STARTUP DEVELOPMENT AND ENTREPRENEURIAL MINDSET
The development of modern startup companies is directly related to the entrepreneurial values, skills and mentality. The new businesses that manage to change the entire markets and industries with their innovative products rely on the entirely new rules of the game when compared to the established firms. Creation and evolution of fast growing startup needs to take into account the key characteristics and mental models that makes them stand out in the competition and provide customer with innovative solutions.
Entrepreneurs who launch the new fast growing businesses, create new markets and provide solutions to previously unsolved customer problems, possess a very different mindset from the traditional owners and managers. Before entering the entrepreneurs’ territory of new business creation, it is important to understand these differences. You can do it by answering the following questions that will determine how entrepreneurial is your approach.
The rationale of this short survey was to provide you with general understanding of what it means to be entrepreneur. Although a part of entrepreneur’s success depends on personality traits, such as ambitiousness, drive and persistency, most of the characteristics can be learned.
There are several possible definitions of entrepreneur. In most general terms, entrepreneur is a person who has started or is in the process of starting an enterprise, taking on financial risks in the hope of profit. More specifically, entrepreneurs are “innovators who drive the creative-destructive forces of capitalism” (J. Schumpeter, 1883-1950), they “shift economic resources out of an area of lower into an area of higher productivity” (J.B. Says, 1767-1832) and “always search for change, respond to it and exploit it as an opportunity” (P. Drucker, 1909-2005). Entrepreneurs differ from traditional businessmen in their approach to change, risk and opportunity. So entrepreneurship is a process of identifying opportunities, allocating resources and creating value by addressing the previously unmet customer needs.
Opportunities can be identified by observing the economic, social, technological and market trends. Entrepreneur always follows the news of the industry he/she is interested in. The media channels, search engines can provide with plenty of information leading to the discovery of potential opportunities for creating own start-up. Economic trends may be related both to the improving as well as deteriorating economic situation and purchasing power of customers. When economy grows, people are willing to spend more on products that go beyond their fundamental subsistence needs and enhance their lifestyles. When economy is in recession new businesses emerge that provide customers with money saving solutions. Social trends influence and change our lifestyle and the way the social value of products is perceived by different customers. Social trends can also help discover new customer groups and new market categories, e.g. it is worth thinking about such social trends as ageing population, health and wellness, security and privacy, clean energy, green products. Technology advances create ongoing opportunities and it does not mean you have to come up with new technology. The emerging business can simply adapt the technology to an entirely different area or build upon and enhance the new technology products. For example, Apple products have dozens of compatible devices (e.g. weatherproof, sweat proof, waterproof audio solutions for athletes), besides there is an enormous amount of apps that are sold on Apple’s App store.
The trend analysis has to be done in parallel with the analysis of potential customers and their problems. Where others sees problems, entrepreneurs see opportunities and think “What complaints do I hear?” or “What recurring problem do I, or some group of people face?” This can help you to come up with the idea. Such questions might be as following: What is the environment of your potential customer? What is the problem that customers have? What are the characteristics of those customers? Do the potential customers recognize the problem you have identified and is it a big one? How many people or companies have this problem? Answering these questions can help you to identify the problem the customer has and cannot solve with the existing solutions.
There is a whole set of questions one has to ask before launching an entrepreneurial venture. Some questions relate to the personal, while others to the business side of entrepreneurship:
- Why do I choose to start my own business instead of being a salaried employee in the company?
- Does the opportunity that I want to implement fulfil my personal goals? How?
- What is my motivation for launching a potentially high growth, yet risky venture that will require full dedication and commitment?
- How will I balance my individual motives and social obligations (e.g. family)?
- What are the things that keep me up at night and get out of bed in the morning in life? How do they actually/potentially relate to my business idea? Do they help it or do they contradict it?
- What do I want to achieve? What are my strengths and weaknesses? What are my key resources / competences?
- What is the business opportunity about? What problem do I want to solve that so far remains unsolved or solved inadequately? Why?
- How did this opportunity come about? Why am I the first to notice it? Is this just my idea or an opportunity that arose due to some new changes in the environment?
