What should a startup do to survive?
In this article, you can find out what stage passes startup before you turn into a business, how to best write project business model to attract investments to help start-up survive.
We are going to talk about:
- How to calculate startup for the investor the amount necessary investment;
- What should I do if the project has a complex business model, as well as other useful for the novice entrepreneur things, reinforcing the technical part possible cases of projects Accelerator;
On the first day of training, we have talked about how to start up a calculation for the investor of the amount of necessary investment. What to do if the project has a complex business model, and also stopped on other things useful for a beginner entrepreneur, reinforcing the technical part Practical cases of Accelerator projects.
One of the fundamental postulates sounds like this:
- A start-up is not a business. You can call it a business in the bud, but there is a very high probability that nothing good will develop from it. For easy understanding whether a profitable business can come out of the idea at all, the startup needs to be driven out in several stages.
The first two stages of a start-up in this methodology are:
And if in the testing process the original idea is not confirmed, the startup has to do a pivot turn, build a new hypothesis and again test, and so on until it turns out to be successful.
The construction of the hypothesis, in fact, is a search for a business model in which the entrepreneur must confirm that there is such a problem that his project helps to solve it and that there is a paying audience that needs it. The main proof is the purchase and installation of the product by customers.
In the testing process, the viability is checking the project economy, and here we must confirm that the product is building a business. The result of testing should be a unit-economy of the product, in which we spend less than three times less than we earn on attracting the client. Also, we need to check the economy needs for its ability to scale.
- If everything is successful, the process of pumping traffic into the project begins to increase the client base. At this stage, it is already possible to attract seed-investment. Between the stages of testing and pumping – the decisive moment for a startup. The first two steps differ from the third in several parameters. First, the team often does not have clearly defined roles, and all team members can perform any functions. Only at the third stage, team members usually have clearly defined areas of responsibility. Secondly, mistakes in the first two stages – it’s even good, they allow you to understand the product, business, a concept better. Plus the losses from them are quite small. In the process of pumping the same process already are much more expensive. And thirdly, when the economy is confirmed, the business model is clearly spelled out, the project is already beginning to realize its primary mission – to earn money.
By our technique, the business model of each start-up is described by several components based on the “IIDF Lean Canvas” model, created with the help of some group of individuals.
The elements of this model are:
- The problem;
- Sales funnel;
- Product economics;
The simplest business models are known to everyone: b2b, b2c, b2g, a more complex b2b2c.
But many companies are forced to operate in several markets and target segments at once, which makes their business model two or more times more difficult. An example from the past accelerator set: the E-transport company (a mobile application that in real time shows when a particular bus or tram is arriving at a given stop). Their customers are individuals who install the app for free, and legal entities are advertisers who sell this audience. They have different channels, different economies. In an interaction with natural persons, it can be planned loss-making, but at the expense of advertisers, the company covers these costs. In this model, live Twitter, Facebook, and so on: they give us their services for free, but we are selling it to advertisers as an audience.
Another case of a complex business model, described by Philip director of SimpleOrder:
- The company SimpleOrder – a system for automating the activities of hostels and small hotels (from 10 to 50 rooms), in the basic version – free. But when the hotel owner uses it for about a month, the company offers a paid service of automatic updating of affordable rooms at Booking.com and other booking sites. And it works because often the situation of re-booking the same number of different locations. A person will come, he will have to be populated, an awkward situation may arise, and the main thing that has allowed such a mistake is the hotel, in agreement with sites like booking.com itself, is responsible for placing the client, which can lead to direct and sufficiently significant losses. The top component of the business model is the load generation one: hotels quickly agree to use a free service, and the next step is the creation of a value proposition for these people, through which some of them are converting into buyers.
What is worth knowing to those startups who have such a model?
- It will not be easy for you. When there is simply a product that you directly sell and take away money, and you can check hypothesis for this cycle very quickly. When this is a complex model, you first need to generate leads, then transfer them to someone else, and there will be someone else paying third. While the whole chain is forming, it will be a long time, and in the end, the result may be unsuccessful. We’ll have to go through it all over again. Lifehack from Philip: you just need to understand which of these models to test first, focus on it, and emulate the remaining parts of the business model manually (for example, instead of the mechanical interface for transferring a contact to an auto dealer), make a call to a live person.
