I woke up with an epiphany, rushed out of bed and drew down a graph on paper. What it illustrated (below) was this simple point: “Valuation doesn’t always reflect how much work you have done unless you pass into a new phase.”
Most people talk about launching, lean-startup methodology style from the viewpoint of Customer Development Methodology to get validation.
But, no one talks about the real reason for launching, which I believe is maximising the value of your time and ability to go faster.
The traditional view of launching is good but it’s not the whole story
Google search this; you will find literature dating back to around 2007 that talks about launching to get validation from customers faster, and that you need to launch with something called a ‘Minimum Viable Product’.
Something that provides the base level of utility that customers will get just enough value to pay you as they ‘get’ your new value as opposed to competitive offerings (including none at all).
This is all completely right, though I think nuance is that I prefer Minimum Desirable Product, being something that looks a bit more polished, a little less buggy and more clearly defined in its value proposition.
The upside being if users (or customers) like it they may refer you to their friends, leading to growth, or have high-enough engagement levels for you to get more valuable feedback to test your hypothesis.
I am not going to go into detail here about MVP and MDP, I largely agree entirely with the espoused value.
Rather, there is something missing here which should make it a lot clearer as to why you need to get your product out and fundraising (assuming you do?). That is the maximum valuation you are going to achieve irrespective of how much more work you do.
Perfectionism is the root causes for not launching, but you can get to perfection if you launch faster
The most insidious thing in some great founders is perfectionism, amongst many other factors. They understand CDM and all the related theories, but they still refuse to launch.
I have never met Paul Graham, but I presume he knows more than I do on this:
“Companies of all sizes have a hard time getting software done. It’s intrinsic to the medium; software is always 85 per cent done. It takes an effort of will to push through this and get something released to users…
Several distinct problems manifest themselves as delays in launching: working too slowly; not truly understanding the problem; fear of having to deal with users; fear of being judged; working on too many different things; excessive perfectionism. Fortunately, you can combat all of them by the simple expedient of forcing yourself to launch something fairly quickly.” – Paul Graham
In the early days when it is one man and his dev in a garage, you simply don’t have resources, ergo, your ability to reach perfection is entirely unrealistic. Do you know what helps you a lot to get to near to ‘perfection’? Resources!
If I said to you now, ‘If you launch and I will give you your angel round to hire five more people, would you do it?
In most cases, yes (I did hear a funny story about Eric Reis offering a founder to launch and he would be an advisor to them and he still didn’t). What you don’t know is that it is truly a distinct possibility!
Understand the value (opportunity cost) of your time
What is key to understand is the value of your time and that you can only ever do and achieve so much. If you are a talented founder, you should be able to do more with more people in the team, right?
So if you and your co-founder spend two years developing a product, do you think that is a good use of your time? How much could you have earned as an FTE at a company and how many devs could you have paid out of your salary instead?
There really does come a point when taking the money and diluting means you can go faster and maximise the value of your time. Spending two years to build a product is ridiculous. Real learning I have heard is, “We should have raised earlier”.
When you understand how valuations really work, this will start to make even more sense.
How valuations work in the real world for early-stage companies
You have no P&L and Balance Sheet, you may not even have KPIs because you have no customers. If you have numbers, they don’t mean much and every KPI comes with an explanation.
The reality is this, valuations for early-stage startups are based on heuristics and what you negotiate, not some magic formulas.
I know this will stress out non-salesy people, but it is simply true.
There is so much uncertainty in your business and also, so little data available in Asia, that even if there were amazing benchmarks, it still wouldn’t matter. You are going to negotiate with your investors for valuation.
Now, this is going to come as a bigger shock, but the valuation expectations of the investors are based on heuristics supported with no data. These ‘rules of thumb’ change a bit depending on the market and the environment (definitely if you get a term sheet) but they sort of exist. You get lumped into very simple boxes and that’s your valuation, particularly with no customers.
Also Read: I am a full time Mom working remotely in a startup, here is how I survive
You have a great idea and a team with some mock-ups, maybe US$1 million posts. You haven’t gone live yet, but have a great product, well you get US$1 million, maybe US$2 million post. You get a couple of customers, but nothing meaningful, well that number doesn’t really change. Sorry.
It’s only when you ‘change your stars’ and put yourself in a new box that your approximate valuation range changes. Only, this costs money. As a founder said to me last week, “But I need money to get more customers!” Great team, great product, not traction, tough.
