Hitting the Ice: Beginning to Develop Your Idea
When you have an idea for a new product or service, even if you believe it’s a really good one, you can worry that you might be pulling a Kramer, Jerry Seinfeld’s lovable but wacky neighbor, who was always cooking up product and business ideas for his company, Kramerica Industries. Who can forget the mansiere (a bra for men), the coffee-table book about coffee tables, the roll-out tie dispenser, and the periscope for cars that would allow drivers to see better in urban traffic? Unfortunately, he had little success with any of his ideas, but that’s not because they were all just wacky. One of them was to introduce rickshaws to the streets of Manhattan, which became a booming business not in New York but in dozens of other cities across the United States. Kramer’s problem was that he never buckled down and wrestled with the realities of actually building a company. That is the only way to find out whether your idea will work, no matter how good the idea seems to be.
I believe that one of the most pernicious misconceptions about entrepreneurship is that the best way to go about it is to come up with a truly great idea and then right away build a slam-dunk business model and write a detailed business plan for executing it. This seems to make great sense, but there are many problems with this notion. Probably the biggest is that while some successful entrepreneurs do hit on their ideas in a eureka moment, most often ideas emerge over time, and most of them need a good deal of tinkering with.
Many hugely successful entrepreneurs started with ideas that were deeply flawed in their original iteration. If you are convinced that your idea has to strike everyone you discuss it with as brilliant and has to readily generate a good model that answers all the tough questions about market size, cost, pricing, profit potential, and competition, you are likely to give up on an idea that may well eventually be made to work.
Good Ideas Don’t Grow on Trees
Hockey Stick Principle #1: You don’t need a good idea.
I loved an article in Business Insider titled “This Man Turned Three Bad Ideas into Fortune 500 Companies,” in which the CEO of Gallup, Jim Clifton, is quoted saying that his favorite entrepreneur is billionaire and former Miami Dolphins owner Wayne Huizenga. He points out that Huizenga’s three highly profitable start-ups: Waste Management (the trash business), Blockbuster Video (video rental business), and Auto Nation, Inc. (a chain of used car dealerships) were arguably bad ideas. Clifton did much of the research for Huizenga on Blockbuster, and after his research, he didn’t think it was a good idea.10
So why did Huizenga succeed in each case? (Blockbuster was a huge success until Netflix came along and ate its lunch, a danger we’ll discuss later in the book.) Clifton credits his success to “extreme optimism, his unstoppable determination, and his incredible energy.” The most basic reason, though, is that Huizenga figured out how to tweak, build upon, and develop his initial kernels of an idea into good ones over time.
Clifton also researched Ted Turner’s Cable News Network’s twenty-four-hours news idea and concluded it wasn’t a good idea, either. He wrote, “No one wanted more news, and the news Ted was going to show was just a reel of reports played over and over again.” He concluded, “Twenty-four-hour news is a mediocre idea.” Of course, Turner went on to turn it into a fortune.
Tesla’s electric car is a more recent example of an idea that plenty of analysts predicted would be bad but has turned out to be a big success. In 2003, entrepreneur Elon Musk invested $6.35 million in the business despite the fact that the big automakers were backing away from electric cars then because they were proving to be unprofitable. For years, Tesla looked like a bad idea. In 2009, it lost $55.9 million with only $111.9 million revenue, proving the big automakers were correct. So what does Elon Musk do? He invests $75 million more to keep it afloat. By 2014, Tesla had revenues just north of $3.2 billion.
Start-up success is predicated not so much on the idea as on the development of the idea, as well as the tenacity and will to succeed. This is why the common approach of starting by writing a detailed business plan, unless it’s written for the benefit of investors to better understand your basic plans, is so flawed. Even the best-researched plan is only hypothetical; it’s really just the addition of more ideas to your main idea. I’ve seen so many founders think of the plans they’ve written to get started as arguments for their concept, almost as if they are a proof of concept. In no way is that true.
Hockey Stick Principle #2: Starting with a business plan is an exercise in self-deception.
A real danger in writing a detailed business plan from the get-go is that having made such a good case for your idea, you may narrow your thinking too early in the process when instead you should be in an exploratory mind-set.
At First, Just Tinker
For years, most experts have encouraged aspiring entrepreneurs to “research, research, research” and “plan, plan, plan” before starting. When I did a book search for “before you start,” 2,185 book titles came up. The Small Business Administration says: “The importance of a comprehensive, thoughtful business plan cannot be overemphasized.”11 But while a good business plan can be important further down the road and is essential in seeking outside funding, spending lots of time researching and writing one up front is not the way to go—and you may not even need one at all.
A fascinating study conducted by William D. Bygrave, a former director of the Center for Entrepreneurial Studies at Babson College, one of the most highly regarded entrepreneurship programs, found that there was little difference in the success of the ventures of founders who graduated from the program who wrote formal business plans versus those who didn’t. “We can’t find any difference,” he reported.12 Another well-respected scholar of entrepreneurship, Stanford professor Steve Blank, who is also a serial entrepreneur, has applied experiential wisdom to his study of the process. He writes, “There’s only one reason for a business plan: some investor who went to business school doesn’t know any better and wants to see one.… Entrepreneurs often mistake their business plan as a cookbook for execution, failing to recognize that it is only a collection of unproven assumptions.”13 And regarding that investor you’re hoping to sway, 90 percent of the time, your plan is not going to be what gets you funding. As we’ll further explore later, demonstrating proof of concept and actual revenue growth are what attract outside funding.
I’ve met so many aspiring entrepreneurs who spent two to three years researching and planning their concept and crafting their plans, imagining how the business could best work, pondering whether or not they could afford to devote their time to it, contemplating whether or not to bring in a partner, writing an elaborate business plan, analyzing their personal budget to see if they could afford to quit their jobs, and stalling because they were afraid to take the first step. Such people consider the “right” things for their business plan: market size, pricing, break-even quantities, scalability, required financial investments. And there’s no question that eventually you’ve got to figure those things out. But don’t fall into the trap of believing your plan can tell you how to actually build the business. As the founder and CEO of sports undergarment firm Under Armour, Kevin Plank, says, “I think sometimes entrepreneurs can get caught up with theorizing, hypothesizing, business planning—at some point, put the freaking pen down and go do something. Go find out if you can make your product.”14
My study and the in-depth interviews I conducted with successful founders revealed that most successful entrepreneurs do not start in a particularly strategic manner—defining the required tasks, setting tight deadlines, keeping checklists, writing formal business plans, and developing break-even cost analyses. In fact, most of the successful founders I’ve interviewed and most of those whose stories are told in this book didn’t start by crafting a detailed plan, and many had no plan at all.
