In our work with startups, there is so much energy focused on Service & Product Innovation, Marketing, and Distribution that it's easy to lose track of the most important issues facing a new company. Not that those things aren't important. It's just that — before you start digging into the details of your business — you and your startup team need to be clear on the answers to three critical questions. Questions you need to think through thoroughly before you talk with even the first Angel Investor, Venture Capital group, or earliest Customers.
The first is actually a two-parter: What is it your company is doing that's different, and why does it matter?
Normally I don't have many prospective entrepreneurs argue with this. They already know they're doing something different. That's also why they're so excited about it. But when you dig deeper you often find there are several issues they haven't considered — even in the answer to this most basic of startup questions.
One of those issues is to separate, especially in your own mind, the core essence of the new product or service you're planning to offer from the impact you hope to achieve in the market.
Consider for example the explosive success of Apple's iPod in the portable music player business. It was a masterpiece of design from the beginning and that might have been enough to drive sales. But the core essence of Apple's innovation in the digital music business wasn't design or even the iPod itself. Because even if it was well executed there were already other competitive and highly regarded products in this category when it first went into production. No, the true innovation was Apple's carefully crafted creation of its iTunes digital music distribution business. For the first time it made buying and downloading almost any music you might want easier than ever before. All thanks to a combination of tight partnership agreements with the main players in the music publishing industry, great store and backup software (first on Macs only but which soon ported to Microsoft Windows OS, an important early decision), and an excellent music player.
And yes that did result in Apple's virtual domination of the digital music business. But it wasn't just — or even primarily — because they made a great iPod. It didn't hurt, obviously, but the core was Apple's invention of the digital music distribution ecosystem.
And the reason this first question you have to answer, about what you're doing that's different and why it matters, is precisely in clarifying that very core issue. Because that core differentiator is going to drive everything from your spending, your hiring, your intellectual property strategy, and how you work with your strategic partners. Apple understood it well and so should you.
The second question you as an Entrepreneur need to answer is: How do you plan to make money?
It's actually more subtle than it sounds. Just saying you're planning to ask people to pay isn't enough. You need to be clear on your Business Model, how it differentiates you from others from the beginning, and why it will be sustainable over time.
As an example here, consider Google's entry into the search business with their now well-known page rank algorithm. When the World Wide Web first emerged on the scene back in the early days of the Mosaic and Netscape browsers, and even just after that when Bill Gates rammed Internet Explorer into the market so Microsoft didn't get locked out as a player, just finding stuff “out there” was a major nightmare. So early search engines such as W3Catalog, Lycos, and WebCrawler showed up, using often very much human-powered research to help guide the early internet explorers to find things of use. All of these operated pretty much “for free” without much of a business model to keep them going. But we were younger and in the days even before WebVan, Pets.com, and other early ventures flashed onto the scene and then flamed out quickly.
Google's initial patent search concept, developed first at Stanford University, was indeed a true killer idea. Instead of relying on curated lists or just “crawling the web” for matches with a search term, their search engine gave back answers ranked based not just on how good the matches were, but also on how often those matches were linked to. The end result was the answers were often so good, so much better, so much more accurate than any of the competitors, that people quickly learned the place to go to search for things was Google.
So far all good but it became very clear people were not going to pay to go to Google's search engine site. Even if it was the best one in the universe. By far. So — and it wasn't clear this was going to work — the answer for how Google ended up making money was by charging for advertising associated with their search results. And because that advertising could only appear when you did a search using Google's engine it gave them a long-term edge in the business.
And when you look at everything else Google has done going forward, they've maintained that model for most of their business. It is part of why their high-demand search engine technology, their Chrome browser, Gmail, QuickOffice software, and Google Docs are all available for free on all major platforms. It keeps you part of the Google ecosystem, and makes the advertising links connected to each of these even more valuable than ever before. Plus because Google's search is the best out there, both technically and in the mindshare it holds with customers, it keeps you coming back to where the money-making advertisements will appear.
You're probably thinking that “my product (or service) is different” and so your situation isn't as complicated. Maybe so. But even if you have a hardware product there must be consideration for why people will pay the price you're setting for it, as well as how the business will scale when your volumes increase. And if it's a “soft” product (like an online or digital service), the question of making money is an even bigger question. Because just because you have something great the odds these days are there's something available that's almost as good and maybe even available for free.
So now we get to the third question every Entrepreneur needs to answer: Why should You be the one to run this?
The answer — in case you're wondering — is not “because it was my idea”. Even if you have filed for and maybe even been granted patents, owning the idea isn't enough. Most importantly because coming up with an idea and converting that into a profitable business are two very different things. And also partly because generally any business requires far more than “just the idea” to make it happen.
The sad truth on this last question is that in many cases there may actually be someone better than you to run the business. Someone who is already in the industry who may have a better chance cutting the deals to create the new ecosystem your idea requires, for example. In the case of Apple's digital music business, it's possible the music industry leaders themselves could have come together first — before Apple — to develop the software, digital music encoding technology, download systems, and micro payment structures to dominate the industry that we now know as iTunes, the iPod, and its successors the iPad and iPhone — as parts of that system.
But they didn't. So why did Steve Jobs win here when others (such as Sony Music, for example) more connected and with the tech smarts to deliver didn't get there before him? Why did Amazon become the online sales and distribution powerhouse for books and beyond that we know today? Once again it certainly wasn't because Jeff Bezos owned the key technology patents for selling things online. In both cases it's because of what they did to prepare their company to execute on their strategies, an execution approach that ultimately demonstrates why they were the best ones to carry those ideas forward.
The answer to this last question of the three, then — which you'll need to seek out for yourself — often lies in a combination of your own (and maybe not that unique, though good) abilities to drive the products you're creating to market, plus your ability to cut the early and exclusive strategic partnership deals needed to drive the early critical market share growth for your business. It does take something unique that you have to offer, including personal drive, a track record for the right kind of innovation, leadership brilliance, and more than a bit of charisma. But beyond that it also often takes just the right amount of humility and salesmanship, to know you can't do it all alone and to then take your to the right group of others, to lock in the rest of what you need to grow that business.
When you have that done, you'll have the answer to that third question. And with all three answers you're more than ready to approach the Angel investors and Venture Capitalists for funds, plus those Early Adopters who will eventually help convince the world that you are on to something truly big.
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