“Create Something and Start Selling It”

Over the past decade, lean start-up methodology, which prizes early customer feedback, experimentation, and iteration—has emerged as the approach of choice. To get a sense of how entrepreneurs and venture capitalists view the framework offered in “Strategy for Start-Ups,” which recommends a more formal approach to strategy development, the HBR senior editors Daniel McGinn and Walter Frick discussed these ideas with three start-up veterans. Niraj Shah is a cofounder of the online furniture retailer Wayfair, which was launched in 2002 and had its IPO in 2014. Bijan Sabet is a cofounder of Spark Capital and an early investor in Twitter, Tumblr, Foursquare, and Trello. Jennifer Lum is building her fifth start-up (four have been acquired by public companies) and is the COO of Forge.AI, a company that structures data for intelligent machines. Edited excerpts follow. HBR: How important is it for an entrepreneur to think through and nail down the major strategic choices before getting too far along in execution? SHAH: The problem is that time is not your friend when you’re trying to be innovative. You need to create something that’s sellable to someone and start selling it. From that you’ll gain some momentum, learn what the market actually wants, and start iterating toward more sales in that segment or additional segments, or more features, products, and so forth. For example, my cofounder and I started a website that sold only TV and stereo stands. We got some early traction and then began expanding into other lines of furniture. Setting out to build a full-line furniture website would have been much harder. So instead of doing excessive planning, you’re better off getting something accomplished and building on that momentum. SABET: I agree with that. The four-part framework described in “Strategy for Start-Ups” is not how most start-ups that we see approach the process. Successful start-ups come from the vision of founders and their insatiable drive to build something they want to see in the world. The path to get there is delighting the customer. Focusing on strategy can lead to a kind of rudderless analysis of which path to take. I don’t mean that approach can’t succeed—it’s just rare that it does succeed. Do VCs sometimes force start-ups to choose a strategy too quickly? LUM: Start-ups are resource constrained, even if they’re venture backed. They need to pick a starting point and strive for aggressive growth. It’s unwise for them to keep searching for the best possible strategy, because they may never land on it. When entrepreneurs and investors work together, it’s common for them to agree on milestones—for a quarter, for the year, or before the next round of funding. Both sides want to see the start-up hitting or beating those milestones. There is time pressure to demonstrate growth and progress, but I don’t believe it drives start-ups to permanently close strategic doors. Do founders pay too little attention to partnering with incumbents or exploiting intellectual property? SHAH: The only reason that many start-ups have an opportunity is that incumbents are slow to do something. And often what you have on day one is not incredibly hard for an incumbent to copy if it’s so inclined. So I’m not convinced that a partnering strategy will work for many start-ups—at least not those in IT. SABET: The only early-stage start-ups I’ve seen successfully partnering with incumbents are government-oriented technology companies—such as iRobot, which found success working with the military. SHAH: Another example is Big Pharma’s licensing deals with biotech start-ups. But in those industries incumbents have outsourced entire functions, such as R&D. SABET: The IP strategy would also be very challenging for early-stage start-ups, which can’t deal with the expense of patent litigation. Companies that get venture funding have 18 to 24 months of initial runway, and every equity dollar is precious. Simply applying for a patent costs $10,000 to $20,000 if you’re lucky—and that’s just the legal work. Defending a patent or creating a business around one costs millions of dollars. When we meet a founder whose slide deck says his strategic advantage is intellectual property, that’s a negative indicator. Do entrepreneurs and VCs sometimes follow fads in business models and strategies? LUM: There is some faddishness. For instance, breakout hits in consumer tech (such as ephemeral messaging or live video) can cause frenzied activity among VCs and entrepreneurs, and if a VC firm hasn’t yet made a bet in a hot category, it may feel pressure to do so. But more broadly, I think what you’re describing is awareness of the model companies and their performance metrics. If your start-up is in social networking or the sharing economy, investors want to see that you’re on a believable, scalable path like that of the established giants, Facebook and Airbnb—and that once you’ve scaled, you can establish moats to defend the business. Do start-ups spend too little time thinking about moats? LUM: You need to ask, If our business gets to scale, what will be the most valuable proprietary parts of the company? The novelty of the technology? The unique way we acquire customers? The unique data assets we have and can monetize? Most entrepreneurs and VCs do think hard about the best way to create enterprise value and whether it will be defensible several years out. Is it a valid criticism that the lean start-up movement overemphasized experimentation and iteration? Should founders spend more time planning? SABET: You have to look at the movement in context. It was a reaction to the wildly dysfunctional Web 1.0 ecosystem. VCs were investing tens of millions of dollars in