It’s What You Know for Sure That Just Ain’t So
Startup killing hidden assumptions are avoidable
“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.” Mark Twain
Entrepreneurs? Startups? Listen up. Samuel Clemens was spot on.
Another way of saying this is, startup killing hidden assumptions are avoidable. How we think customers make decisions is often wrong. And these undiscovered errors are fatal to entrepreneurial dreams.
Here are some common mistaken beliefs that you must test and correct to be successful as an entrepreneurial startup. They’re gleaned from twenty-years of investing and coaching startups. A few are so well known that they are red flags for investors. The lean startup methodology of hypothesis (or best guess) testing must include testing your startup killing hidden assumptions. Don’t let your hidden assumptions become avoidable mistakes.
We write about entrepreneurship at Aging with Freedom because High Purpose, or service beyond self, is an essential element of success in our Third Act (formerly known as retirement). See more on our motto High Wealth, High Health, High Purpose at About Aging with Freedom. Encore entrepreneurship is a big trend for Boomers. When we retire from working for others, many of us think about how we can apply our lessons learned from a career in a way that serves others. Or perhaps we focus on our passions or avocations after a life of vocation. The market works because we all become servants to each other, providing what we’re uniquely great at while buying the expertise of others.
Lean Startup Toolkit
For more on the Lean Startup approach see:
Business Model Generation: A Handbook for Visionaries, Game Changers, and Challengers, by Alexander Osterwalder and Yves Pigneur. This is a graphics-heavy paperback filled with practical tools and examples. It’s a quick read but requires practice to apply. For the details behind the concepts, the Bible is, The Startup Owner’s Manual: The Step-By-Step Guide for Building a Great Company, by Steve Blank and Bob Dorf.
Steve Blank also has a great introductory article in Harvard Business Review if you need more persuasion. Why the Lean Start-Up Changes Everything. Talking to the customer first, not last, just works.
Another resource-rich source is www.SteveBlank.com, especially the Startup Tools tab.
If you are a late-career entrepreneur planning your encore venture another great resource is www.Retirepreneur.com. (Retirepreneur wins our Award for Best Blog Name, with a mashup of two concepts that clearly conveys the target audience.)
The Lean Startup approach is all about testing our best guesses or hypothesis about why customers do what they do before we burn money, time, and relationships. We do it by getting out of our heads, out of the building, and talking to real customers. Only from customers will you understand their reality. You’ll learn to explain the benefits of your idea in the voice of your customer. That’s not necessarily your voice or how you reached your ah-hah entrepreneurial moment.
The Lean Startup is now the standard approach of our leading accelerators and incubators that help startups take ideas to market. It’s now expected by major public and private investors.
So, if the Lean Startup is the right way, what are some ways startups get it wrong? Back to the dangers of our startup killing hidden assumptions.
Some common assumptions that we don’t even realize we’re making include:
Perfection comes before launch
Many creatives innately believe that you can’t sell something that isn’t finished. And finished requires having all the engineering and production issues resolved. This is especially true of entrepreneurs that come from resource-rich big corporate environments. Getting it perfect before launch feels to many creatives or entrepreneurs like it should be lower risk.
It just ain’t so.
Expecting perfection exemplifies startup killing hidden assumptions.
With agile development and the lean startup, perfection comes after launch (if ever).
The whole concept of minimum viable product (MVP) is to get started with two thresholds:
- First, you have to meet the market minimum expected by customers of any player in your market space. This requires asking the customer and multiple iterations to get it right.
- Second, you need at least one benefit that is uniquely yours. It’s the unique that defines your bullseye target customer and market fit.
“Build it and they will come,” only works in Kevin Costner baseball movies.
But MVP is about delivering on your unique value proposition or brand promise. Your MVP doesn’t have to be done to find strategic customers, key partners, or investors.
There are many examples of products and projects presold long before there was a working prototype or final engineering.
