A friend of mine who recently took the entrepreneurial plunge and launched a consumer web business recently asked me for some advice. Aiming to serve more people than just him with what is hopefully useful advice, I am posting my response here.
This was my friend’s request:
“I believe the greatest challenge my company will face in the near future is how to manage anticipated rapid growth. We have a marketing strategy that will be capable of producing an extremely fast growth rate in users of our website, leveraging the power of social media and highly targeted and well-categorized content on a site that is designed to serve the everyday reading needs of all segments of the general public. I would like to be able to make management decisions based not on fears of scarce resources but on confidence that additional capital will become available to continue paying existing staff and to hire the new staff we will soon need after our website goes live. I believe it will be necessary to secure a large amount of capital investment soon after launch, from investors who are interested and capable of assisting the company in various ways to navigate the challenges of explosive growth — both financially and in terms of business experience, advice, and connections — or else we run the risk of growing ahead of our ability to run the business in practical terms.”
“It is interesting to see you anticipate that your greatest challenge will be keeping up with growth. Historically this is not the challenge of most entrepreneurs. The challenge of most entrepreneurs is to provide a product that people really want. Then their challenge is to provide a product that people want enough to pay for – or that so many people want for free that advertisers will pay to reach them. With one of those two scenarios emphatically proven, then their challenge is to grow the business sustainably. Sometimes this involves raising capital, which is a very unique process/skillset.
It is getting harder and harder to “make it” with this second type of if-you-build-it-the-advertisers-will-come model and, if you seek additional investment, you will need to show traction with advertisers or at least user numbers (especially high-value users) that are so massive as to convince any investor that SURELY some advertisers would want to reach them. Recently some very public flops of advertising-driven consumer web companies (e.g., Facebook’s IPO and Digg’s acquisition) have made investors in this space particularly wary.
Generally the two metrics that an investor will focus on are your Cost of Customer Acquisition (How many marketing dollars do you have to spend for each new customer to join your site?) and Lifetime Customer Value (How much revenue will that customer make you either through paying you directly or through advertising dollars over the entire time that you expect that customer to continue using your site?). If LCV is significantly higher than CCA, it allows an investor to think, “If I invest X, it will generate a return of more-than-X” with high probability. Do you have convincing data to quantify your CCA and LCV – both today and how you believe these numbers will evolve in the future?
Almost every startup that becomes “successful” – that is, grows into a big company with sustainable profits – looks very different by the time it achieves “success” than it did at the time of founding. The key success attributes for entrepreneurs these days are not “great vision” or even “incredible execution to achieve that vision.” Rather the most successful entrepreneurs exhibit outstanding ability to test products with their target markets, rapidly collect feedback, interpret it, and adapt or pivot the company’s business model based on that learning and/or based on partnerships or other new means that the entrepreneurs are able to bring to their ventures. This has been the case for a long time but recently it has gained traction under the buzz categorization of “lean startup” principles. My favorite book that espouses these principles and provides a step-by-step guide to implementing them in your startup is The Startup Owner’s Manual and I would highly recommend that you read it. It is unfortunately only available as a big, heavy hardback, but the process diagrams and writing inside are very valuable.
Another challenge you might face IF you seek additional investment will be your team. Investors tend to invest in teams before they invest in ideas. There is nothing wrong with you being a first-time entrepreneur but it would be ideal if you could strengthen your team with other experienced entrepreneurs (Previous startup experience – success or failure – of the founding team has the highest correlation with the success rate of entrepreneurial ventures and investors know that.), especially those who would complement your skillsets / fill your skill gaps.
Finally, from a cost perspective, I wanted to check with you on your technology infrastructure. I believe I saw you post on facebook before about costs for servers. Are you familiar with cloud computing options? Amazon Web Services, Rackspace, and many others offer virtual servers with ~infinite scalability to entrepreneurs. This helps you avoid some of the costs/risks/concerns of growing your venture on the technical side such that you can focus on the commercial side.”
What do you think? Did I provide some valuable feedback?