start-ups that hadn’t received any customer feedback. Companies were spending their entire first rounds on infrastructure and web stack development. Against that backdrop, the lean start-up message—that you need to begin getting customer feedback quickly—was extremely useful. It’s the right approach for most IT start-ups. But even today lean start-up isn’t right for some companies. We’ve backed one called Cruise Automation, which has the leading technology for autonomous vehicles. That didn’t yet have a market, so we knew it would be a very slow build. We believe in the team and the vision, but the technology was very immature when we backed it, and there was no market to test it. So the company requires a different approach. Jennifer, can you describe how the strategy evolved at one of your start-ups? LUM: The last company I started was called Adelphic. We formed it with the idea of creating a platform that could add value to both sides of the advertising market, the supply side and the demand side. When we started engaging with customers, we gained traction much more rapidly on the demand side. Since we had limited resources and had to demonstrate success as rapidly as possible, we decided to focus exclusively on the demand side. We didn’t abandon our hopes to someday service the other side, but we needed to allocate resources appropriately. Today the company has a robust platform in the market, and it’s still focused on the demand side. Pictured from left to right: Bijan Sabet, Niraj Shah, Jennifer Lum Has pivoting to a new strategy become so commonplace that entrepreneurs underestimate its costs? LUM: Pivots aren’t easy, and they shouldn’t always be celebrated. In the best cases, after spending time in the market you land on something even better than your original idea and you can successfully pivot to that. In other cases, the company may have started with a lack of customer development, the wrong team, or poor market timing. Pivoting out of challenging situations can require a complete recapitalization of your company and reconfiguration of your team—it’s almost like shutting down your business and moving forward with a brand-new idea. That’s tough and expensive. SABET: I agree that a pivot is never pain-free. But if you backed the founder for a good reason, you often see the benefits of one. When we backed Warby Parker, it was going to be an online eyeglass company. After a year or so it began experimenting with physical stores. That worked really well, so now it’s opening up stores very quickly. If the company had pitched us originally with plans for brick-and-mortar stores, we would have been less likely to back it. Twitter, another company we backed, started out as a podcasting company. Probably the hardest pivot we’ve seen is Slack. Stewart Butterfield raised more than $10 million to build an online gaming company, but it wasn’t working. Meanwhile, the company had built this internal communication tool, so he pivoted toward that, and we’re grateful he did. Deciding to pivot is hard, but when a founder says, “We’re going in the wrong direction,” we never dismiss that conversation. But wouldn’t Twitter have been better if it focused on 140-character social messages at the outset, or Slack if it hadn’t wasted years building games? SHAH: In my view, you often have to do the first thing to get to the second thing. Are too many start-ups focused on disruption as a strategy? SHAH: People describe Wayfair as disruptive, but I tend not to use that term. What is a disruption? It can come from anywhere—from an incumbent, from a new entry. The only question is whether you’re offering more value to the person buying your good or service. “Disruption” is too much of a buzzword. SABET: We tend to think about “market creation” versus “market disruption,” and new experiences—the former—tend to get our imagination spinning. Using an app to hail a ride with your phone. Donning a headset and going into a virtual world. It’s more interesting to think about businesses that deliver experiences that haven’t been possible before. What else do you wish founders knew about strategy? SHAH: Being strategic is important, but it’s best done with a very small allocation of your time. Maybe put 1% into strategy and 99% into execution. When you’re early-stage, you’ll learn the most by just being out there. Go do something. Have a conversation. Try to sell something. I guarantee you will have nothing to show for it if you just sit there. For start-ups, being prone to action is good. LUM: When founders work on customer development, it’s important that they focus not only on the current state of the market but also on how it may evolve. This is especially true if they aren’t domain experts or don’t have experience in their target market. Don’t just get feedback from customers about current pain points and how your solution can address their immediate needs. Try to gain a sense of where the market is moving so that you can develop a point of view about how it and the competition may look five years down the road. That crucial information can help inform your strategy and product road map. SABET: I’d suggest that founders think not only about how but also about why. There’s a gravitational pull toward starting companies right now. The one question I often ask first-time founders is, Why are you starting this company? For me, that opens a really interesting conversation—one that’s far more instructive than whether their strategy is B2B, B2C, IP, or whatever. A start-up has some tough days ahead, so it’s useful to do some soul-searching, think about purpose, and reflect on why you want to do this.

“Create Something and Start Selling It”

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