To get started marketing and pre-selling you don’t even have to be ready to deliver your MVP. If you think about it, Kickstarter proves the point. Crowdfunding is all about preselling to enable delivery of your MVP. And it tests customer demand. Are there willing and able buyers for your idea or are you chasing a chimera? Preselling is an essential entrepreneurial skill. Thinking you can’t presell that you need a fully finished product? Yep, that’s a mistake. Another to add to the list of startup killing hidden assumptions.
A mentor of mine built an entire factory by pre-selling its capacity to a major national submarine sandwich restaurant partner. He had turkeys to process. But what he sold the restaurant chain was a state-of-the-art, food safety system that would pre-cut and package sliced meats and cheeses. It saved labor and improved both worker and food safety for the client at the restaurant. It protected against food contamination with positive pressurized HEPA filtered air in clean room work cells, sterile packaging, and documented controlled environment shipping and handling. The engineering wasn’t done when the agreement was inked. It was enough to know it could be done. Factories and value-chains are far more complex than most products. If pre-selling works here. It can work for you.
I have another client that sold his company and intellectual property (IP) based on the market potential of a new idea, even though he didn’t have the capital to produce it himself. He did have customers lined up. He’d done his customer discovery. He’s now in sunny southern Texas with his diesel pickup and fifth-wheel avoiding the cold weather in retirement. And the well-capitalized buyer is selling his innovation like hot cakes. After working out the details of manufacturing.
Elon Musk pre-sold almost every Tesla car, long before fully working out the engineering or the manufacturing.
Preselling is a way to conserve capital or be cash efficient. With orders in hand, you can debt finance or you can sell the IP and the order. If you can get the customers, the money will follow.
Some other common but wrong startup killing hidden assumptions?
Selling to Everyone
This is an investor red flag. An entrepreneur comes in and says, “Everyone would buy this. . . .” The investor walks out. Why? You don’t know your bullseye target customer. And you can’t afford to sell to everyone. Your message will be so unfocused that no customer will recognize themselves as the “market fit” – the one who gets the most benefit from your offering.
Selling on Low Price
Many startups seem to believe that winning business with low prices is a good thing. Investors want to see you sell on value, not low price. Value is a function of price and benefits. The only way to win the low-price game is to truly be the low-cost (of production) competitor. It’s like the Highlander. There can be only one. And most startups lack the scale to be the true low-cost seller. Cost is not the same as price. Rarely should your buyer know your cost-of-production. Of the various strategies to profitability, low-cost of production, high-quality, and innovation? Low cost-of-production is the worst for average margin and return on invested equity. Not a good way to attract investors.
I Can Make It For Less Than That
Wanna be entrepreneurs often look at market prices and say to themselves, “I can make it for less than that.” That’s true. Any successful seller is making it for less than that.
But it’s the wrong question. You should be asking, can I afford to sell it for less than that?
Most industries have a cost-of-production or “Cost Of Goods Sold” (COGS in accounting speak) substantially less than the price. Gross Margin = (COGS/Total Revenue) at the company level or (COGS/Price) at the product level. For instance, You better have a significant Gross Margin. Why? Because, from the remainder, you have to pay overhead (fixed expenses) including salaried employees and more. You have to pay the Cost of Sales (COS). Marketing and distribution aren’t free. No matter how hard it is to make stuff well and consistently? It’s harder still to sell stuff. It’s why great sales and marketing teams are so valuable. That “get, keep, grow customers” cycle doesn’t happen by accident. Marketing and sales enable everything else. You also have to pay for service after the sale.
It’s not enough to make stuff cheaper than the market price. You have to do the full spectrum of business and deliver competitive value at a competitive price justified by your unique value. Gross Margin is essential. To survive you need enough Gross Margin to still pay all your other expenses and leave a Net Margin or Profit.
Don’t confuse cost and price. Don’t confuse Gross Margin or COGS and Net Margin and Profit. These are red flags for investors considering debt or equity and more startup killing hidden assumptions.
