Financial Strategies for Lean Startups from Superangel Boris Wertz
Being an entrepreneur is a messy, difficult, excruciating, and painful. Despite movies that may make you think it is cool, it’s really not fun. However, with events like the Lean Crossroad Vancouver, the entrepreneurial experience can be softened and perhaps you’ll be able to make it big.
When three very active and social groups come together to host an event you can expect it to be well attended. Internet Masterminds, Lean Startup Vancouver, and Vancouver Tech Co-Founders did just that and it provided one of the most electric atmospheres I’ve seen. Combined with the solid line up of speakers using the lean methodology there was much to learn.
WHAT IS A LEAN STARTUP?
Dan Martell, co-founder of Clarity.fm and Flowtown, gave a well defined version of what a lean startup is. Combined with input from the other speakers, this is how a lean startup was explained.
A lean startup makes learning as quickly as possible the primary objective. Testing the riskiest assumptions first and listening in on what their customers say about their product.
These typically include assumptions like people will pay for my product, people will use my product and people will come back to my product after they use it. This means that what most people think of as their core product they are creating is usually too large in scale. To quickly test these hypotheses you have to get out there and get feedback quickly to see if your product has any merit.
As such, even before you feel you’re ready with your product you should be looking to see if people will use or pay for it. Make a product 10 times more primitive than what you were expecting.
Ask a customer to pay for a product and you will discover how they truly feel about a product and what they need it to do. This is where the learning begins and you find out how much value your product provides.
If customers aren’t willing to pay for the product, you’re building the wrong one. If your ideas fail fast and often it means you are learning fast and often.
LEAN FINANCIAL STRATEGIES FROM SUPERANGEL BORIS WERTZ
Boris Wertz, a local superangel, described some of the strategies in financing lean startups.
Revenues are the first but hardest way to finance a startup for most companies. Social media is hard to monetize as the nature of the customers means they aren’t willing spend money on these services. This strategy works best for e-commerce, software, and services.
However, if you monetize too early it can be dangerous. Monetizing hampers growth and if growth is necessary perhaps it’s best not to monetize so early.
Minimizing salaries can also prove beneficial. The most successful startups live off instant noodles; of course, this is an extreme. Consider offering stock options to your employees in exchange for a smaller salary. Effectively in doing so you are also testing their dedication and belief in your company. If they truly believe in your company they are more likely to accept the offer.
Avoid large marketing investments with upfront risk. Never invest in channels you can’t track which include radio, TV ads, and other traditional media. In marketing it is best to maximize your acquisition cost to life time value ratio. The best start-ups have a very high ratio. Try certain channels and see if they work. If they do double down on them and if not then try something else.
Minimize capital expenses such as office furniture, deposits, and hardware. In lean start-ups, cash is king.
Optimize your financing round by getting a higher valuation of your company. Such things as favourable unit economics or other incentives which reduce the risk of investors will drive your valuation up. The government of Canada has a lot of ways to get financing without giving up any dilution. Just remember that dilution isn’t everything. Sometimes it’s better to have a small part of a large company than a large part of a small company.
MISTAKES TO AVOID
David Ulevitch, founder and CEO of OpenDNS, dived into what he learned while he was doing his first start-ups and while growing his current company. These are the lessons he learned from his mistakes.
Personnel are vital to startups.
Wasting time hiring, and wasting time with time waters are key things to avoid. If you have a great candidate that is everything you need hire him right away.
Treat all people with dignity and respect even if they are leaving your company. Burning bridges is the last thing startups should do.
Wasting time not making money is also a key part of lean start-ups. If the activities you are doing don’t directly contribute to making money than you are “yak shaving”—the art of doing something useless in the pursuit of some larger problem.
CURRENT LANDSCAPE OF ENTREPRENEURSHIP
Eric Ries, who called in from “undisclosed location,” described entrepreneurship to be experiencing a worldwide renaissance. There is more interest in it today than in any other time in history.
This is being fuelled by the technological changes making it cheaper, and the ability to monetize simpler. There is a lot of money chasing startups and it’s the time to take advantage of the circumstances.
However, it is important that true entrepreneurs take the responsibility to think that once this fads end, will our effort and money spent account to anything? Is there real value being created by our ideas or are we simply getting caught up in the entrepreneurial bubble? Although times are good now, winter is coming. Hopefully we can look back on this time with pride and say we made a better place.
