Rinse and Repeat: How to Start a Business

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Think about an app or gadget you love to use. Is it Instagram? Is it Snapchat? Your smart phone? Whatever it is, at some point it did not exist. At some point someone out there decided that there was something missing in the world or they wanted to make the world a better place. An entrepreneur is someone who feels this way and makes something to create the world they want to see. When this something makes money, it is a business. If it does not make money, then it’s just a hobby. You do not have to have an MBA or a PhD to start a business. Anyone, no matter how young or old, can be an entrepreneur. You just need to have ideas, perseverance, and an iterative framework to test your ideas until you find one that makes money, in other words, creates revenue.

“An entrepreneur is someone who… makes something to create the world they want to see.”

My first entrepreneurship experience was when I was a little girl of 7 years old. We had a bird farm. I would train my father’s parakeets to stand on a finger and be pet by a human. When my father sold the parakeet I would get a cut of the sales price. My idea was that people want their pet parakeets to be nice and affectionate. A parakeet that was not trained would not sell for as much as one that was. In this way I was able to test out my idea and make some money. Now it’s your turn!

The steps below will guide you in starting a business:

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Ideation

Ideation is the process of creating ideas. At this point no idea is good or bad. Do not worry if your idea does not seem like the most incredible idea ever. It does not have to be unique to become a business. Facebook was not the first social network. Think of MySpace. Generally the first place to begin creating ideas is to “scratch your own itch.” This is a phrase that means if you already have the problem or know the problem very well, you are probably the best person to come up with ideas to fix it. If nothing jumps out at you, just pick a problem area and analyze it. For instance, what is your morning routine when you get up and go to school? Is there anything that could make it a better experience? Once you identify an idea or set of ideas, then you want validate you then have a solution that will work for more than just yourself or a small circle of friends. This is one of the first steps in defining the business model for your idea. We will discuss the business model next. Remember, this is an iterative process. No entrepreneur ended up being successful with the first idea he or she had. The goal is to validate your idea, learn, modify it, and validate again until you have a profitable business model.

“No entrepreneur ended up being successful with the first idea he or she had. The goal is to validate your idea, learn, modify it, and validate again until you have a profitable business model.”

Business Model

It is time to fill in the blanks that will take your idea from a dream to a revenue producing product or service. A business model is similar to a detective story. There is a set of questions that you must answer to solve the case and this will take some investigation. Below is a table, which will help you understand the questions to ask so you can formulate a business model for your product. Notice I am not calling it an idea any more. It’s time for that idea to mature into a tangible product. Just like a growing child, this product will have to learn through trial and error until it can stand up by itself. Failing is expected and fine as long as you learn from it and then try again with the new learnings. It is a fun experience to get out there and test your product. The steps below are not a junior way of starting a business. These are the questions every entrepreneur must answer.

“A business model is similar to a detective story. There is a set of questions that you must answer to solve the case and this will take some investigation.”

Let’s get started! You’re now an entrepreneur!

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Value Proposition

The value proposition is key to building your product. In simplest terms, the value proposition can be stated in one sentence. It’s like playing Mad Libs.

____[insert product/service name]___ WILL HELP ____[insert customer description]____ TO____ [insert the problem being solved]____ _____[insert secret sauce]____

Example:

A self-driving car will help mothers with many children be able to make sure every child will always have a ride even if she is busy with another child.

At the beginning, a value proposition statement is just a hypothesis, which needs to be validated. Talk to who you think is the target customer. This will validate if your hypothesis is a real life problem that people want fixed. In the case above, a good group of people to ask about this value proposition would be mothers who have multiple children and even children who have multiple siblings. You are looking to see how much pain this problem causes and if your solution really resonates with them. Then ask how much they would expect to pay for such a product or service.

Market Size

Now that you have evidence from speaking to various people that the problem exists and is worth solving, it is time to understand how many people have this problem or type of problem. If we continue the example from above the market size would potentially be all the mothers who have multiple children. The more specific you can get the more accurate your market size will actually be. Let’s say you’re first starting in the US. Then you will want to know how many mothers in the US have children who are not of driving age and do not have a car.

“The more specific you can get the more accurate your market size will actually be.”

Distribution Channels

This part of your business model defines how you will reach the target customer, whether they are a paying or non-paying customer. You will dive more into the price in the revenue streams section. Distribution channels also are the ways you will keep your customer using your product or service. Here are some examples of distribution channels for a self-driving car.