Promising Low Price and High Quality
Are you promising, “Low price and high quality?” This is a variant of selling to everyone and relying on low price to win business. Compound the other mistakes with promising high quality. Or for overkill, add, “and great service.” Now no one believes you. Thinking these go together? Startup killing hidden assumptions.
Customers often assume you get what you pay for. Without more information, price is a surrogate measure of quality. We assume the higher priced car is higher quality. The high-priced lawyer is more expert than the public defender.
Every contractor knows the old saw, you can have low price, high quality, or fast. Pick any two. Don’t promise everything. It’s not credible.
And low price is not inherently good for all customers. If I want exclusivity, or leading-edge, low-price actually sends the wrong message. Low price and exclusivity are mutually exclusive. You can’t be both mass market and premium. You shouldn’t promise both. It confuses people. And you can’t deliver.
Investors see these mistakes as:
- You don’t know who your customer is. And;
- You don’t know what the value to the customer is, and therefore you don’t know how to price based on value.
A corollary. Whatever your unique is, it shouldn’t be “low price”, or “high quality,” or “great service,” (or “great people”). Why? Everyone says that. It’s not unique enough. It’s not a quantifiable benefit. Any of these may be important to the get, keep, grow customer funnel but it’s not enough to be unique. Things like reliable quality are closer to minimum market requirements than a distinguishing market advantage.
Selling a Commodity
Startups can’t afford to sell commodities. You must offer something unique and different. De-commoditize your product or service. Charge a premium for that uniqueness. If you can’t, you’re not unique enough.
There’s No Competition
So, if commodities are bad, surely no competition is good? Nope. A startup that thinks it has no competition is another investor red flag. It means one or both of the following:
- You don’t understand the customer or the market. There’s always competition in the status quo solution to a pain point. Customers are doing something with their time, money, and resources.
- You’ve got a pain point or problem that isn’t worth solving.
In fact, from an investor viewpoint, other startups in the same basic marketspace can be a good thing. It means that other entrepreneurs and investors see opportunity in a pain point.
As an investor, I start with, “Do I believe in the market space? Is this a problem worth solving? Is the potential market size worth pursuing?” Once I believe in the market space, then I’m looking for an entrepreneurial solution and management team that I believe can perform in the upper quintile of the market. There’s almost always more than one way to skin a cat. Solve the same problem or pain point. Or serve the same passion. No one ever gets all the market. I need for there to be some losers for my winners to beat.
Think you have no competition? It’s one of those startup killing hidden assumptions.
Check Your Startup Killing Hidden Assumptions
This list of common startup killing hidden assumptions or mistakes is not exhaustive. Others include that it’s easy to replace the “middleman.” (Hint, there’s almost always a reason why intermediaries exist.) You can’t disrupt a market until you understand how the current market operates and why.
You may have other fatal startup killing hidden assumptions. Dig deep to make sure the market and customers behave the way you think they do for the reasons you think they do. Guessing wrong, even unknowingly, can be fatal to a startup.
Listen to Mark Twain. What gets us into entrepreneurial trouble are those things we know, that just ain’t so.
About the author
Daniel Winegarden is an Aging with Freedom principal. His day job is as an I-Corps‘ VentureWell certified Lean LaunchPad instructor. Dan works with a variety of entrepreneurs, especially tech and data-driven startups pursuing national and international markets. He focuses on market fit and strategic relationships. Get the right customer and people and the money will follow. Dan explains his own unique value proposition or brand promise as an entrepreneurial coach, “I help entrepreneurs tell their best story in language meaningful to the listener. That requires both persuasive and internally consistent words and numbers. It requires translating the language and worldview of the entrepreneur into that of the listener, especially the customer.” Lean Startup is all about testing your best guesses with customers before launch. This includes finding and disabusing startup killing hidden assumptions.