How Not To Start A Business

This is our story about how Lean Startup would have saved me a lot of money.

Building the Product

Over the next 18 months, I spent over $200,000 of my own money, designing and building a desktop application. At one point I had a team of 6 working for me with a monthly run-rate of over $16,000. Though I say it myself, the finished product was actually amazingly good. We then just had to sell it. We tried everything we could think of – including partnerships, free and freemium models, and direct sales, but nothing worked.

My first major partnership was with Bloomberg. Back then, XML was the new great thing, and Bloomberg was developing a new XML feed for their platform. I invited the two Bloomberg product managers from NY and London to lunch (a barbecue in my back yard in Boston). I would help Bloomberg’s business analysts design the XML feed, and then I would include support for it in my product. In return, they would promote my product to their research contributors. I ended up giving them a month or so of free consulting to get the feed working, and probably three or four weeks of development time (i.e $12-16,000) on creating and testing the feed. We got a few trials out of this, but we only managed to convert a few paying customers, paying just a couple of hundred dollars a month.

My second partnership was with Factset. They did not have a submission platform of their own so I worked with them to develop a feed to their system from my application. In return, they agreed to promote the application to their researchers. We got many more firms using our platform, but the relationship with Factset precluded our ability to charge. As soon as we moved to a paid model, Factset pulled their support.

As the commercial model collapsed around us, in order to save costs I moved our servers from a commercial datacenter into my basement, but even then it was too much. I finally closed the company in June 2008, after burning through almost half a million dollars with development expenses and living costs.

What went wrong?

In hindsight, I did every wrong. This isn’t an exhaustive list of what went wrong, but it is probably enough to give you a flavour of how not to start a business of your own.

• I spent too much money to build the perfect solution, and I did that way before I knew I could sell it to anyone.
• Because I had a large investment portfolio from my time as a stock market analyst, I was able to keep spending long past the point where it made sense to do so.
• The partnerships I formed were not partnerships. Large companies only help themselves. There was no financial basis for any of them, and no path to profit for me. I was taken advantage of as a result. I was excited to be associated with them, but the lower-level staff I was dealing with did not have the power to really help.
• The customer research I did was only around functionality. At no point did I really ask what, if anything, customers would actually pay. I made a series of self-delusional assumptions that cost me dearly.
• The alternatives to my product (publishing to all the platforms separately) took a little bit of additional time, but they were free. I just wasn’t adding enough value to overcome that – not because my software wasn’t good, but because the problem wasn’t worth solving.

Is there a better way to start a business?

I believe that there is, and it is called ‘Lean Startup’. Since those first attempts at starting a business, I’ve had much more success when I start by thinking of the customer first.

Lean Startup is a different approach to starting a business. Using a mini business plan known as a Lean Canvas, the company is built incrementally, one customer at a time. Small experiments – radical innovations – are continuously performed until both a problem worth solving, and a customer segment that is willing to pay, are identified. Only then do you build out the product, and only when you have established a predictable growth, do you scale it.

Lean Startup comes from Steve Blank, a graduate of the University of Hard Knocks and Bitter Experience. The popularization of his thinking was achieved by Eric Ries in the 2011 book ‘Lean Startup’. It has since been developed out as a formal methodology – most significantly by Ash Maurya of LeanStack. As a startup methodology, it is characterized by continuous innovation, a focus on the customer acquisition funnel, and a preference for customers and problems over products and solutions.

Looking at my failed business from 2003 through a Lean Startup lens I can now see quite clearly where I went wrong.

1. As a Product Manager, I had a huge case of Innovator’s Bias. I had fallen in love with my solution. This is expected of you as a Product Manager in a large, infinitely-resourced multi-national, but it is fatal in a startup. I knew exactly what I wanted to build, so I built it, regardless of whether anyone would pay for it.
2. In the face of low conversion rates, I fell for the myth that if I just added this one more feature, then customers would have to come. I was looking for the magic key or hook. Needless to say, my ‘partners’ were happy to play into this, requesting additional features that didn’t cost them a penny. Under Lean Startup, if your customers aren’t willing to pay, you either find another problem to solve, or you find another set of customers who are willing to pay. There should be no free rides.
3. I built my product at scale before I even got my first customer, with backup redundancy, in an expensive datacenter. With a Lean Startup process, you start small, with a small set of early adopters. Only later do you consider scaling, and only then as revenue justifies doing so. The product that satisfies your first few customers may need to be completely rethought to reach the wider market, so scaling too early can be disastrous.

Does Lean Startup work?

YES!

That is to say that Lean Startup works…but only if you actually follow the process. Like Lean Manufacturing, and also like Agile software development, it is both simple and yet surprisingly hard to put into practice. Lean Startup is founded on a simple concept – test assumptions with a ‘Minimal Viable Product’ (MVP) until you find a product that people are willing to pay for. In addition, there are a couple of simple principles and tools that anyone can learn. Lean canvases, A/B experimentation, pivoting, conversion metrics and others. However, its real difficulty lies in the discipline that is needed in order to execute it properly. We rarely have the patience.

As humans and entrepreneurs, we love building stuff. When we’re not building stuff, we’ve been taught to find great comfort in planning and researching. Formal business plans are still very much encouraged in the startup world, despite there being an almost universal understanding that as a catalogue of dreams, wishes, assumptions, and fantasies, they are rarely worth the paper they are written on, let alone the hours that have gone into them.

Not building stuff before you REALLY have evidence that there are customers for it, and not believing the fantasies you spin in your business plan turns out to be pretty hard stuff. Entrepreneurs are optimistic first and foremost. If you build it, they will come…except mostly, they won’t.

So what about business advisors and Accelerators? Most business advisors are trained to help you with traditional ‘business planning’ activities which are fundamentally flawed as they are not based on customer realities. Traditional Accelerators no longer really work as well as they did – the traditional funnel is broken. Ash Maurya’s In Search of Unicorns explains in more detail why this is the case. Getting funding too early is also fatal as it helps you avoid actually getting customers.

Creating a massively scalable business is really, really hard. it is much harder than many people realize. ‘Overnight successes’ have often taken five or ten years of hard work and frustration. Studying past successes like Facebook, Amazon, WeChat, Airbnb, or Tesla, is at best misleading, and at worse deceptive. You can’t grow a business today like you could in the past – this is a different world from even six months ago.