Consulting with startups. The “right” way.vaidy
July 20, 2016
This is about something that’s been bothering me and the team here for years. You might have heard this phrase before: Don’t build something nobody wants.
I first came across this idea, I think about 6 or 7 years ago - when I first heard about Eric Ries and the Lean Startup. Almost all of our revenue at that time came from startups - so this advice was particularly relevant.
As the years rolled by, two sets of things happened:
Eric Ries and team did their thing. They published a bunch of books. They spoke at conferences. They consulted with startups - large and small - and shared their stories - of how much waste they’d avoided creating - using Lean Methods.
My team and I did our thing. We kept up with everything that was happening in the Lean Startup world. We read their books, listened to the podcasts and attended conferences. And then…We’d come back to our desks at work, and continue working with our startup customers exactly the same way we’d always done. Write code for them whenever they asked us to - and billed them by the hour. All the while, knowing deep inside, that we were probably building something that nobody would ever want.
I doubt anyone can blame us for doing that. We were consulted by our clients to build software and we did.
But, when I ask myself the question, should we have done something different, anything different…I can see multiple situations where we could have or should have guided our customers better.
There’s 3 phases while building a startup:
Phase 1: Problem Solution Fit [“ Do I have a problem worth solving?”]
Phase 2: Product Market Fit [“ Have I built something people want?"]
Phase 3: Scale [“ How do I accelerate growth?”]
Let’s go through each of these in succession:
Phase 1:Problem Solution Fit
(PS Fit) is when the entrepreneur has gotten enough feedback from speaking to enough potential customers - that there is indeed a problem worth solving and that his product idea is a good fit for that problem.
Further, these potential customers have also promised to pay a certain price for his product when he ships it. The entrepreneur can now give himself “permission” to build the product and test how strongly his customers hold up their promise.
**Phase 2: Product Market Fit (PM Fit) ** is when there is clear unambiguous feedback from the market that the business model has been validated - that, not only is there very good market demand for the product, but also that a viable business can be built around the product.
Phase 3: The Scale stage is where there is significant business expansion happening.
A Depressing Stat
Now..here’s the question: What % of startups are yet to cross PS Fit phase? 50%? 70%? 90%?
You may be surprised to know that it’s a large majority. Probably more than 80%.
[NOTE: This is based on my own research and experience - but has not been tested/measured/validated by me.]
So, what are they supposed to be doing? The most suggested approach before hitting PS Fit is to get out of the building and talk to customers. Instead, what most entrepreneurs do is to assume that they have already crossed this stage - and start doing the things that are meant to be done only to achieve PM fit - or Stage 2.
They then set out to build an untested solution for a problem that is also untested. Needless to say, this ends up in a lot of code being written (as indicated earlier, we @ Multunus are guilty of this too), that just lies by the wayside - with hardly a soul to try out.
We asked ourselves the following questions to help us rewind and get a better perspective:
Why do we want to work with startups?
What “phase” startups do we want to work with? Do they need to have crossed PS Fit or PM Fit, for us to work with them?
If they were yet to cross PS Fit, what would be our recommendations to them?
If they’d crossed PS Fit but were yet to cross PM Fit, what would we recommend then?
If we could rewind back a few years, what should we have done differently in terms of the startups that we worked with?
We’ll look at each of the following questions below.
Why do we want to work with startups?
First, some history
We’re now into our 8th year of business. From Year 1 to Year 7, more than 80% of our revenues came from startups (and every single one of them were in the Pre-PS Fit phase). We thoroughly enjoyed building products for these startups. We learned almost everything we know about world class engineering (technology & agile processes) while working with these customers.
In fact, it is because we worked with startups so much, that we had the opportunity to iterate and learn so much over the years. The startups founders that we worked with were mostly non-technical and they relied on us heavily to make almost every single engineering decision. Perhaps none of our differentiation and focus in areas such as Test Driven Development and Continuous Delivery would have existed if we didn’t have the space to experiment and learn. Our startup customers gave us that space.
While I’d like to say it was a strategic decision to work with startups, it wasn’t. Our only “plan” was to ensure that we kept creating more value for our customers by learning, experimenting and tweaking our process everyday.
Having said all of the above, the driving factor was always to see these entrepreneurs succeed. For us to help them get to PM fit before they’d run out of time and/or money.
