What’s a Startup? (1 of 2)

This blog is about startups, startup operations, and finance.  But what’s a startup?

Not knowing the answer is your leading cause of death if you are a startup.  (Hint: it’s not about forming a new business.)  Let’s find out why this is a question of existential import.

Eric Reis (the guy who literally owns the term “Lean Startup(tm)”) says a startup is an organization working to deliver a new product or service “under conditions of extreme uncertainty” (Lessons Learned blog, “What is a Startup?” 2010).

Now, established businesses are solving known problems with known solutions.  Their challenge is to do it better or cheaper than the competition.  Think WalMart or Intel.  New businesses (of the non-startup variety) do the same.  Think of the new dentist office in your neighborhood.

In contrast, a startup knows neither the customer problem they are solving nor the product or service solution to that problem.  That’s extreme uncertainty.  And ironically, not knowing is key to their success.

Huh?

It took me a year in my current role to figure that one out.  Here’s the key for me.  If you assume you don’t know the problem or solution, at least not well, how will you devote your resources?  You’ve got it:  resources will go to nailing exactly who the target customer is, what deep problem they have in droves, and how you can solve that problem and make money (in excess of solution costs) in doing so.  That’s what Steve Blank calls establishing Product-Market Fit.

To be a startup, you need to be breaking new ground.  If you’re solving the problem of holes in teeth, you are not a startup.  You are a small business.  Those holes and the solution of dentists putting in fillings are known.  However, if you’re fixing cavities without fillings (technology innovation) or taking patients without appointments (service innovation), you just may be a startup.

If you are a startup, the single most important thing to know is that the customer problem you propose to solve and your solution to that problem are only hypotheses.  They’re not etched in stone.  In fact, your hypotheses are almost certainly wrong in fundamental ways.  The humility of knowing what you don’t know will compel you to go learn the answers in the real world from real target customers.  And a learning experience it certainly will be.  As we’ll talk a lot more about in later blog posts, this learning process is what will most dramatically increase your prospects of success because it will dramatically increase the value you derive from expenditures of those scarce early resources.

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Next up: Part 2 based on Steve Blank’s startup definition as the search for a “repeatable and scalable business model” (“What’s a Startup?  First Principles.”  2010).