To put this in perspective, I have seen companies invest a US$1 million of their own money to create a superb product and not many customers, and then have unrealistic expectations on valuation simply because the valuation doesn’t match what the stage investors think they should be at. There is a mismatch of “the box” they want and the one they are in.
Stages of development
Let’s continue to focus on pre-revenue companies looking to do first raise. I have set out a simplified graph illustrating:
The stages of development for your product are:
1. The percentage of ‘perfect product” completion
2. Anticipated Net Promoter Score (NPS) you could expect from early-stage users/customers. Google the term, for now, I will blog on this later.
Launch Faster
Bad MVP
I truly believe launching too slowly has killed a hundred times more startups than launching too fast, as founders lose faith and give up. However, it is also possible to launch too fast with something with no value, or perceived value.
If you go guns blazing reaching out to PR and all your contacts, you can ruin your reputation.
You launch something, anything, you get the early adopters to try it out, and drop out rates are immediate and they don’t come back with a moments thought.
You will have to do something special and reach a later stage in the adoption curve before they will give you another try. In short, your NPS sucks and it shows.
Forget about raising money here. Not only do appearances matter, but also the underlying reasons you failed will be apparent to investors.
MVP
If you follow theory to the T and launch with something your targetted user base will get some value from, you are on the right track for sure.
If you get your hands dirty and elicit real feedback from customers and keep iterating, your chances of surviving to go up a lot. Furthermore, team morale and motivation will be high and they celebrate the small wins.
Take care to do some easy wins that will add disproportionate value. A nice landing page and decent UI/X is simply required now. With all the tools and frameworks available, there is also no excuse.
On the downside, it’s not all perfect. It is fairly unlikely, given your NPS is low, that you won’t get referrals to spur your growth and save on marketing money you don’t have.
However, you will be able to get a few customers and that is super useful.
If you can show that customers have high engagement rates (time spent, DAU, etc.), you can use this to approach investors. This to me is the best time to ‘open dialogue’ with investors you want.
Go ask for ‘advice’ and see what their temperature is. Keep focussing on improving the product and getting more customers, but definitely engage investors. Your valuation, if the team is good and you understand the problem and market, will be decent.
MDP
This is your ultimate sweet spot. By this I mean you are in the ‘referral zone’ in terms of NPS, customers may actually like your product, use it and tell some friends about it.
The key thing though is, unless you are lucky to magically gain real traction (not likely) this is the best possible time to raise money.
Assuming investors are already tracking you, you come back with a fairly nice product, some customers as well as learnings as to why they use your product and may be willing to pay for it.
Also Read: How I manage my time and a team of 130 employees
Any development beyond here is really a waste of time as it won’t lead to what matters beyond here, traction (which costs cash). An extra module here, automation there is simply not quantifiable, as if you can’t measure it, you can’t value it.
Overdone or overdeveloped
How is this different from the MDP stage?
Well, your early-stage customers like you a little more, you can address more customers as features meet their needs, but more likely than not… you spent another six months to do this and got few more measurable achievements (aka traction).
These six months has taken its toll on your morale, no one is getting paid yet and you are worried about losing staff, there are more arguments. But more so, your valuation simply doesn’t reflect the time spent.
In fact, if you approached investors at MVP stage and return eight months later with no numbers to show, they may lose faith in you and tell you to go away and ‘get more traction’. I know how much founders love that response!
All the time spent is a waste of valuation and you curse the investors that don’t have the vision to invest in you and just don’t get it!
When to launch and raise
So in summary, launch when you are slightly past MVP and launch small.
Make the users you get so happy, they become customers and ideally make referrals. Do this in an unscalable way, focus on them being super happy. Reach out to a few select investors and get their feedback, they may even fund you.
When you are MDP, your value proposition is, at this point, sort of clear and users get enough value to keep using you, get on and fundraise, get the deal done. Any more product development will not lead to meaningful valuation increases.
Conclusion
You need to understand that a startup is both an art and a science. You need to work smart and hard.
You can do too much work as well as too little if you want to raise money, and make the best possible use of your time.
It just is really silly to find yourself in a position where you say, “We should have raised money earlier”.
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The post The real reason why you should launch your startup faster (which is not talked about) appeared first on e27.
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