Our Report Card
So, how does our report card look?
Did we end up shipping working software at a good pace?Yes. Was the software that we shipped of high enough quality?Yes. Were the startups able to reach PM fit?No.
Did we do anything significant to help them achieve PM fit? Yes and No.
Before I move on, let me dive a bit more into that last answer.
What did we do to help these startups achieve PM fit?
What did we not do to help these startups achieve PM fit?
To answer both of the above, take a look at the following image:
We focused on the “The Build” and “Code Faster” bit. And we’ve written and spoken about this as well.
The “Measure” and “Learn” bits? We hardly did anything about them, other than gently encouraging our startup customers to take care of those aspects.
Now let’s rephrase that original question a bit: Why do we want tocontinue working with startups?
We know that the value we’re currently providing in terms of “Coding Faster” is valuable for startups. And we enjoy delivering that value.
We know that the Lean Startup is a “mindset shift” - that does not come easily. But it can be accelerated when you have a coach who can both:
Empathize with customers struggling with the shift in mindset, and also
Provide guidance while they navigate through the steps needed to cross “PS Fit” and “PM Fit” phases.
We've been building our skills in the Measure and Learn parts of the above cycle. And are now in a position to provide a more holistic service to early stage startups.
The good news is that we've started seeing some early successes with existing customers - where we've been working through all parts of the above cycle.
So..we are making progress. But it’s the early days. The real magic is when we help startups hit PM fit.
What “phase” startups do we want to work with?
Do they need to have crossed PS Fit or PM Fit, for us to work with them?
Let’s zoom out for a bit here.
At Scale: At this stage, the customer’s business model is already proven in the marketplace. And their primary constraint is in being able to meet the increasing demand for their technology products.
We’re already working with customers at this stage. For “Scale” customers, the most amount of value we can provide is our deep technology expertise. This is because at this stage, their technological problems are not trivial - and they need deep expertise to come up with creative technical solutions to those problems.
Beyond PM Fit, Before Scale: Startups that reach this stage are in need of rocket boosters to fuel their growth, to ensure that they capitalize on the traction and resonance they’ve gotten from the market place. At this stage, the startup will need to invest heavily on marketing and/or sales, hiring and product.
As of today, we arenot focused on this segment.
Why? Because our team would need to effectively complement the rapidly growing Marketing/Sales teams and we’re currently not equipped/skilled to handle this need.
Beyond PS Fit, Before PM Fit: At this phase, the entrepreneur knows:
That there are real must-have problems out there that need to be solved by a specific customer segment.
They have a pretty good idea of what solution will solve the customer’s problem much better than existing alternatives. And they have confirmed that this solution will be received well by the customer.
Finally, they have also confirmed the price that the customer will be willing to pay for the solution (once it’s built).
What they might not know are:
How to ship the solution in small iterations - to allow for frequent feedback from customers [This is where the “Code Faster” skills come in handy]
How to effectively get qualitative (for example, with usability tests) and quantitative (using analytics) feedback on the product
As of today, our services have expanded to include both of the above. So, yes we do work with startups in this segment. I’m glad to say that we’ve successfully helped our first startup customer in this segment to grow his product from an idea to something that is gaining traction among enterprise customers.
Before PS Fit: At this stage, the entrepreneur:
Has an idea for a product that he’s excited about and thinks would be great business opportunity as well
Has done some due diligence on the idea
What the entrepreneur may not know are:
Who his target customer segment might be and what pressing/must-have problems are and how they’re solving the problem today
What his unique value proposition might be
What his solution is going to look like and what price his target customer segment might pay for his solution
What process he should follow to answer all of the above questions
As of today, we work with startups to help them answer all of the above questions as well. Once again, I’m glad to say that we’re actively working with a startup at this phase. And we’ve already helped him pivot significantly from his original idea, without writing a single line of code, yet.
In summary, we work with startups in all phases except the ‘ Beyond PM Fit, Before Scale’ segment.
If our customers were yet to cross PS fit, what would be our recommendations to them?
The most important activity at this stage is what is called Getting Out of the Building - that is actually having real face to face conversations with potential customers. More technically, this is called Customer Development.
