Build a Business, Not a Startup.
Truly great companies start with strong business fundamentals.
“What would you do differently if you started your company today?” my friend asked me over coffee the other day. “My biggest learning was from not building my startup as a sustainable business from Day 1,” I responded.
“What do you mean?” she asked, slightly puzzled. I explained that I had been so excited about how ‘cool’ our product and UX was that I forgot about making sure the right business fundamentals were there from the start.
“Having the right fundamentals would have turned my startup into an actual business that could sustain itself over the long term through profit.”
Had I been more aware about the business fundamentals of my startup upfront, I would have made different decisions. In the past, I had made decisions as a designer or product manager. But as a founder of a company, I was required to make decisions as a business owner. This reinforced something I now understand:
Truly great companies start with strong business fundamentals.
These business fundamentals often include unit economics, customer willingness to pay, what is the market, differentiation and ability to scale. And so, I’d like to take a few minutes to review these fundamentals as lessons from the stories of Amazon, Spanx, Tonal, Airbnb, Uber and from my time as a founder and working at Siri.
Lesson 1: Get clear on what you’re selling
Sometimes what your business is selling is not obvious. At Neuron Mobility, we build an e-scooter sharing service but we’re not selling e-scooters. We sell convenience to get to a destination and fun in exploring a city. By asking deeper questions about the value you are providing users, you can start to uncover what it is you should be focusing your attention on.
For example, when Jeff Bezos started Amazon, he started selling books online. He could have stopped there and built Amazon to be an online book store. But he asked himself “What could I sell today that the world will still want to buy 10 years from now?” As a result he discovered he needed to sell something much more valuable:
- Lowest prices.
- Fastest shipping and convenience.
- Biggest product variety.
Amazon started selling books and then went on to sell electronics, clothing and other products. But it evolved even further because Jeff Bezos understood he was selling something far greater and more timeless — a new innovative shopping experience, one that brought the lowest prices, fastest shipping and largest choice in products. This is how today’s Amazon was born.
Lesson 2: Generate cashflow on Day 1
When speaking about startups we often think of building a product first. However a product that attracts users doesn’t always make your business become sustainable and you need to keep raising money to keep it going until it does.
Sara Blakely, founder of Spanx, tried a different approach. She started her company with $5000 of her own money and raised a total of $0 of Venture Capital money.
Her idea began with a prototype of a modified pantyhose and ended up as a billion dollar company reinventing the undergarments industry for women. She did this without raising a single dollar of investor money because she generated cashflow on Day 1.
There are 2 key things that Sara did here to generate cashflow early:
- Target a customer segment that has a strong willingness to pay. In this case she chose the women segment.
- Surprise and delight customers with a unique and differentiated product. She discovered to her dismay that women’s undergarments were designed by men. She noticed a lack of undergarments in the market that made women feel truly comfortable. And so she decided her product would be different because her undergarments would make women feel truly great.
Generating cashflow early means you do not have to rely on raising more money from investors and you can start earlier to build a business that can sustain itself.
Lesson 3: Find niche and unexplored markets
Niche and unexplored markets are great places to start a new business because these are places where fewer people are looking and there is less competition. Less competition means you start your business with a bigger piece of the pie.
Aly Orady, found himself in his mid-30s feeling depressed and not in great health. He discovered he had type 2 diabetes. He wasn’t like those fitness junkies and didn’t enjoy going to the gym. At the same time he knew he had to get off his ass and do something urgently to save his health.
There was no great solution out there for someone in his shoes. So he had an idea to bring the gym into his home instead.
He was able to articulate his uniqueness — a nerd at heart but one who was not willing to compromise on having the full power of the gym right at his fingertips and in the convenience of his home. This is how Tonal was born.
Building a business with a product that maintains the status quo means you’re inevitably going to compete head on with other incumbents and competitors. This doesn’t make much sense when you’re small and starting out. Instead, look at what’s happening at the edges of society and the extremes of life to find out what’s going on that is niche or unexplored. This is where you can find your wedge, build something unique and win the market.
Even if the market is small at first, as long as you can become profitable (which we’ll discuss in the next section) you will be able to build a sustainable business.
Lesson 4: Play a game with strong unit economics
Playing a game with strong unit economics will help as you navigate your market to become cash flow positive. Unit economics is the value of your product to a customer minus the costs involved.
From my experience, no matter how beautiful you make your product or how amazing it’s UX, it’s tough for the product to change the value the customer is willing to pay.
Unit economics also need to make sense as you scale. Software driven businesses scaling from say 100 to 10,000 units are able to do so without adding much more cost for each additional unit. No big deal.
But in real-world businesses such as e-scooters scaling from 100 to 10,000 units means every new unit is an additional capital cost that needs to be offset by customers willing to pay the difference.
Real-world businesses such as Airbnb and Uber are great examples of businesses that need to keep a close eye on their unit economics in order to succeed.
Both deliver amazing and magical product experiences in travel and transportation respectively. But if traveler is not willing to pay to offset the cost of a host to rent out their apartment or if a commuter is not willing to pay for the cost of a driver’s time and fuel, then no matter how magical these product experiences are eventually they won’t become sustainable businesses.
Once you achieve positive unit economics, life becomes a lot easier. It means you either do not have to raise more money from investors, or you just became a lot more attractive to investors.
Check out this link to find a great guide from Jyri Engestrom on the unit economics required to become attractive to early stage Venture Capitalists.
Lesson 5: Look for the inflections
By the time everyone recognises a trend, I believe it’s too late to start a truly great company. Instead, I believe the best time to start is when fundamental shifts are about the happen or are happening early on in their cycle. These fundamental shifts are also called an inflection.
Inflections are wonderful opportunities for new businesses because they change the game, a game where you could start to play and figure out to win. Inflections take keen observation and patience to notice. Here are 4 types of inflections I learned from Gagan Biyani to watch out for:
- Adoption inflections — when people start adopting new technologies or platforms, e.g. TikTok, WhatsApp.
- Belief inflections — when people change their beliefs about the world, e.g. remote work and other social distancing tools due to Covid-19.
- Regulatory inflections — when regulations change, e.g. medical marijuana, new city licenses for e-scooters and e-bikes.
- Market/technology inflections — when there are shifts in markets or technology, e.g. 5G network, maturing of AI frameworks such as GPT-3.
When we started building Siri back in 2008, there were two inflections happening at the time.
The first was an adoption inflection which meant more people were spending time on their smartphones like finding restaurants, events and managing productivity.
The second was a technology inflection where Natural Language and Voice Recognition technology was starting to mature and become consumer ready. Siri sat nicely at the crossroads of both of these inflections to become the world’s first mobile Virtual Assistant.
So, now that we’ve completed our 5 lessons, where does that leave us? Well, circling back to the conversation I was having with my friend, I can confidently say that the #1 thing I would do differently is to start a business, not a startup. So do yourself a favour and ask yourself — am I creating a business?
Keep these 5 lessons in mind and you’ll start a company with confidence knowing that you have a business set up for long-term success.