Ryan Allis, the founder of e-mail marketing firm iContact—whose story we’ll explore more in chapter 2—makes the important point that too much planning may sway you from digging into an idea you might be able to make work. “When we first started, I’m really glad I didn’t know what I know now,” he reflects. “Otherwise, I might not have done it, you know? Sometimes a little bit of naïveté or even ignorance helps.” He says if he had more thoroughly investigated the competition, he would have found out that several other entrepreneurs were entering the same market and he thinks that might have stopped him there. That’s a common mistake.
Hockey Stick Principle #3: No idea is yours alone; you can never escape competition—you have to outcompete it.
The fact that others are doing what you’re setting out to do—or have failed at doing it—doesn’t necessarily mean you shouldn’t start trying your idea out. The initial research Graham Snyder, the inventor of the SEAL SwimSafe device, conducted showed that other companies had tried using technology to prevent drownings. In the late 1990s, Poseidon Technologies had invested $30 million developing video technology to detect if swimmers are at risk of drowning, but the system was only installed by two hundred swimming pools worldwide.15 Video detection is prone to errors, and the Poseidon system was expensive. He believed a more reliable, affordable device could be made.
I think sometimes founders focus on lots of market research and on writing business plans because it seems like the professional thing to do. They’re often concerned about appearances, worrying that people, including their families and friends, to whom they may be going to ask for funding, will think they’re being irresponsible if they don’t draft some sort of plan. Brian Hamilton, the founder of financial-analysis software firm Sageworks, made a great point about this conundrum when I interviewed him: “Spending so much time planning is just silly. You can’t explain that to someone who hasn’t started a business because they will think you didn’t know what you were doing. Well, the fact is it’s true. You don’t know—you’re just trying stuff. That’s what [a start-up] is.”
Don’t Start with a Road Map, Either
Hockey Stick Principle #4: Following a road map is a road to the predictable; innovating is an uncharted journey of discovery.
You may be thinking, But isn’t there some time line I should be on or some game plan I should create with benchmarks for progress so I don’t just waste my time? After all, that’s the way the leading innovators in the corporate world innovate. They’ve developed tools like product road maps, three-, five-, ten-, and twenty-year business plans, and a number of disciplined methodologies, such as Customer-Centered Innovation Maps, the discovery-driven planning method,16 or the R-W-W (“real,” “win,” “worth it”) process, developed by innovation strategist Lance Bettencourt, which industry giant 3M has used to manage 1,500 innovation projects.17 New product projects are given strict time lines and budgets, and while trial and error is often accepted for some specified period of time, progress must be measured and reported on often. Many experts on innovation advocate for this kind of highly disciplined process, such as the authors of the book Ten Types of Innovation: The Discipline of Building Breakthroughs, who write, “Innovation almost never fails due to lack of creativity. It’s almost always because of a lack of discipline.”18 They assert that innovation requires a “simple, organizing system—an underlying structure and order governing what works and what fails.”19
In the corporate world, this approach can work well, but that’s often because the innovation is incremental, a comparative tweak to an existing product rather than a disruptive new product with a new market. A great case to illustrate this point is Procter & Gamble’s launch of the Tide Pod laundry detergent capsule. It offers the modest incremental convenience of not needing to measure and pour your detergent, which was enough to make it a big success.
But that’s just one successful example. In reality, even with these elaborate and closely monitored processes, the fact is that best estimates are that 65 percent of new products created by established corporations fail,20 which is why many corporations have been pursing alternative methods of innovation, including P&G, which has developed an open innovation program called Connect + Develop for generating new products through crowdsourcing and cocreation with outside partners.
You are not a corporation, and individuals are free to innovate in a much looser, more experimental fashion, which is vital for unleashing your creativity. Don’t let any rigid process dictate terms to you. Always keep in mind that to survive each step, founders eat the apple one bite at a time.
Do Begin Tinkering with Your Model
What I do advocate you do at the start, as a means of beginning to think through the practicalities of how to build your product and business, is to craft a provisional business model. But you should do this as you begin taking actions to explore your idea. You should develop this model in tandem with making your first explorations into how feasible your idea is. Think of this early stage model not as your set of answers to how the business will work but as your set of hypotheses to test.
The best approach to formulating your model is to begin by considering this essential set of questions:
• Who will your customers be?
• What benefits will your product or service offer them?
• What competitors will you have, and what extra value are you offering customers?
• What processes will you be creating and then continuing to run the business?
• What financial, physical, and human resources will you need to run the business?
• How will you sell and deliver your product at a price—or prices—that generate a good profit?
• How much will it cost to produce the product, and how much can you sell it for?
• How much pricing power will you have?
• How will you market your product and build customer relationships and loyalty?
I don’t suggest writing detailed answers for each of these at this early stage. It’s best to come up with conjectures and then to explore the ins and outs of the practicalities for each as you proceed to take action. One device that many entrepreneurs have found helpful for organizing their thoughts about their model and coming up with action plans is the Business Model Canvas put forward by Alexander Osterwalder and Yves Pigneur in their book Business Model Generation. The canvas is a visual map of nine essential elements—or, as they call them, building blocks—of making every business, putting all of them next to one another on one page in order to help you keep them all in mind as you search for your solutions. The building blocks are:
• Customer Segments—the various groups of customers you’re targeting, such as teenagers or married couples.
• Value Proposition—the commonly used business term for how your product will solve your customers’ problems and satisfy their needs.
• Channels—the means by which you will sell your product, such as online retailers, your own Web site, brick-and-mortar stores, or through distributors.
• Customer Relationships—which refers to the various means you’ll use to manage and build relationships with all your customer segments, for example, social media or a customer relationship management (CRM) online system.
• Revenue Streams—or where your sales will come from, such as product sales, subscriptions, or renting of office or warehouse space you may own.
• Key Resources—all of the inputs you’ll need to make and deliver your product, such as raw material if you sell a tangible product or programmers if you sell an online product.
• Key Activities—everything involved in making, marketing, and selling the product.
• Key Partnerships—the people or companies that you’ll outsource work to, like suppliers or anyone you might go into a co-venture with or make licensing deals with.
