricing

As mentioned above, with the rising demand for cannabis, in the US market, the price shot up. “The main thing we found wasn’t that you couldn’t get product, it’s that you couldn’t get product cheap,” said Dave Cuesta, now the chief compliance officer for Native Roots, the largest dispensary chain in Colorado.

In 2014, he was an investigator for the Marijuana Enforcement Division, he says: “You could walk into a store that sold both medical and recreational, and you were paying $30, $35 for an eighth on the medical side, and it was $60 or $70 on the recreational side. People were just adjusting their pricing to manage supply.”

Since this is likely to happen within the South African market as well, you can implement a strategy to have more supply than your future competitors. This will enable you to undercut the market when the demand for both medicinal and recreational marijuana increases.

Lesson 6: You’ll need to be adaptable

As mentioned previously, in the US regulations fluctuated until the government could determine the best way forward. Since this will also be a learning curve for parliament you’ll need to be able to pivot or agilely handle each change as it’s thrown at you.

Here are a few examples of changes the US entrepreneurs had to navigate:

For example: Content producers in California face fees and legal penalties if they mention any unlicensed cannabis brands.

Another example: Brands in Colorado, Washington and California that used the event High Times Cannabis Cups to move their product, suddenly lost a major source of income when vending was no longer allowed at the event.

A further example: In Washington DC, marijuana events that were legal last year are now being raided and people are being arrested.

If you don’t move with the industry you’re either going to be left behind or find yourself being fined or imprisoned for breaking the law.

Lesson 7: Raise more capital than you need when starting out

Considering how often regulations changed in the states in first few months, even the first few years, you’ll need to be able to afford to handle any changes that your business comes across.

 “Always raise more money than you think you need and don’t expect business to come easily. In fact, expect everything to go wrong, because the regulations will change often, and your plan will become obsolete,” explains Villano.

Changing regulations can cost you an entire crop or all of your painstakingly designed, unique and innovated, costly packaging. Ensure you remain agile and be flexible enough to handle any unexpected costs that come along.

By implementing these top lessons and seeking the expertise of financial and legal professionals, you can successfully navigate the cannabis industry. To run a sustainable business that will achieve long-term growth your venture will need to jump the cannabis industry’s unique hurdles, maintain compliance and avoid costly and often business-ending fines.

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Start-up Advice

Your Best Ideas Are The Ones No One Else Believes In

Airbnb, Rent the Runway and Foursquare all seemed odd – or even off-putting – at first glance.

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As you consider new ideas for your next project or business, give extra credence to the things you believe to be true that others doubt. The most exciting products are created by people with tons of conviction for something that strikes most others as odd. I’ve heard from Joe Gebbia, co-founder of Airbnb, that when he and his co-founder Brian Chesky pitched the idea of having strangers sleeping in your home when you weren’t there, many investors shifted uncomfortably in their seats.

One investor shared that he had never had such a visceral negative reaction to a business idea, ever. Jenn Hyman and Jenny Fleiss, co-founders of Rent the Runway, told me they encountered similar doubts when they pitched the idea of renting dresses rather than owning them.

For both teams, first reactions from people were often strongly negative. I cringe to think what focus groups would have done with these ideas. But, Chesky and Gebbia, and Hyman and Fleiss, were undeterred. To these founders, their ideas were obvious and they set out to find investors and employees who got the vision when most everyone else did not.

While he is an outspoken and notoriously controversial contrarian, Peter Thiel has had undeniable success starting and investing in highly disruptive businesses that were, without a doubt, venture worthy. PayPal, Palantir and Facebook to name a few.

In order to gauge whether something he is persuing is venture-worthy, there is one question he asks everyone he interviews or invests in: “What important truth do very few people agree with you on?”

Related: 5 Actionable Tips For Novice Entrepreneurs To Skyrocket Their Business

In his book Zero To One, Thiel goes on to explain why he asks the question and what he looks for: “This is a question that sounds easy because it’s straightforward. Actually, it’s very hard to answer. It’s intellectually difficult because the knowledge that everyone is taught in school is, by definition, agreed upon.

And it’s psychologically difficult because anyone trying to answer must say something she knows to be unpopular. Brilliant thinking is rare, but courage is in even shorter supply than genius.”

He goes on to share some examples: “Most commonly, I hear answers like the following: Our educational system is broken and urgently needs to be fixed; America is exceptional; there is no God. These are bad answers. The first and the second statements might be true, but many people already agree with them. The third statement simply takes one side in a familiar debate. A good answer takes the following form: ‘Most people believe in x, but the truth is the opposite of x.'”

Chesky and Gebbia believed that most people thought hotels were the only option for travelers, but the truth was that renting someone’s extra room was cheaper with an added dose of personalised hospitality – and likely a higher margin business as well. Hyman and Fleiss believed that most people thought they needed to buy the dress they wanted to wear, but the truth was that you didn’t need to own a dress that you only wear a few times. Both teams set out to challenge old customer preferences with modern technology and logic.

If you can discern a truth early on and start it before anyone else, then you can front-run the future.

As a manager, this may take the form of believing that people with less experience but lots of initiative tend to outperform experts. It may mean looking past the traditional resume. As an entrepreneur, this may be a conviction that some social stigma, like sleeping in someone else’s home (Airbnb), wearing someone else’s dress (Rent the Runway) or persistently sharing your location with all your friends (FourSquare), will lessen over time and eventually disappear.

Related: 4 Fundamentals To Successfully Jump-Start Your Start-up

Over the past five years, as I have chronicled the lessons learned by great founders and leaders traversing what I’ve come to call “the messy middle,” I have noticed a few recurring themes that I cover in my new book by the same name.

Chief among them is the need for us to learn to value conviction over consensus. While our natural human tendency is to seek validation from others and avoid disagreement when possible, the business of innovation is different.

You need to develop tactics to recognise and double down on the deep conviction you have in your gut that nobody else understands. Stop looking for consensus or opportunities that seem obvious and compelling at first glance. Great opportunities never have “great opportunity” in the subject line. Honing your gut instincts and acting upon conviction is a theme of every successful journey.

This article was originally posted here on Entrepreneur.com.

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