- Is the new opportunity related to new technology? Is it sufficiently attractive to the current customers or needs some other complementary technologies? What knowledge and other resources do I need to enter this new technology market?
- Is the new opportunity related to new market trends and the emerging customer needs?
- Is this new opportunity related to new different value?
- Does this opportunity represent a reasonable business idea? Is the solution genuine one that customers are ready to pay for?
- What are the key resources / competences do I need in order to implement this business idea? Should I involve any partners? What should be the balance between my and partner’s resources in the enterprise? What team do I need to bring this idea into market?
- What is the best ownership model to support this enterprise? How do I attract the necessary financial resources?
- Is the fast market entry and taking the critical mass of new market category a prerequisite of my business success? If yes, how do I ensure the speed and scale?
- Is my business idea easy to scalable, i.e. can it achieve the economically feasible scale?
- How can I prevent the idea from being copied by the fast imitators? What barriers to entry can be established?
Although there are many important questions that can be posed in the entrepreneurial process, some are the most critical ones that distinguish the best business ideas with a high growth potential from the rest. For example, M. J. DeMarco makes a distinction between the “fast lane” and “slow lane” business.
“Slow lane” business means that my business idea has a limited growth potential, provides a relatively well-known solution to the customer’s problems and is built on the widely adopted business model. Establishing physical retail shop in the saturated market is an example of “slow lane” business. A long-term career track of any salaried employee in the organization can also be considered as a “slow lane” business because it brings limited, though predicable income, but will not lead to vastly improved financial performance and self-sustaining business.
“Fast lane” business, on the other hand, is built by the Schumpeterian type of entrepreneurs. It focuses on high growth market opportunities, unique, previously unanswered customer needs, builds on unique and rare assets, creates new markets, and establishes new systems of value delivery. Most of the innovative fast growth start-ups that open up the new “blue oceans” in the marketplace and challenge the established players belong to the category of “fast lane” businesses. An example of “fast lane” business could be the new (virtual and physical) platforms replacing the old intermediaries in the traditional value chains.
So it is important to answer the question. Does my business idea belong to the potential “slow lane” or “fast lane” business? What should I do to make it a “fast lane” business idea?
- J. DeMarco proposes NECST model that enables the entrepreneurs to test whether their business idea belong to the “fastlane” or “slowlane” category of business. The questions below address the fundamental aspects of business: Need, Entry, Control, Scale and Time. They build upon and extend the ideas of M. J. DeMarco.
|NECST||Questions to be answered:||Hints|
|Need||The fundamental question:|
– Does my business idea really address a genuine customer need?
– Or am I only following my own passion that very few people are ready to pay for?
|Most people make a fundamental mistake of confusing own passion with business idea. The best business ideas are those that not too many people are keen on doing. In most cases, businesses built on passion have many competitors.|
|Entry||– How do I prevent my idea from getting easily copied and the imitators (e.g. with more resources) from entering my market?|
– Does my business idea rely on some rare resources / competences that makes it hard to imitate?
– What barriers to entry can I impose?
|The best business ideas are not the easiest ones to implement. The more specialised are your competences, the less chance your idea will get copied. Starting the business has to be more difficult than filling out a form or signing a contract.|
|Control||– Do I really control the main resources in my business?|
– How do I make sure that I do not lose the main resources in my business?
– What resources can be outsourced to my partners? Which ones should not, even if it makes economic, but not strategic sense?
|Some resources in business matter more than others. Every fast lane business is in control of its key resources. They are not affected by the changes in environment or partner’s policy. You do not outsource your main resources. If you do not have the deciding voice over your business model, your business is vulnerable.|
|Scale||– Can we provide customers with great quantity of the product at lower extra cost?|
– Is it easy to scale the product?
– Can we design our value proposition in such way as to achieve economy of scale and to offer customer individualized value, i.e. mass customization?
|Every “fast lane” business relies on products (and services) that can be provided in high volumes at little extra cost. “Slow lane” business quickly “hits the ceiling” of potential customers to be served (e.g. number of people in the gym). The “fast lane” business can achieve great scale, especially if it is not limited by physical constraints.|
|Time||– Am I trading my time for money?|
– Or will my business idea enable earning money independent of my time?