• Cost Structure—delineates the total set of costs you’ll incur.
One thing I like about the canvas is that it doesn’t suggest a linear, step-by-step process but, by putting the blocks side by side, suggests one on which you will be working toward solutions for multiple components at once. One of the first things entrepreneurs learn is that the building process is simply not a straight, sequential one. As we’ll see more in chapter 3 on getting to market, once you’re engaged in earnest in your lead-up to launch, you will have no real choice but to work on parallel tracks in developing your product, your sales, and your marketing, and those tracks will be looping ones, often with byways you find yourself going down. Sometimes you’ll have to take three steps back on one track just as you’re taking two forward on another. The sooner you begin getting used to this, the better, and it’s more helpful to not even have a conception in your mind—or on paper—of a linear, orderly series of next clear steps.
You may want to use the canvas, or you may want to create your own schematic for writing up and updating your hypotheses about each of the core elements. Maybe you prefer to list ideas under a heading for each, or maybe you prefer to create a PowerPoint deck or a spreadsheet. Whatever format you choose to use, what’s important is that you treat your initial ideas about your solutions as hypotheses and then continually update and refine them—or, as the case may be, overhaul your model as you test those hypotheses.
You certainly don’t have to have proposed solutions for each of the key questions right at the start, and for some, you might be better off starting with a set of possibilities. For example, regarding who your customers will be, you may want to specify a target market with a good deal of demographic precision—maybe that’s males ages eighteen to thirty-five—or if it’s a business-to-business (B2B) model, meaning a company that sells to businesses instead of consumers, a high degree of specificity about the type of business being targeted, such as pet store chains and independents. Or you may want to start with a broader definition, such as small business owners, and refine your targeting over time. For sales channels, you may want to start with just one or two as propositions, such as a company Web site and e-commerce sites for sales, Internet advertising for marketing, and order fulfillment from a warehouse by mail delivery for distribution. Or you might want to list a set of all the available possibilities that you’ll need to research and test out as you go. Do not spend days and days working on this plan; rough it out and get going with the first actions to get your business actually up and running.
Learning by Doing
You should begin the way the feeling moves you to. That might be working on the product itself first, discussing the idea with potential customers or retailers, going out and checking competing products, or reaching out to specialists you’ll have to contract with for design or manufacturing and getting costs. More likely, the process involves doing some of all of these things at once.
It’s vital to keep an open mind, which is true all through the building process but especially so in this stage. You may discover a whole different way to make or deliver the product than you’ve expected; you may come to the conclusion that you need a partner; or you may even come up with a whole different idea that you think is better to pursue.
Hockey Stick Principle #5: A foolish consistency is the road to failure.
Ralph Waldo Emerson wrote, “A foolish consistency is the hobgoblin of little minds” in his essay “Self-Reliance,” suggesting that it’s important to change your mind about things. In building a start-up, it’s often important to change both your mind and your methods. When Lisa Falzone started having conversations with restaurant owners that led her to pursue creating the first point-of-sale system for an iPad, which became the very successful Revel Systems service, she was exploring the idea of a restaurant ordering and delivery mobile app, along the lines of the Seamless app. But when the demand for a better POS system was expressed repeatedly, she listened and totally changed course. Red Hat founder Bob Young was trying to build a newsletter business about Linux software and a catalog business reselling Linux and UNIX products when he kept hearing from customers about the man who would become his partner, Marc Ewing, who was selling a version of Linux he had programmed. Bob didn’t abandon his newsletter and catalog businesses right away, but he kept them running to sell Red Hat as a complement, and that was the business that eventually took off.
Of course, your early tinkering may also provide you with just the confirmation you need to be confident in going forward as you’ve wanted to and in taking the risks that may be required. One of my favorite stories of such a case is that of Graham Snyder and the tinkering he did to explore his idea for the SEAL SwimSafe device. He began tinkering in his basement, often staying up as late as two or three in the morning while his family slept. The first device he assembled was too complicated and too large and heavy to be practical for a child to wear. It also only worked some of the time. But it did provide good reason to believe that a much sleeker and more foolproof device might be possible to create, and by building it, he got the proof of concept he needed to decide to invest considerable personal funds to get a highly functioning prototype made by experts. Probably no mechanical engineer or corporate product manager would have advised him to do this tinkering, because he knew very little about the work required, but it has led him to a remarkable feat of innovation.
You Don’t Need to Be an Expert
One of the most common pieces of advice offered to aspiring entrepreneurs is to build a business in an area in which they have expertise. That can work well, but it’s by no means required, and many entrepreneurs who start businesses they’re experts in fail.
Hockey Stick Principle #6: It’s not what you know that matters; it’s what you learn.
Graham Snyder had no expertise whatsoever in building any kind of mechanical device and very little business experience at all. He was an emergency room physician. The only background he had in any sort of machining was hanging around the garage of Ed Patterson, a neighbor of his when he was growing up, who invented things for the sheer enjoyment of it. Ed showed him how to use lathes and specialty saws, but that wasn’t the kind of work he’d have to do to create his antidrowning alarm. As an undergraduate, Snyder had studied chemical engineering, which also had no direct bearing on making the device. As he told me, there was one way in which he felt his medical experience was relevant: “When people are broken, I can help get them fixed.”
Many successful founders had no expertise in the business they developed when they started. Fred Smith, the founder of FedEx, conceived of the idea for a competitor to the US Postal Service in a term paper he wrote at Yale, and he had no knowledge of the postal service business. In 1976, Howard Head invented the Prince oversize tennis racket because he had so much trouble hitting the ball in the sweet spot of a traditional racquet. Talk about not being an expert!21 Bing Howenstein worked in film and TV production when he created BackJoy, a medical device that improves your posture and helps prevent back pain. I could go on and on.
This doesn’t mean that you should proceed without any expertise. Graham Snyder managed to create a workable, if clunky, prototype because he threw himself into learning everything that he needed to know, no matter how arcane. One of the first things he did was take apart a flood sensor to figure out how it worked. As he explained to me, “I didn’t know whether a device could sense water intake and then use that to deploy alarms,” and he figured a flood sensor was a good place to start finding that out. For more than eighteen months, as he learned more about what would be required to make the device, he taught himself about circuit board layouts, capacitor timers, CAD software, programming, and other electronics. Engineers told him he should pay someone with the expertise to figure it out, but he refused. He told me, “I needed to understand this at the base level. And so I did. I learned what’s called assembly language. It’s not quite programming using 0s and 1s, but it’s almost that complicated.”