  • city community centers
  • malls
  • schools
  • website and mobile app for sign up and management car dealerships
  • Revenue Streams

 

There are several ways to make money. The challenge is to find the best way or ways, which will maximize what your product makes and is still more than the cost of producing and running your business. Finding the right revenue streams will need to be tested along with the rest of your business model. That will be done with your MVP (minimum viable product).

For many types of businesses, common revenue streams can be evaluated. For a self-driving car think about your customer and what her need may be and how frequent it may be. If a mother constantly finds herself double booked to pick up two children should the self-driving car be owned by the family or should the family rent or subscribe to using the self-driving car. Advertising in the car during a ride can be a source of revenue. The equivalent to in-app purchases could be added services that can be bought while in the car, for example Wi-Fi or watching a movie or show. These are all examples of revenue streams that do not just apply to self-driving cars, but other products such as apps.

Cost Structure

It will cost money to run a business. Identify fixed costs and variable costs. Fixed costs can be a one-time cost or a recurring cost that is the same. For instance, setting up the factory to make self-driving cars will cost you once. Creating new self-driving cars will cost you every time you make one, but the cost to make one is fixed. Variable costs can change overtime or at different quantities. One example of a variable cost is the cost to acquire a new customer. This is generally the cost of marketing, which can be periodic and vary in expense depending on how much needs to be done. Think of your costs when you have 10 customers, 100 customers, up to 1 million customers. A common mistake that entrepreneurs make is not taking into account that, as the business grows there are new costs that may spring up. The line “More money more problems.” can be very true, so think big and plan for the success of your product.

“A common mistake that entrepreneurs make is not taking into account that as the business grows there are new costs that may spring up.”

The MVP

Now that you have done your detective work to build a business model it is time to build your minimal viable product ,or MVP, to test out the different pieces of your business model. The MVP is the smallest representation of your product that will test the most risky parts of your business model. Usually this means starting with validating the value proposition. Prototype the experience you want for the customer. A prototype can be done quickly and inexpensively through paper prototypes, using power point, or there are several websites and apps which make it even easier to create an interactive prototype. For the MVP of a self-driving car, you do not have to actually build a car that does not need a human driver! You can simulate the experience by having a human driver who helps a mother pick up her other children when needed. Just by doing this or any other simple form of prototyping you will learn a ton and tweak your business model as you go.

“The MVP is the smallest representation of your product that will test the most risky parts of your business model.”

Rinse and Repeat as necessary

“I have not failed. I’ve just found 10,000 ways that won’t work.” – Thomas Edison

No entrepreneur gets it exactly right on the first try, which is why starting a business is an iterative process. Through each MVP you will learn something new and modify the business model and the MVP a bit. This is called “pivoting”, where the business model is modified when a hypothesis proves invalid. This does not mean that one failure results in a completely new vision. If that were the case, then a new business model would have to be built from scratch each time. Once you get through MVP1 and MVP2 and you see the amount of new information decrease, your business model will start to stabilize, which is a great sign that your business is working. You have reached the golden state for a startup called Product/Market Fit. This means you have customers signing up, paying or pre-ordering your product, and sticking around to use it over and over again.

Conclusion

Congratulations! If you have made it this far you have started your business. You are an entrepreneur! Life is grand, but do not think life is over. The opposite is true because the next stage of your company is growth and scaling. Getting the first early adopters is one thing, but capturing the attention of your next set of customers will be different. All in all, remember that you are not the first entrepreneur and there are many resources out there to help you at any stage of your company. I wish you the best of luck on this fun journey!

“…remember that you are not the first entrepreneur and there are many resources out there to help you at any stage of your company.”

Resources

One of the most comprehensive lists of entrepreneurship resources is from Steven Blank: http://steveblank.com/tools-and-blogs-for-entrepreneurs/

ABOUT THE AUTHOR:

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Jennifer Arguello is a Co-Founder of Latino Startup Alliance, a community of Latino tech entrepreneurs. She also serves on the national board of directors for the largest organization of Latinos in STEM in the United States, the Society of Hispanic Professional Engineers. A Silicon Valley native, she has been working in the tech field for over 12 years and is alumnus of Mozilla and Microsoft along with various startups. Jennifer holds a BS in Computer Science from UC San Diego. Follow her on Twitter at @engijen.