– What can be done to make the business self-sustaining?
|The “fast lane” businesses can be arranged in such way as to generate the financial flows independent from the time involved. “Slow lane” business examples – dentist, lawyer, accountant – are good income businesses, but all depend on the professional’s time. The business system creators can earn greater income without being directly involved in daily business activities.|
After answering the fundamental questions regarding the internal motivation, business opportunity and potential idea implementation, every entrepreneur should structure his business idea into the separate elements of a potential business model. The initial ideas can even result in several business model prototypes that can be later tested in the market place.
The most popular way of structuring and presenting the ideas is Business Model Canvas (BMC) by A.Osterwalder and Y.Pigneur (from their book “Business Model Generation”). The Business Model Canvas has become the common language of entrepreneurs for launching their startups and communicating their business ideas in a structured way to the potential partners and investors. It also helps make sense of the key building blocks of your business model and the ways they relate to each other.
At the centre of every business model is its Value Proposition, which represents the offered solution to the customer’s fundamental problem. Value proposition is much more than product, it is the key value elements that product or service provides to the customer. For example, the value proposition of the coffee shop is much more than selling the coffee – it is connecting people in the social environment, creating experiences, etc. The technology business is much more than selling the specific technology, but about solving customer problems with the help of technologies. So the core question in determining the value proposition of business model – what is the underlying value / problem solution that we are providing to the customers? (Value Proposition is explored in more detail in the next topic)
At the right hand side of the Value Proposition are the demand- or revenue-side elements of the business model. The first and most important question that has to be answered while determining the Value Proposition is – what Customer Segment are we dealing with? What group of customers are we addressing with our proposed solution? What are the genuine needs of these customers that make them pay for our value proposition? The business model design and its elements should be focused on addressing the needs of the most important customer groups. Different customer groups can be addressed in a different way throughout the business model, i. e. offered different value propositions through different channels, relations, resources, etc.
Source: A. Osterwalder, Y. Pigneur (2010). Business Model Generation. (Creative commons license)
Channels show how the value proposition is delivered to the specific customer group. It is important to decide what are the best ways of reaching the customers, e. g. physical delivery of product / service through own or partner’s channels, establishing virtual channels of e-commerce, using the established internet platforms. Every business has to decide whether to invest into own channels or use the existing channels of potential partners.
Customer relationships in the business model can vary from personal to automated, depending on how customized is the value proposition. The main rationale behind the customer relationships is the acquisition and retention of customers. The successful business models are built on returning customers, not on one-time transactions. So it is important to answer the following question while designing the business model – what should we do to make sure our customers have incentives to return to our business?
At the bottom of the right side of the Canvas is the structure of the main Revenue Streams of the company, i.e. what are the main sources of revenue in our business model? What and in what ways are the customers actually paying for the value that we provide? The examples of revenue streams can be advertising, membership, licensing or subscription fees.
At the left side of the Value proposition is the supply- or cost-side of the business model. It includes all the elements that an entrepreneur has to consider in order to provide the expected Value Proposition.
First, one has to decide what are the Key Resources needed for designing and offering the Value Proposition. It means answering the following questions: What are the main resources that are crucial for the success of our business (i.e. making customer happy with value that we seek to propose)? What is the nature of these resources – are they physical, intellectual, social, human? What specific competences do we need? Once the key resources are determined, they have to be continuously strengthened within the company because they become the key building blocks of sustained competitive advantage that competitors should find hard to imitate.
Key Activities are directly related to the Key Resources within the business model. If the Key Resources rely on the question “what do we have?”, the Key Activities reflect “what do we do to provide the value proposition?”. For example, if the key resource of the company is its brand, then its main activities will be marketing-related. If the main resources are technologies, the main activities will be related to research and development.
Last but not least, every company has a number of Partners that help reduce operational costs or provide with resources / competences that entrepreneurs does not necessarily have. One of the key questions that has to be answered in designing the business model – what resources / activities should one have / do inside the company and what can be externalized to the partner network? For example, most companies seek to minimise their fixed costs (if they are not related to their strategic resources) and outsource them to the partners that specialize in manufacturing or infrastructure-related services. The start-ups that are focused on innovative value proposition may need partners for a variety of reasons, such as sharing of risks, combining the different competences, gaining access to the markets that entrepreneur has no previous experience working with. Building a resourceful and reliable network of partners is one of the key success factors in every entrepreneur’s activity.