You could absolutely say this was quixotic of him, but the fact is that by learning a great deal about the engineering involved, he developed the knowledge that allowed him to work closely with trained engineers on the further development of his product.
The big takeaway here is that while expertise is not required for first pursuing an idea, developing expertise as you do so is crucial.
Irish playwright and cofounder of the London School of Economics and Political Science George Bernard Shaw wrote, “Geniuses are masters of reality.”22 It’s the realities you want to be mastering, not the planning process. As is so often the case, Graham discovered that, as the saying goes, “the devil is in the details.” And it’s by beginning to confront these details during the tinkering process that you discover not only what’s really going to be required but whether or not you have a passion for tackling the job.
Don’t Be Afraid to Socialize Your Idea
An aspiring entrepreneur recently told me about his idea, which involves creating online contests for personal home videos. (Nothing inappropriate—just good, clean fun.) He was walking me through the complexities involved with getting it going, telling me, “To even start this business, I’ll need at least $50,000. It’ll require secure hosting. Advertising is critical to getting enough customers to break even. I’ll need a business plan. I figure I’ll need X content entrants to break even at Y revenue per entrant.” He’d clearly put a good deal of thought into the concept, and he was already thinking seriously about its scalability.
This entrepreneur would be better off simply starting by creating a version of a video contest on an inexpensive hosting platform, such as YouTube, and inviting his friends and family to participate. That would give him all sorts of feedback for taking the concept from there. But when I suggested this, he responded that he didn’t want to give the idea away.
Contrast that anecdote to the approach Darren Pierce took in investigating his idea for his successful business etailinsights. His premise was that with e-commerce booming and so many sites springing up, companies needed help in targeting those sites, getting the contact information for their buyers, and crafting their pitches to them by getting a richness of data about the firms. He went out and started discussing the idea with potential customers with just a very preliminary “vaporware” demonstration product consisting of just a screenshot prototype drawing, having done no actual programming. From that, he got the message loud and clear that, as he says, “They had a pain, and we had a remedy.”
Hockey Stick Principle #7: Ideas are made to be shared, not stockpiled.
There’s no substitute for discussing your idea with potential customers, as well as suppliers and retailers. The quality of the information you will gather is richer and more nuanced than any survey or purely online method of testing can provide. Potential suppliers offer great advice, can save you lots of mistakes, and help you understand how much the product will really cost to build. For instance, retailers can give you good feedback in particular about packaging and pricing.
Many founders I’ve recommended Hockey Stick Principle #7 to have worried about protecting their idea, concerned others will steal it. To my mind, in most cases, you shouldn’t worry about that. The truth is most people have their own lives and passions, and very few are in a position or have the desire to knock off someone else’s idea. And the process of creating a product and developing a market requires so much input from others that keeping it truly under wraps is normally impossible, anyway. Furthermore, big ideas that involve selling to mass markets generally end up with hundreds of new entrants, anyway.
Protecting trade secrets and confidential information is a whole other thing. I wouldn’t teach my potential partners—who could just as easily become my competitors—exactly how I produce industry profiles and how much they cost, at least not without noncompetes or nondisclosure agreements. And when you contact suppliers, having them sign a nondisclosure agreement might be a good idea. For proprietary information about design, costs, and specifications and for your logo and name—and also protection of your confidential customer information—you should absolutely have people sign such agreements, and you should register for trademarks, copyrights, and patents, and it’s best to do that as soon as possible. The good news about that is that getting this paperwork done is generally easier than you might expect.
You should also involve an experienced corporate attorney early in the process to guide you about how to protect your idea and company. I wouldn’t advise trying to save a few bucks by managing all this yourself because the process is too complex, and a good lawyer will already know all the pitfalls. There’s no need to be intimidated by the process because normally it doesn’t have to be a big deal or very expensive, but it’s critical to get a lawyer involved because before launch you’re often negotiating with potential partners, customers, manufacturers, suppliers, and consultants, and you’ll need to protect your interests. Most experienced corporate attorneys won’t charge you for an initial meeting, so you can at least gain a broad understanding of what’s needed before starting out. My attorney, Byron Kirkland, says, “I recommend entrepreneurs go talk to two or three attorneys. I do that all the time. I meet with them and don’t charge them for the first few meetings to just help them get along. But maybe they’ll come and hire me one day.”
With the protections you need in place, generally, you should begin sharing your idea with those who can help you to craft it, those who can help you sell it, and those you’d like to buy it from very early on. This means at the very least having a series of conversations with potential customers, suppliers, and retailers.
An Idea Is Only a Figment of Imagination
When doing this outreach, whether in person or online, it’s best if you can provide those you’re consulting with some type of prototype or demo, so you should work on getting that made early on in the process. For potential customers or retailers, you should try to actually sell your product to them on the basis of your prototype for future delivery. Although early sales might help you raise some funds, the main reason you do this is to learn from their rejection. You’ll probably get a lot of “maybes” from them, and you should follow up by asking them why they won’t commit now. That will help you flesh out your understanding of shortcomings in the benefits you’re offering and in how you’re describing them.
Going to trade shows is another great approach to product and market research that many of the successful founders I interviewed found very valuable. The founders of Boogie Wipes, Julie Pickens and Mindee Doney, attended a number of trade shows during their first few months of development to get hands-on feedback and product awareness. This may strike you as going right to the competition to give your idea away, but remember, it’s not the idea, it’s the development of the idea that’s key. Julie and Mindee had a fundamentally simple idea—to add saline to tissue wipes—and they might have worried that Kleenex or another major brand would hear about it and swoop in and steal it. But instead, they took samples as they were developing the product in order to get feedback from retailers, which proved important to the creation of a final product that got a good reaction once they went to market.
You may even want to canvass reactions more widely by tapping the power of the Web. Julie and Mindee did this by targeting the network of “mommy blogs.” “We put it out there to a lot of mom bloggers at the time,” Julie recalls. “There were some really large ones that drove interest to some of the big retailers. We got them to review [the concept], and we based some of our criteria for success off the reviews. We got them to react to both the idea and the name of it.”
