A Norwegian version of this post was published on “Ledernytt” Nr. 1 / 2019 in the form of an interview.
Innovation is a relatively new discipline, especially when it is not incremental and with a digital technology as a reference. Much of what we consider “best practice” today is based on “trial and error”. Still, there are recipes and processes that can help entrepreneurs, managers, and employees to increase their chances of success in developing radically new solutions. Startups and established organizations should naturally have different focus if they want to succeed. Nevertheless, many of the comments and guidelines described in this post apply to both startups and typical New Business teams in mature organizations. I will start with startups and the most typical traps entrepreneurs face.
First and foremost, it is extraordinarily important that all owners of the startup have the same goals and are bonded by them. What is more important to the owners? Control of their baby or rapid growth and a potential lucrative exit, most likely requiring new capital and dilution of the founders? Disagreement between the owners or within members of the board can lead to a terrible decision paralysis.
Thus, the formalization of the relationship between the founders is of extraordinary importance. It may be unpleasant for some, but the shareholder agreement should not be considered a mere formality. It is a very serious document that should regulate scenarios that no one wants to face, but which may happen. The agreement between the entrepreneurs must therefore take into account the worst possible scenarios. An example? The possibility that at least one of the entrepreneurs gives up and finds a permanent job. Should the entrepreneur who “jumps off” be allowed to keep his shares and potentially reap the fruits of his or hers ex- colleagues hard work?
The reality in most cases is that the customer has somehow already solved the problem the startup is trying to help with.
Then there is the “visionary trap”, entrepreneurs with a strong desire to change the world and preferably disrupt one thing or another. Unfortunately, it is less common for them to articulate who their target audience is (customers or users) and, not least, who is not. Consequently, they also do not know what kind of value their product or service really should create for them. Too many entrepreneurs sit in their office and discuss critical issues for the future based on gut feelings, things they’ve heard or read, or simple clichés. Hypotheses do not lead anywhere if they are not actually tested by talking to potential customers, suppliers and partners. You don’t have to have your whole product ready. Building early prototypes and mock ups usually gives valuable feedback to the startup team. The very popular Lean Startup Build-Measure-Learn model is based on this approach.
Even more common though, is to neglect competition. The phrase “we don’t have competitors really” is unhealthily common. The reality in most cases is that the customer has somehow already solved the problem the startup is trying to help with. The key here is being able of determining which key figures the customer measures their pain upon, and to beat them with the new product or service. Does the reader remember the value proposition of the original iPod? “A thousand songs in your pocket”. Simple, yet compelling!
For entrepreneurs, it is therefore essential to follow some simple rules tomaximize their chances of success. This is especially important if they start as a small company with great enthusiasm and few resources.
If you are in a life situation where starting a company does not fit, it may be more sensible to let it be. New opportunities will emerge later in life if you really have an entrepreneur in you.
First, the founders must know each other well. Everything else means to take unnecessary chances. They must be able to trust each other, because the journey is most likely going to be tough. In a country like for example Norway, where comfortable jobs are relatively easy to get, one must be hundred percent sure that all co-founders are willing to invest the same. Here I am not talking just about money, but about time, focus and the daily effort.
What is the situation at home? Are some of the founders married or have family, while others are single? No one beats math by playing the hero. If you are in a life situation where starting a company does not fit, it may be more sensible to let it be. New opportunities will emerge later in life if you really have an entrepreneur in you.
Secondly you have to invest everything you can into listening to potential customers before you rush to the market with a product. Which is the target segment? How big is it? Which customers are there? Where is the pain the customer experiences? How much is it worth removing the pain for the customer? Not least, is the customer willing to pay to have it removed? Does those customers have the money to invest at all? How much value will a customer create for the company (so-called Life Time Value) in relation to how much it costs to acquire it, ie Customer Acquisition Cost? A ratio of three or higher will impress most investors.
Let’s get real. Employees of a potential customer usually work mostly for themselves and their families, not for the company that pays their wages.
It helps thus extraordinarily that the founder or founders of the startup are themselves part of the customer segment the new solution is aimed to. If the team knows the target group well, they will automatically know many critical elements regarding pain and cost already from the start. This is not only useful and time-saving. It helps adding credibility scores in front of investors.
focus groups are also an excellent opportunity to recruit the participants as customers or pilot customers in the future.
Identifying the right segments is, though, not enough. Let’s get real. Employees of a potential customer usually work mostly for themselves and their families, not for the company that pays their wages. If the new product offered by the startup can lead to less power or fewer people in the department of the potential user, the chances of making a sale are staggeringly small. Which formal incentives does the user or buyer has at the company that may define his or her career? Are these incentives compatible with the benefits that the new product theoretically should bring? Sorry. Idealism does not help.
As a consequence, it is extremely important not to identify the potential customer just as an organization or as a role. One has to identify who, first name and last name, should be “Champion” and force the new solution through in the organization. Don’t you know him or her? Check if anyone in your network does. Chances are most are willing to help. Invite potential champions to a focus group and ask candidly. Don’t be afraid to discover that your new solution isn’t really that brilliant. If the business idea is not viable, it is better to discover it early. Such focus groups are also an excellent opportunity to recruit the participants as customers or pilot customers in the future.
Good KPIs , a collection of letters of intent and a serious plan for the use of money in the future significantly increase the chances of getting serious investors on board.
This maybe critical, because most founders end up in a chicken-and-egg situation. They need money to grow and become profitable, but most investors want to see growth and customers – traction- before they contribute with capital. The situation, however, is not hopeless. You definitely will need a financial buffer or some kind of first access to capital. However, if the innovation is good enough, then the startup should be able of signing several Letters of Intent (the more concrete the better) with potential customers and run a few pilots. The solution must neither be perfect or complete. A Minimal Viable Product or MVP should suffice.
Still, be aware of what to measure with the pilots. What Key Performance Indicators (KPI) will trigger a positive response from investors? What do you need before you can optimize these and what will it cost? We talk about everything from organization to number of people, network, knowledge and capital. Good KPIs , a collection of letters of intent and a serious plan for the use of money in the future significantly increase the chances of getting serious investors on board.
Innovation teams in established businesses also suffer from some of the points that have been mentioned. Nevertheless, the biggest challenge for established businesses is to master the transition from pilot to scaling. In order to succeed with such a transition, a set of questions must be answered before giving green light to piloting and scaling.
Who is responsible for running the pilot and making the new solution work as an integral part of the business?
How should the incentives in the company be changed so that they are adapted to a new offering and most probably to a new type of operations?
Who will formally change the routines and job descriptions?
Who will train the staff in the new skills needed and how? Do they want to change their everyday lives and who will incentivize them if they do not want to? How?
How should this be communicated to users and customers? What to do with those who do not want to or cannot adapt?
It is therefore essential to prepare the transition from pilot to day-to-day operation already in the final phase of it. It implies a separate budget for innovation that not only covers the pilot, but also the scaling of it. In addition, it involves developing new job descriptions and incentives for what will be the new core business, in coordination with the innovation team. Good methodology, clear KPIs and good routines on portfolio management at top management are therefore essential.