An example from the first set of FGI accelerator is the Online Dealer project (service for booking new cars from official car dealers). The hypothesis was this: car dealers, most likely, are ready to buy leads – pay for attracting a person to a test drive. Service was a kind of widget with specific models of cars; it wanted to hang it on portals like Auto.com To test this obvious hypothesis it was necessary to negotiate with dealers and with portals. By the time it took 2.5 months, that is, two weeks before the end of the accelerating cycle, they just started testing. From the client, they received the first money only when the acceleration has already stopped. What conclusions can we get from this? To understand that dealers are willing to pay for attracting leads for a test drive, it was possible with the help of Customer Development – just talking with them. When testing a hypothesis, it is necessary to correctly identify exactly the place that you need to check, so as not to waste a lot of time for nothing.
- Consider such components of the business model as the channels and the market.
Channels are not only advertising places, but also ways of communication with customers, their attraction, as well as the means aimed at it. It can be both personal sales, and targeted advertising. To register channels for attracting clients is necessary, first of all, for the investor: he wants to know what the money gives.
- For example, there is a Google channel, it prescribes keywords, channel capacity, conversion, conversion price, the price for attracting one customer, how much on this channel we will earn and some investments that need to be excited to cover the channel. Next, you can discuss this for a long time, look for ways to optimize. But in any case, if you explain where and why money will go, this will cause the investor’s confidence. To know the capacity of the channel and the conversion, you need to work with funnels: if the ability of the source is 500,000 people, and the buyers of them are only 5, something is clearly going wrong between these two figures, and this needs to be clarified.
A few key points in the design of the funnel:
- It is not necessary to collect all channels of attraction in one funnel. Otherwise, the misleading picture will turn out, which shows nothing: the average temperature in the hospital.
- You need to go for the visitor of the site all the way: problem points are hiding (registration does not work, disorients the menu).
- If you do not know all the figures yet, you can put the common market to calculate the project economics at least approximately.
For the investor, no less important than miscalculation of the channels of promotion and the funds necessary for them has the correct calculation of the market. There are three market sizes:
- TAM (Total Available Market) – the total volume of the market for similar products;
- SAM (Served Available Market) – available volume of the market, that is, a potential market taking into account competitors that are already working on it;
- SOM (Serviceable Obtainable Market) – an available market volume, 100% of your turnover.
An example of incorrect calculations of the market.
- Several years ago, Philip, operating with his money as a partner of the RedButton fund, was considering an investment in a rental service that he wanted to replicate. On reminders that Airbnb occupies this market, the guys answered that six months ago they had already made such a service and sold it, now they want to do it again. In an attempt to understand how they did this, they asked them to count the markets. They calculated that the market for daily rent of apartments and cottages in Russia was $ 1.2 billion. As per statistic that 15% of the market was booked through the Internet, that SAM turned out to be on the order of $ 200 million. And if you take a city with a million people, except for Moscow and St. Petersburg, Will be no more than 10% of the market, and the maximum SOM – about $ 20 million. It would seem, reasonable money. But they forgot one nuance: the service earns on commissions from 5 to 15%. It turns out that TAM – $ 129 million, potentially for the whole of Russia – $ 19 million, and in one city – a maximum of $ 2 million, for which you no longer want to fight. Moreover, in the process of field research, it turned out that in this particular city through the Internet less than 10% of real estate is reserved. The saddest thing is that most of the services with a similar situation continue to be treating the same way.
- An interesting example is the dual market of the graduate of the FSRI Accelerator. EasyTen (a service that every day suggests learning ten foreign words) has discovered two audiences: application users and companies that can sell these same users as clients – educational agencies, language schools, tutor centers, etc. Accordingly, the market that In the end, consists of two pieces: we first sell the solution to people who want to learn languages, build up the base, and then sell interested people to agencies, in general, we can get $ 1.7 billion.
Another important issue for the investor:
- The better they will be competitors. EasyTen rebuilt from competitors in dealing with investors as follows: to LinguaLeo bring to Spanish, Chinese, Portuguese and other markets, you need to spend a lot of time and money on localization and adaptation. Since in EasyTen users learn only words to enter a new market, you need virtually only a month to introduce new pairs of words.
There is another example of GeneGuard – it’s a script that is built into the web service, and diagnosis hacker attacks and makes maximum efforts to prevent them. The guys considered their market quite simply: people who have similar sites, and which it may need, in the world only 200 million, 6.7 million of them are willing to spend money on security. Annually about 675 thousand companies are already facing attacks. From competitors, they differentiated at the lowest price of this solution due to the maximum specialization in protecting the site from hackers. The rest of the services in this sphere do besides this site monitoring, and many other services, so the price of their service is much higher.