Another founder who tapped the power of Web feedback is LendingTree’s Doug Lebda. He had written a great business plan, but when he took it to funder after funder, they turned him down. He was also running into a chicken-and-egg problem in trying to get buy-in from banks. He thought he needed them to agree to offer loans on the site in order to build it, but as he recalls, “The big question with the banks was, are consumers really going to do this? They asked, ‘Why would a consumer put their confidential information on the Internet to fill out a loan application? Nobody’s going to do that.’” Finally, when a potential angel investor he pitched to requested that he get some proof that consumers would respond positively to an online mortgage application process, he got a great idea for a market test. He asked a Web developer acquaintance to build him a very basic site, which he did at no charge. Then, to see if he could attract consumers to the site, Doug invested $1,500 of his own money to buy search-engine keyword advertising from Yahoo!. The campaign attracted more than three hundred borrowers, which was a stellar result. That simple test became the hardy sprout that grew into LendingTree, providing the basic proof of concept that got him his first funding.
If you are going to put your idea out in the world, the only caution I would pass along for blogging or putting your idea on the Web is not to include confidential information, such as business processes, details about costs, business plans, and projections.
Minimal Viable Products Can Be a Virtue, but They’re Not the Only Way to Succeed
Most entrepreneurs should expect their tinkering process to take at least several months, and it often extends to well over a year. My Hockey Stick study showed that the average founder tinkered with his or her idea for 10.6 months before actually officially starting his or her business.
A popular method for shortening the time it takes to get a product on the market was introduced by successful entrepreneur Eric Ries in his book, The Lean Startup. It’s a rapid prototyping and market-testing process. The core of the method is to create a minimal viable product (MVP), an inexpensive version of your product with only enough features to satisfy a first set of early adopter customers, as quickly as possible. You then sell it to those targeted first customers and get customer feedback from them, conducting analysis of which features are most popular and which aren’t being used as much. Then you use that information to make improvements to the product. Ries summarizes the method with the phrase Build, Measure, Learn. He developed this method after his painful experience of putting everything he had into a long product development process as an employee for a 3-D virtual world program called There.com, which had to close its doors. He had taken a class in entrepreneurship with Professor Steven Blank at Stanford, and he combined Blank’s insights about being customer-centric in your development with the lessons of the lean manufacturing process created at Toyota, as well as the discipline of agile software programming, to craft this new way of working. For his next start-up, the 3-D social network IMVU, he and his cofounders used the method to great success.
This method can certainly work well, and you should consider whether or not it’s a good way for you to go. Lisa Falzone and her partner took this basic approach in launching the Revel Systems to great effect. For them, speed to market was very important. When restaurateur Michael Lappert mentioned that he wanted a better POS system to replace the complicated ones available at the time in 2009, he outlined the basic features he was looking for, and Lisa told him on the spot, “We’ll build it for you!” The annoyance of the available POS systems had come up in a number of conversations Lisa had had before with restaurant owners. Meanwhile, the iPad had recently come out, and a system using that, connected to the cloud, seemed feasible. It was a great idea, and they knew someone else might have it soon.
They immediately followed up with a written contract to deliver Michael the product, scheduling a follow-up meeting for a week later to get more precise information about what he’d need. During that meeting, Lisa says they “just storyboarded [the product layout] and said, ‘What do you think about this? Is this right?’ And he said, ‘Yeah, we want you to build it.’” They told him they’d deliver the system in two months, a very challenging time frame because Chris not only had to write the software but they had to find hardware to handle credit card swipes, and a stand to hold the iPad had to be designed and manufactured. They hired an outside programmer to help Chris with that part of the project, and Lisa worked on getting the hardware developed and crafting their marketing. The first stands she ordered weren’t right, but on the next try, they hit the mark, and she ordered one hundred stands to start.
They didn’t even try to raise any outside funding; they invested $30,000 of their own savings. Rather than a full-blown business plan, they wrote an executive summary and created a PowerPoint pack to tell the story of the product.
The product they delivered was bare bones, offering only the simplest POS functions, but it was much easier to use than other systems, and they got lots of great feedback for improving it from Michael and the other early customers they sold it to.
This method works best for software products and has more limited relevance for manufactured products, with which an MVP might spell disaster. If Graham Snyder’s SEAL SwimSafe device failed in use by early adopters, even once, he’d almost surely have had no second chance. And the device had to go through rigorous safety testing and receive regulatory approval in order to go on the market.
The official Lean Startup description of the development cycle shows how tailored to software products the method is, including how the Build-Measure-Learn cycle is translated to “code, data, ideas,” meaning that after you’ve written the code, you gather and analyze data from users to get ideas about improvements and then do more coding. But even for software, the market you should be selling to may be unclear, and you may start with a misguided target, so the feedback you get could be counterproductive. For example, Sageworks’s cofounder Brian Hamilton first tried to sell his financial analysis software to small business owners for their own purposes of learning more about their business. Only after running into a wall with them did he stumble on certified public accounts as his core market.
Even software products sometimes simply require that they function at a very high level before they should be sold. With LendingTree, given the extensive network of mortgage brokers, Doug Lebda had to be sure his system was offering a very strong set of loan offers to choose from before he launched.
So the Lean Startup method shouldn’t be considered the way to go but rather a very useful process that might work well in your overall development approach. The tinkering process I recommend is a more informal, hands-on, trial-and-error exploration of product possibilities that allows you to identify clues for moving the idea forward. And you should expect it to take some time. If getting answers and coming up with solutions is taking longer than expected, don’t panic; just keep trying more new things. Learn what you need to learn. That’s a big part of the satisfaction.
Some Feedback Won’t Be Pleasant At All
There are a few key things to keep in mind about this process. One is that some people are inevitably going to tell you your idea is horrible, and many won’t mince their words. Be aware it can be very hard to take. What can help with keeping your bearings and not letting harsh responses derail you is to always keep in mind that the fact that you’re asking for feedback doesn’t mean you should believe all of it, even if—and sometimes especially if—it’s from experts.
Hockey Stick Principle #8: Feedback is meant to be challenged, not bowed down to.
Before starting First Research, I asked my target market, bankers, about my idea, pitching it to Bank of America and Wachovia. The people who managed industry research for them rejected it flat out. When I persisted and pitched it to a woman who worked for one of the men I met with, she said, “There’s no money in industry research.” A few of my good friends were feet-on-the-street business bankers, and so I decided to also ask them what they thought about my idea for the reports. They didn’t even take the concept seriously and saw no real opportunity to make money from it. I was still getting poor feedback even after I had quit my job and was selling a finished product, but I was stubborn because I was confident in the value of the reports. I’m sure glad I persisted.