At the bottom of the left side of the Canvas is the Cost Structure of the business model. It summarizes the main cost areas of planned business that are usually associated with financing of key activities and investments into the key resources.
The entrepreneurs should look at the Business Model Canvas in its entirety and to make sure that all elements complement, not contradict each other. It always helps to draft several alternative business models and test them in the market by making fast adjustments.
Since you already know what you want to produce, it is worth to carefully evaluate the ideas. This process will help you to identify strengths and weaknesses of each of the ideas, minimize risk, decide what is important and make best use of limited resources (e.g. spending too much money and time on the ideas that has more pros than cons).
Today’s market is overcrowded with products and various startup firms providing customers with the new solutions every single day. The challenge that every newcomer startup has to overcome is to be fast, while at the same time minimizing the development time and effectively commercializing new products/services.
Idea generation and evaluation is a part of process, which includes goal setting, target definition (customer segments, supplier, competitors), evaluation of the capabilities, resources a startup owns (internal, external or the new ones) etc.
One of the methods you could use to evaluate and select the best one out of all potentially viable ideas is Evaluation Matrix. The aim of this method is to evaluate the idea based on the selected criteria. Therefore, it is important carefully select the scoring criteria.
Idea generation is the creative process of generating, developing and communicating new ideas. However, there is a variety of misconceptions concerning the ‘great ideas’. Some can tell that such ideas emerge spontaneously, but the reality is that most successful idea generators do so in a structured and systemic way. You may think that you can get a big pool of fantastic ideas once you sit with your team. However, you should note that great ideas are best shaped through an ongoing dialogue. Another myth is believing that customers will tell you what to do if you listen to them attentively enough. The reality is that customer can help you identify the unmet need, but there are other important things to do when making an idea workable.
There are different methods that can help you to find the idea for the startup. You can question the existing product concepts, scan the environment or explore other industries, even cultures and use the inspiration for generating ideas.
Hereinafter you can find few of the methods to be used to generate new or improve the existing ideas:
Mix and Match – is a method when you are asked to connect and combine unrelated ideas or products and services from two different industries to offer entirely new mix. Such the technique to generate the ideas will help to link products and services in a new way and to find a fit between seemingly unrelated or remote ideas. This can enable you to find a unique and fresh approach, completely new idea.
Traditional brainstorming method can help you to come up with as many and as different ideas as possible. Later you can build on the ideas turning them into entirely new directions.
SCAMPER is a method that stimulates new, different ways of thinking about the problem. You should use it when you feel you are struggling with new ideas. The word is an acronym and each letter means action verb and invite you to follow the provision., i.e.:
|S||Substitute, simplify (e.g., ballpoint pen is a comfortable substitute of ink pen);|
|C||Combine (e.g., camera, alarm clock and calculator are all incorporated in one device – smartphone);|
|A||Adapt (e.g., Facebook initially was developed to use with laptop, but was rapidly adapted to use it with smartphones);|
|M||Modify, magnify, minify (e.g., when public climbing stairs are made to play music; or alarm clock made to fit in a small device called speedometer);|
|P||Put to others uses (e.g., somebodies waste can be others recourse;|
|E||Eliminate (e.g., post cards business is struggling because of the popularity of electronic cards);|
|R||Reverse, rearrange (e.g., energy produced by wind power plants latter is supplied and distributed through electric vires).|
|Criteria 1||Criteria 2||Criteria 3||Criteria 4||TOTAL|
After having completed this chapter, you will:
- Distinguish between entrepreneurial and business owners mindsets;
- Recognize opportunities when rising proper questions;
- Understand the characteristics of fast growth and slow growth businesses;
- Know the main elements of business model canvas –a tool that helps to structure your business idea;
- Possess the methods for generating new ideas;
- Know how to apply Evaluation Matrix to evaluate potential business ideas.