Hungry Start-up Strategy

Creating New Ventures with Limited Resources and Unlimited Vision

Peter S. Cohan

• Publisher: Berrett-Koehler Publishers
• Year: 2012
• ISBN:
  9781609945305
• Edition: 1
• Topic: Business
• Subtopic: Entrepreneurship
• Index: Business

Entrepreneurs are hungry. But it's not just because they're living on ramen and adrenaline while they pour their all into their business. Peter Cohan has found it's something deeper: a hunger to create the kind of world they want to work in. To leave a legacy, they build carefully with limited resources and maintain control of the venture's direction.For years, students have told Cohan that the seminal business strategy guide, Michael Porter's Competitive Strategy, was too big-company focused. So Cohan—who once worked with Porter—has written the first business strategy book to address start-ups' very different challenges.Cohan focuses on six key start-up choices—setting goals, picking markets, raising capital, building teams, gaining market share, and adapting to change—explaining the unique rules start-ups must follow. For example, when setting goals, large corporations try to maximize their long-term return on equity, but resource-poor start-ups have to plan by setting a series of short-term goals—and how they do this will mean the difference between blazing a trail or flaming out. When entering a new market, well-fed companies can invest substantial time and capital before ever launching a product, but hungry start-ups must get an adequate prototype in front of customers fast, get feedback, and quickly develop a viable business model or they'll starve to death.For each of these six areas, Cohan provides a decision-making approach and lively case studies of what actual entrepreneurs have done. He extracts hard-hitting lessons not only for start-ups but also for investors and even established companies. Hungry Start-up Strategy offers a full menu of vital information for anyone seeking to cook up a thriving business from scratch.

PART ONE

Six Start-Up Choices

CHAPTER 1

Setting Goals
What Makes You Hungry?

START-UPS ARE BORN HUNGRY—their demand for money exceeds their supply. So start-ups need a different currency—a powerful emotional magnet that draws in talent.

Why would anyone go to work for a start-up? The hours are sure to be longer than they would be at a more established company, and the pay is likely to be lower as cash will be in short supply.

The simple answer is that some talented people are able to defer short-term economic gain in exchange for meaningful work with the possibility of a longer-term payoff.

Of course, this puts entrepreneurs in the difficult position of persuading talented people that they should stop whatever they are doing and work for them instead. And as we’ll see in Chapter 3, entrepreneurs must also persuade capital providers to part with their cash to invest in their start-ups.

To recruit talented employees, entrepreneurs must mint emotional currency by way of three hungry start-up goals. These three goals answer the basic questions a talented potential employee might have before going to work for your start-up.

Why should I join your start-up? Mission. The mission is the entrepreneur’s most compelling case for why the start-up is going to achieve greatness. At the core of this case is a passionately held belief that what the start-up aspires to do is important. As we’ll see, that passion might come from the desire to make the world a better place, the excitement that comes from being certain that the start-up could capture a great economic opportunity that nobody else has seen, or the simple desire to solve a problem that perplexes the founder.

How will I get a return on the stock I receive in exchange for giving up my life to your start-up over the next five years? Long-term goals. Long-term goals describe a tangible way that the entrepreneur will measure the venture’s success, say, five years into the future. Long-term goals include being the leader in an important new market, becoming a big public company, being acquired by a bigger company, or remaining permanently private and independent.

How will you actually deliver on that promise? Short-term goals as a series of real options. Short-term goals are specific milestones that the entrepreneur sets over a period of months, and the idea of real options means that each short-term goal is a frugal experiment. Setting good short-term goals reflects how effective the CEO is at getting stuff done. Many of the start-ups I interviewed tend to view these short-term goals as a sequence of go/no-go decisions. For example, the first short-term goal might be to figure out the start-up’s business model, the next might be to get customers to use or pay for the product, and the third to expand success from one market to five around the world. If the entrepreneur can figure out, say, the first goal—e.g., the start-up’s business model—then she continues on to the second one. Otherwise, she shutters the venture.

MISSION: RESPOND TO MARKET OPPORTUNITY, SOLVE PERSONAL PAIN, AND FOLLOW THE RESEARCH

As Figure 1.1 illustrates, entrepreneurs have different ways of picking a start-up’s mission.

