Startups begin with the founders' idea, which constitutes a hypothesis about how to satisfy a perceived need in the marketplace. This initial guess at the customer/product mix may or may not turn out to be true and rests of assumptions that need to be tested and validated. That is why good startup management is about focusing on continuous experimentation in the highly uncertain environment that new ventures operate in. I have depicted the key elements of managing startups below:
The primary goal of entrepreneurs is to achieve product/market fit, which can be defined as a product that satisfies the three characteristics I listed earlier: satisfying a core need in a good market in a disruptive and scalable way. Most startups go through several iterations that more or less follow the same pattern:
- Ideation - the entrepreneurial team starts by coming up with carefully evaluated idea(s) to pursue. To maximize chances of success, entrepreneurs spell out the leaps of faith inherent in their ideas to come up with specific hypotheses to test.
- Testing - the best way to determine if a new concept will catch on is to test it with its target audience. To do that, entrepreneurs create a Minimal Viable Product, which is simply the fastest and cheapest way to test and validate the hypotheses that are being investigated.
- Analysis - if the experiment validates the proposed value-add, entrepreneurs can proceed to scale the product into a business. If the experiment doesn't result in product/market fit, the entrepreneurial team can come back to ideation armed with new insights and pivot, which is defined as changing the product, the target customer, or the busines model. Alternatively, if critical resources run out, the new venture might have to fold.
The key purpose of these startup iterations is to quickly discard ideas that are not worth pursuing. I further expand on this topic in section IV, Achieving Product/Market Fit.
A second important priority for entrepreneurs is to build the startup organization and equip it appropriately for the search for product/market fit. Some important activities include recruiting the right team, raising enough capital, and managing the emotional rollercoaster that startups create. Without these ingredients, the new venture cannot execute well and is thus at a significant disadvantage.
Next, I go into a lot more details on these two priorities, beginning with building the startup organization.