There are two key parts to this process:
The “Understand Problem” stage, and
The “Define Solution” stage
Here’s a summary of what those stages mean:
|Stage||Stage 1: Understand Problem||Stage 2: Define Solution|
|What our startup clients need to Learn||- What are client's customer’s most significant problems? - How are those customers solving their problems today? - Which specific customer segment has the problems?||- How will our clients identify their early adopters? - What is the minimum feature set needed to launch? - Will the end customers pay for a solution? What price will they bear?|
|Key Tasks||- Informal Customer Observation - Problem Interviews||- Prototype [pdf] - Solution Interview - Testing Pricing|
You could say, that the goal of this stage is to exit with a great deal of empathyfor the target customer segment.
If they’d crossed PS Fit but were yet to cross PM Fit, what would we recommend?
At this phase, the customer has the empathy with the target customer segment that they need and can now give themselves permission to actually build the product to test the assumptions using the product itself.
Once again, this phase is also split into two parts:
Here's a summary of what those stages mean:
Stage 3: Validate Qualitatively
Stage 4: Verify Quantitatively
What our clients need to Learn
*Does our landing page get noticed?
*Do end users make it all the way through our activation flow?
*What are the usability hot spots in our product?
*Does our MVP demonstrate and deliver on our Unique Value Proposition (promise)?
*Can we bring on more paying customers (end users) using our existing channels?
*Are these customers paying for our solution?
*Have we built something people want?
*Validate Customer Lifecycle [Pay to read full chapter]
*Sean Ellis Test
If we could rewind back a few years….
What should we have done differently in terms of the startups that we worked with?
The only thing I think we should have or could have done differently is to have had this level of clarity earlier. How could we have done that?
Well, we could have asked ourselves when we were approached by some of our earlier startup customers “Wait..But Why do we want to work with this startup? What additional value can we create for them, beyond the technological services that they approached us for?”.
We couldhave put our revenue interests second and forced both ourselves and our startup customers to pause and reflect. To be honest though, I’m not sure if we’d be in business today if we’d done that.
Important questions to answer before consulting with startups
The startups that we worked with so far were all in the “ Before PS Fit” category.
As I’d mentioned earlier, our key recommendation at this stage would be to get out of the building and answer the question: “ Do I have a problem worth solving?”
But here’s some other questions that are worth asking:
Are there successful startups who don’t necessarily follow the above framework? Yes
Is it possible that a startup founder who chooses to work with us, listens to us patiently on the whole Lean Startup recommendation and then still chooses to take a different route - knows what he’s doing? Yes, of course.
Do we think we can create significant value for startups with just our technology skills, that is by being involved onlyin the “Build” phase? Yes
If a startup chooses to engage only on the “build” front, is that something that we’re still open to? Yes
NOTE: The above answers are equally (perhaps more?) applicable for startups in the next stage - that is those who’ve crossed PS Fit, but are yet to hit PM fit.
A new consulting engagement model for startups
Considering that we’re strong believers in the Lean Startup approach (and are keen to avoid building something no one wants), how do we reconcile that desire when our clients engage us solely on the build phase?
Here’s our new engagement model for startups:
As of today, our startup consulting offerings include 3 types of services:
Market Analysis & Research (including Business Model iteration and Customer Interviews)
Solution Analysis & Research (using our Design Sprint approach - which includes Prototype creation & Customer Interviews)
MVP build & iteration (using our Continuous Deployment approach)
Our sales team will work with the startup customer to:
Determine the current stage of their business (At Scale Beyond PM Fit, Before Scale Beyond PS Fit, Before PM Fit Before PS Fit)
Determine whether we can create significant value for the startup or not based on our range of both startup business skills and technology skills and the customer’s budget
Strongly recommend one or more of the above services - based on the above factors
- Then help the customer make the final decision - which could range from completely going with our recommendation (at one end of the spectrum) to suggesting an alternate partner that they should work with (to the other end).
We think this adds a lot more clarity in terms of our engagement model with startup customers.
A clearer conscience
As they say: Better late, than never.
With our earlier model, the following two aspects were less aligned:
Our startup customers’ need to discover a repeatable business model before their runway ends, and
Our revenue model (consulting based mostly on hourly billing)
With our new model, we can now walk together with our customers, looking in the same direction: Forward.
And that makes us happy :).
Many of the key ideas in this post are based on Running Lean by Ash Maurya. Ash’s framework is perhaps the most prescriptive and practical “How-To” system that exists for entrepreneurs today. Do yourself a favor and get the book today!.