Almost every successful entrepreneur I’ve ever talked to or read about has been told their idea was flawed, even ridiculous. Marc Benioff, cofounder of cloud computing behemoth Salesforce.com, recounts in his book Behind the Cloud that he was told by programmer Dave Moellenhoff, who would later become one of the company’s cofounders, that his idea “was ‘a crackpot idea’ and would never work.”23 Recall that both Wayne Huizenga and Ted Turner were told by an expert researcher to forget about the ideas that they’re best known for today.
Expertise Is a Tricky Thing
Negative feedback from experts can be disorienting and especially hard to take. So consider this. Ravi Mehta, a professor at the University of Illinois, has conducted studies of how experts evaluate new products. He says, about the research he and colleagues have performed, “There is a blanket assumption that knowledge and expertise are always good. What we show is that it’s not always true. Expertise is a double-edge sword.”24 It can cloud people’s judgment with biases, and Mehta found that when experts evaluate new products, they often make inaccurate comparisons with prior products.25
This is why, as said earlier, industry insiders aren’t often the ones who make the biggest innovations in their own industries. The experts you consult may simply be wrong. I’d say that the lawyers you go to for advice about contracts, trademarks, and patents are an exception when it comes to those legal issues. I’m not saying that you shouldn’t consult any experts; you probably should, because they can be a font of important information. But keep in mind that Steve Jobs said, “We built [the Mac] for ourselves. We were the group of people who were going to judge whether it was great or not. We weren’t going to go out and do market research. We just wanted to build the best thing we could build.”26
Listening to advice—and this goes for all the advice you get, whether from potential customers, suppliers, or retailers too—requires a challenging balancing act between being receptive on the one hand and persistent on the other. People are going to tell you all kinds of things, and they’ll often be conflicting. You’ve got to be digging into the feedback, thinking through why people are reacting the way they are and whether there’s some message within their message that you should be discovering. You can’t use any formula for this, such as if eight out of ten people like it, then you’re good, or vice versa. Eight out of ten people can be wrong, and so can ten out of ten.
A founder I interviewed who did an especially deft job of managing this balancing act and figuring out how to challenge and dig deeper into the feedback he was getting is Bob Young, cofounder of Red Hat. The breakthrough business model that led to the successful launch of the company came out of a combination of rejecting the chorus of nay-saying he got from industry insiders and potential funders he approached on the one hand and brilliantly recognizing how he could reconcile conflicting feedback he got from potential customers on the other. Challenging the feedback he got and thinking deeply about it provided the insight he needed to create a counterintuitive business model that made sense out of selling software that was available for free, a model related to the now-popular freemium model of giving away a version of your software or service but also offering a paid premium version, like the model that’s used by Dropbox, Skype, and so many others.
Bob was a standout exemplar of taking the right approach to market research. He was like an anthropologist, going out in the field to get firsthand insight and studying responses thoughtfully. That led him to a radical sales model that has earned billions. So adept was his approach in the tinkering process that it’s valuable to take a closer look.
What Microsoft, IBM, and Apple All Missed
In fiscal year-end February 2015, Red Hat earned $1.8 billion in revenue by offering support service for clients who run their servers and applications with a particular kind of high-demand open-source software called Linux. When Bob started the process of creating the company, he didn’t have any experience in building a software firm, which helped him spot an opportunity to build a unique business model around Linux. He and the partner he built the business with, Marc Ewing, were willing to move into a market dominated by such behemoth firms as Microsoft, because they believed that they could offer a proprietary version of the free Linux at a low enough price that it would appeal to the programming crowd that was adopting Linux and because the big firms weren’t showing any interest in offering a version of Linux themselves. The success of Red Hat is a true David-and-Goliath story, and it illustrates one of the great paradoxes of innovation, dubbed the “innovator’s dilemma” by Harvard Business School professor Clayton Christensen. Quite often, large market-dominating firms do not pursue emerging opportunities within their business domain because they consider them too small. This is another way in which industry experts can be biased.
The business idea that led Bob to Marc and then to their breakthrough Red Hat model was much more modest than the game-changing concept that emerged from their tinkering—it was a newsletter for users of the UNIX computing program, called New York Unix. Bob started the newsletter even though he had no knowledge of programming. At the time, he was in the business of leasing the big computers that UNIX ran on, and he had discovered that programmers regularly had meetings to talk about the latest trends with the program. He began crashing those meetings, even though initially he couldn’t speak their language, and that’s how he got the idea for the newsletter. His business model called for making all his revenue by selling advertising, but it turned out that advertisers were only somewhat interested in his specialized offering. While he was trying to make a go of it, though, he developed a close relationship with the UNIX programming community, and he was always asking them, “What do you want me to write about that you can’t get from other publications?” Again and again, they said they were curious about the free software known as Linux, an open-source, Unix-based language originally created by programmer Linus Torvalds to improve on UNIX (Linux being short for Linus’s UNIX).
Bob’s first pivot was to start The Linux Journal, but that still wasn’t making him enough money. He recalls that his family was “living on the knife edge,” using credit cards to pay all their bills. So his next pivot was to branch out into catalog sales, selling applications for UNIX and Linux, books, and other computer-related products. He finally started to make some money, but not all that much. In the process of working on lead generation, though, a customer told him about a programmer, Marc Ewing, who had written a proprietary version of Linux, called Red Hat, that was easy to use. Bob asked some other programmers about it and learned that Red Hat was being well received by the wider community. Bob’s first proposal to Marc was that he become Red Hat’s sole distributor, and they made a deal.
After a couple of months, he and Marc realized that the distribution deal wasn’t optimal. It led to complications about who would set the price, and it was stopping Marc from pursuing other sales channels. So they discussed combining their businesses into one company. But before he made that commitment to quit his Linux catalog company and take a huge risk, Bob made the very smart move of going out in the field to meet with leading-edge customers for Linux. He wanted to understand the market potential better.
On an early trip to the NASA Goddard Space Flight Center, he interviewed programmers and learned that “they were not using Linux because it was better, faster, or cheaper technology; they were using it because it gave them control.” The engineers at NASA—and, as he was to discover, at many other organizations and companies—wanted to be able to customize the operating system running their programs, but they had no alternative system—not from IBM, not from Microsoft, not from Sun, not from Apple. The engineers were saying to him, “I really want to see you guys succeed. But if you layer proprietary software on it, I can’t use your stuff. I’ll build my own. If you just share your code with me as quickly as you can, though, I’ll use Red Hat rather than making my own.”