Entrepreneurs get the ideas to start companies from three sources:

In many cases, it appeared clear that the founders did not consider their emotional or intellectual connection to the start-up to be a sufficiently compelling reason to devote themselves to a company. Instead, they felt a need to go beyond that personal impulse and determine whether there was a big enough market opportunity to justify the investment of time and money in starting the venture.

FIGURE 1.1 Why Entrepreneurs Start Companies, by Percent of Interviewees.

This is not to say that the ventures that were started purely to relieve personal pain or develop an intellectual interest did not eventually coincide with a market opportunity. Rather, these entrepreneurs were willing to defer identifying that opportunity at the time they started the company. Of the start-ups I interviewed, 24 percent sprang from a combination of personal pain and perceived market opportunity, and 10 percent were born of a combination of or intellectual interest and perceived market opportunity.

Let’s take a look now at examples of each kind of mission.

Respond to Market Opportunity

Responding to market opportunity is the most common reason that entrepreneurs start companies. Their mission is to satisfy that unmet need better than the competition and build a significant enterprise in the process.

The specific nature of the market opportunity varies for each start-up and some are more studious than others when it comes to talking with customers to get external evidence to support their belief that the market opportunity is real.

Among the start-ups I interviewed were for-profits and social enterprises. And one interesting feature of these examples is that two of them—SoFi and m-Via—combine pursuit of market opportunity with a bigger social purpose. Here are some examples of the market opportunities that the for-profit start-ups perceived:

I saw an opportunity in the $1 trillion student loan market to lower the rates that students pay on their loans while creating an attractive investment opportunity for alumni.³³

— Mike Cagney, co-founder and CEO of SoFi, and former vice president and head trader of Wells Fargo. SoFi raises capital from alumni at colleges to help finance loans to their students.

ExtraHop was founded in early 2007; my co-founder and I saw an underserved market. We are targeting a large, fast-growing market. After all, Gartner estimated that the market for network and application performance monitoring products hit $3.8 billion in 2011 and is growing at an 8.5 percent annually. And we were eager to solve the problem. We spent over two years working on building a product that would work well for the customers with whom we collaborated.³⁴

— Jesse Rothstein, CEO of Extrahop, a sub-$50,000 appliance that provides IT managers with real-time system health and performance information.

I see a big opportunity in a very fast-growing industry. IDC reports that between 2001 and 2011, the market for our product—virtualization storage—grew from scratch to $11 billion. Before founding Tintri, I oversaw the development of all server virtualization technology for VMware as its VP of R&D from 1999 to 2006. I recognized the problem server virtualization created for storage early on and resolved to shift my career focus to solve this storage dilemma. To that end, I founded Tintri—it’s Gaelic for “lightning.” My aim was to extend the benefits of virtualization from the server side to storage—what could be a lightning bolt of efficiency if carried out.³⁵

— Kieran Harty, CEO of Tintri, which helps companies store and retrieve information more efficiently.

While working at a mobile gaming start-up, I grew increasingly outraged as I analyzed the way the cross-border money transfer business has skillfully avoided disruption of its tactics over the last thirty years. I felt that it was unfair to exploit the weakness of people sending money home and became convinced that I could develop a service that would offer them a lower-cost, safer way to transfer money.³⁶

— Bill Barhydt, CEO of m-Via, which helps people wire money to their families in Mexico and other countries.

From these examples, the takeaway is simple. Start-up CEOs should set their start-up’s mission based on their own experience. But the mission should be bolstered by some external validation: ideally, in-depth customer research that confirms that what is important to the founder will also be important to a sizable audience.

This same principle holds for social enterprises—set up not for profit, but to make the world better. What’s different about them is that they face a unique challenge in their efforts to achieve what is most commonly a very noble social purpose. It’s challenging for social enterprises to make enough money to perpetuate doing social good. Here are some examples:

One of the reasons I started PoverUP was that in the summer of 2008, I volunteered in a border refugee village in Thailand. That’s where I realized that a little money—I bought 50 donuts for $1—could go a long way to helping poor people start businesses that would lift them out of poverty.³⁷

— Charlie Javice, co-founder and CEO of PoverUP, a social network for university students to get involved in soci...