The engineers were saying that if Red Hat would share its Linux upgrades, such as improved methods for printing or managing Web pages, then they’d use Red Hat’s version. However, if Red Hat charged money for those improvements or refused to share the source code, they would just keep working with Linux. That left Red Hat with no way of making more money, which might have been extremely discouraging.
But Bob didn’t stop there; he also decided to talk to people at companies that weren’t adopting Linux. He discovered that they were rejecting it because Linux was too complex for them—more than six hundred separate programs make up Linux—and they didn’t have the staff to maintain the programs and keep track of updates and changes. Another issue was that Linux nonadopters tended to think of the “freeware” programming community as long-haired radicals—not exactly the kind of team they wanted to rely on for mission-critical company functions. They wanted to have support, security, confidence, and backup plans from their software providers. They also wanted “official” documentation to show their bosses and auditors that they had a legal right to use the programs. Linux didn’t offer any of that. So Bob and Marc decided Red Hat would.
But these insights left them with a tricky market complication to manage: How could they sell a product to the Linux nonadopters without alienating the avid Linux community? They made the bold decision to distribute the same product in two different ways:
• a free, downloadable version that included the software and source code, and
• a CD-ROM “official” version that customers could purchase.
The two versions were exactly the same software program, but the official version included a product serial number, installation guides, a how-to manual, and customer service and support. To its buyers, the Red Hat Linux paid version stood solidly between hackers and the establishment.27 These buyers regarded serial numbers and support as insurance against loss. Meanwhile, Red Hat got top-quality R&D from the programmers who downloaded the software for free, as they made many improvements that were helpful for all users. And because Red Hat didn’t have to invest the man-hours to build Linux, it could compete aggressively on price. Red Hat Linux, therefore, retailed for $49.95, compared to Microsoft’s Windows NT’s retail price of $150 and up. You could describe the model as a two-way freemium, as the free service provision worked both ways, allowing the company to gain insight and input from the extremely talented programmers that were using Red Hat at no cost.
When Bob and Marc were pitching their model, not one of the industry experts thought it had the potential to achieve major growth. But through all their tinkering, they had learned one of the great truths of new-product success. As Bob puts it, “I’m a sales guy. I don’t sell features. I sell benefits.” Bob came to realize that listening to customers would be the key to Red Hat’s success. “I saw an opportunity. I saw the benefit of open source articulated by guys like [the engineers] at Goddard Space Flight Center, which all the business guys working for Oracle and Sun Microsystems and Microsoft and all the rest didn’t have the opportunity to see because they weren’t asking the questions.”
The features of the software were the least valuable part of what they had to offer; their customers had articulated two clear benefits—control over the code and professional documentation and support—and Red Hat figured out a way to offer both.
You Don’t Need to Quit Your Day Job
One great lesson from the Red Hat story is that as you are tinkering with your idea, you do not need to go “all in” and sacrifice your source of income. Bob and Marc kept their catalog sales going until they saw that Red Hat was catching on. Many of the successful founders I interviewed either stayed at their jobs while they tinkered or did consulting or other work on the side as they tinkered.
Hockey Stick Principle #9: Successful entrepreneurs take as little risk as possible.
A common notion promoted about entrepreneurs is that they have a propensity for risk taking, sometimes characterized as a need for risk if not an outright obsession with it. Taking risks is certainly at the core of starting an innovative business, and some successful entrepreneurs do seem to relish the danger, but as long ago as 1961, Harvard professor of psychology and leading entrepreneurship expert David McClelland conducted a study in which he found that entrepreneurs are generally rather moderate risk takers. Much subsequent research has backed this up, and some has even shown that entrepreneurs tend to be risk averse. Malcolm Gladwell wrote in a New Yorker article about entrepreneurs that “their entrepreneurial spirit could not have less in common with that of the daring risk-taker of popular imagination. Would we so revere risk-taking if we realized that the people who are supposedly taking bold risks in the cause of entrepreneurship are doing no such thing?”28
Work on Your Whole Model
Another lesson from Red Hat is that as you tinker, you should be exploring not only how much interest there might be in the product or service and the costs and other practicalities of making it but also tinkering with your hypotheses about delivering it to the market. Many start-ups fail because they didn’t create a good sales and distribution model and also because their product wasn’t competitive. One of the most glaring cases in point is how JVC’s VHS (Video Home System) pummeled Sony’s Betamax in the once-lucrative market for home video recording devices and cassettes. Sony was out the gate first with Betamax, and it had better picture quality, a slicker design, and smaller, more storage-friendly tapes. However, JVC won the war by tweaking its business model and engaging other manufacturing firms to build their own recording devices that could play VHS technology. They would earn money by selling their own recording devices and gaining market credibility but would also learn important insights for product improvement from their competitors. JVC eventually won a nearly 90 percent market share.
Doug Lebda was also able to strike gold with LendingTree by making a new model for selling mortgage loans work. Michael Dell did the same with a new model that allowed customers to customize their computers and order them by mail. Jack Dorsey hit it big with his Square point-of-sale system by removing hidden fees and charging all retail customers the same rate to process credit card orders. Daniel Ek and Martin Lorentzon broke Spotify out with a new model of offering access to millions of songs on their computers and mobile devices for a monthly subscription.
Hockey Stick Principle #10: A great product is not a business model.
The point here is that many great business successes weren’t the result of an invention or physical product; they were the result of a clever business model. You may not even need to invent a new product in order to achieve phenomenal success. Amazon didn’t get into product development until many years after launch, but it’s an innovation pioneer based on its pricing, sales, and delivery model. Another example I love is the endearing start-up Dollar Shave Club, cofounded by former digital marketer Michael Dubin, who, I should point out, wasn’t an expert in the business of manufacturing or distributing razors when he started. The genesis of the idea came in 2010 when Dubin met cofounder Mark Levine at a holiday party, and they started chatting. “I don’t know how we got on the subject of shaving, but we started talking about what a rip-off it is,” Dubin recalls.29
A common scenario for men when purchasing razor blades is that they go to a grocery store or drugstore, stare at the display offering a wide array of blades, hope they don’t accidentally purchase the wrong ones, and out of frustration from the decision-making process, curse all the way to checkout before paying thirty-five or forty dollars for a purchase they’re unsure about. They use the blades for too long because they’re so expensive, and that results in dull blades and some painful shaving. (Okay, so this is my personal experience, but I bet many men would agree.)
Dubin came up with the idea to sell razors with a subscription plan that ships replacements automatically. Basically, he applied a well-established model to a well-established product. As of 2014, Dollar Shave Club had more than 650,000 customers and was growing fast.30
Finding a Cofounder
Don’t let the mythology of the lone genius stop you from collaborating. Another important consideration during this early tinkering process is whether or not to get hooked up with a partner. Sometimes cofounders cook up an idea together, of course, but often, deciding to find a partner is motivated by the realization that you need someone with complementary skills. It can also be a great help to have someone to share responsibilities and to make the thousands of decisions you’ve begun to realize are in store. The Hockey Stick Research Study showed that 85 percent of the successful start-up firms had more than one founder. Sixteen percent had more than two.
Many times, cofounders are friends, but if you don’t have a friend who’s interested or has the skills you need for a cofounder, it can be difficult to find one. The process took me eighteen months from when I had the idea to start First Research. When I decided to give my idea for First Research a try, I started by crafting some very rough research reports and that quickly allowed me to realize that I really needed to find a partner to do the report writing. It just wasn’t my greatest strength, and I realized that I wanted to focus on marketing and sales. I had no idea how to find someone to write the reports, and I just figured I would need to partner with a big firm, so I sent my business plan to Dun & Bradstreet, Frost & Sullivan, and other large research firms. I made the mistake of thinking that I’d have to partner with a large, established company and that doing so would also give the business credibility.
During those eighteen months, all the established firms I approached rejected me, and I realized that it’s actually uncommon for big companies to partner with individuals. Fortunately, those efforts pointed me in the right direction. One of the people I met with to discuss my idea was Rafi Musher, CEO of Stax Research headquartered in Boston, and though Rafi wasn’t interested in partnering, during our lunch, he shared with me three names of people he knew who did do business research. One name was Ingo Winzer. He was a self-employed real-estate-analysis guru whose second-bedroom company was called Local Market Monitor. He’d been quoted in Barron’s, The Wall Street Journal, on CNN, and other media. He had credibility, so I called him. This was the gist of our first conversation:
Ingo: “I can create a research product, but I can’t sell.”
Bobby: “I can sell, but I can’t create a research product.”
After that call, I decided to go meet him. Ingo picked me up at a street corner in Boston, arriving twenty minutes late in an unwashed, gray Toyota Camry. I figured he’d be big-city serious and formal, but he wasn’t like that at all. With hair falling slightly below his shirt collar, in black jeans, a gray T-shirt, and cowboy boots, he was a superintelligent, laid-back Yankee cowboy. Meanwhile, I was in my pressed khakis and a blue sports coat, an intimidated, small-town Southern banker. We might not have seemed a likely fit, but I soon discovered that Ingo had humility and sincerity to go along with his brilliant mind. He took just a day to design a nifty, efficient process for creating industry reports, and he turned out to be a great partner in building all aspects of the business.
Hockey Stick Principle #11: Going it alone may mean going nowhere.
Many of the cofounders I interviewed brought complementary skills to their businesses. Bob Young had experience in customer development and management while Marc Ewing was the specialist in programming. Lisa Falzone took the lead in marketing, sales, and manufacturing while Chris Ciabarra took the lead in programming. Wes Aiken was stalled for two years in launching Schedulefly because he didn’t want to do the marketing and sales and did not have any real sense of how to go about it, and bringing in Tyler Rullman as his partner to take charge of that aspect of the business was a vital decision.
A number of organizations have sprung up to help founders with the process of finding a cofounder. One example is cofounderslab.com, an online matchmaking service that counts its membership community as having forty thousand founders, advisors, and interns. Another is Startup Weekend, where aspiring entrepreneurs come together for fifty-four hours in one weekend to share ideas and form teams. One benefit of attending this event is “cofounder dating.” If you do a Google search, you’ll turn up other such organizations.
It’s also fine to just go it alone and find independent contractors or hire staff as you need specialty skills and extra hands to manage the flow of work. As we’ll dig into more in the next chapter, partnering involves sharing control and splitting equity, which can be quite tricky to manage. One thing is for sure about whether or not you seek out a partner: The decision has to be made carefully. A few things to consider when choosing a partner are you have to be sure that you have a shared vision, that you have similar goals in terms of how far you’d like to take the business, how many hours you feel are acceptable to work each week, and how you treat employees.
No Hard Line between Tinkering and Committing
The simplified explanation as to how a business starts—that a founder first gets an idea, creates a plan, and then executes on it—has led to a false notion of there being a clear planning phase and then a development phase. The truth is that tinkering often morphs seamlessly into serious development. You may find yourself well into product development from very early on in your tinkering process, maybe because there’s no other way to even begin figuring out whether the product is viable—as with Graham Snyder’s SEAL SwimSafe device—or because you quickly discover that you are very serious about going ahead and that you should do so as quickly as possible, as was true for the Revel founders who launched in two months. But even the Revel founders kept tinkering after their launch. And, as we’ll discuss in the blade years chapters (chapters 3, 4, and 5), most founders have to and should. You should really never stop tinkering.
But you may also find out during this stage that you have to do lots of other legwork before you can begin your actual product development and that the development is going to cost a substantial amount, as was true for both Doug Lebda in founding LendingTree and Graham Snyder in creating the SEAL SwimSafe device. They learned they would have to come up with lots of money to hire expert developers.
You know that you’ve passed from tinkering into prelaunch development once you have gained a deep conviction about pursuing your idea and you truly commit to it. This often involves quitting your day job, and even if it doesn’t, committing to actually making the product work will inevitably involve many more hours and a greater intensity of development, as well as more money. So I strongly advise that when you arrive at this juncture, the one key thing you should take the time to reflect on deeply is how you’re going to have enough money to launch your business and make it through the blade years. Does that mean you should now start drafting a detailed business plan so you can pursue angel investment seed money? Should you ask your family and friends for money? If you’re still working at a day job, should you quit so you can focus entirely on the business? Should you figure out ways to bootstrap during this development process so you don’t need outside funding?
As you move out of the tinkering process and into the blade years, these questions about funding are pressing, and we’ll dive deeply into them in the next chapter.