Hungry Start-up Strategy: Creating New Ventures with Limited Resources and Unlimited Vision

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A celebrated professor and practitioner of entrepreneurship provides the definitive handbook on entrepreneurial strategy. Based on more than 150 case studies of successful business that started from the ground up.

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1 Setting Goals: What Makes You Hungry?

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START-UPS ARE BORN HUNGRY—their demand for money exceeds their supply. So start-ups need a different currency—a powerful emotional magnet that draws in talent.

Why would anyone go to work for a start-up? The hours are sure to be longer than they would be at a more established company, and the pay is likely to be lower as cash will be in short supply.

The simple answer is that some talented people are able to defer short-term economic gain in exchange for meaningful work with the possibility of a longer-term payoff.

Of course, this puts entrepreneurs in the difficult position of persuading talented people that they should stop whatever they are doing and work for them instead. And as we’ll see in Chapter 3, entrepreneurs must also persuade capital providers to part with their cash to invest in their start-ups.

To recruit talented employees, entrepreneurs must mint emotional currency by way of three hungry start-up goals. These three goals answer the basic questions a talented potential employee might have before going to work for your start-up.

 

2 Picking Markets: Feed Your Customers and They’ll Feed You

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WHAT IS A MARKET? Why does it matter which one you pick? A market is the place where hungry customers and suppliers set the terms at which they’ll sate their mutual hunger. How participants think about markets depends on their place in the entrepreneurial ecosystem; after all, different participants have different hungers. For example:

Start-up product users often hunger for a solution to a problem that no vendors provide. And if that unsolved problem is important enough to those potential customers, then there is an opportunity for the start-up to deliver the solution. However, many potential customers are reluctant to do business with a start-up because they are concerned about the costs they could incur if the start-up goes out of business. Hence, those customers will only try it if it’s free. The hope is that, over time, customers will become more confident in the start-up’s ability to deliver value consistently, and then be willing to pay.

Start-up CEOs look at markets in different ways, depending on the source of their hunger. For example, if they’re trying to solve a problem that bothers them personally, then they look at markets not in an abstract way but as a chance to satisfy one customer at a time. Alternatively, if they hunger for wealth, then they may look at markets based on the sales potential for their venture—the bigger, the better. To that end, such start-up CEOs might rank markets based on four factors: size, growth, margins, and odds of their company gaining a meaningful share. Entrepreneurs look at markets in both ways—some are more willing to talk about their interest in wealth creation than others.

 

3 Raising Capital: Maintain Your Fighting Weight

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WHEN IT COMES TO hungry start-up strategy, there is often no more compelling trade-off than the one between the hunger to control the start-up’s destiny and the need to pay its bills. Most entrepreneurs postpone as long as possible taking money from outside investors.

And the reason is fairly simple: Taking an investor’s capital means ceding some control of the venture. And since controlling the way they spend their time is often the most important reason that founders start their companies, it can be painful to raise capital. Of course, with capital comes the pleasure of being able to meet a start-up’s financial obligations and to pay for its growth initiatives. But that hunger for control means that capital’s silver lining also has a cloud.

This raises a series of burning issues that start-up CEOs struggle to resolve. There are many answers to these questions and we will explore them through the lens of the companies and experts I interviewed for this book. Here are the key questions and my summary of the key findings from these interviews below:

 

4 Building the Team: Whom Do You Invite to the Table?

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FOR A HUNGRY START-UP’S FOUNDERS the most pressing daily trade-off is between sleeping and getting stuff done. And if that start-up is bootstrapping itself, odds are good that they’re burning through their own cash.

This means that unless those founders are spending their almost continuous awake-time getting the right stuff done, then their venture will never reach the point where it can raise the capital needed to hire help so the founders can get a bit more sleep.

Simply put, the people sitting around the start-up’s table must produce more than they consume; otherwise the start-up will perish. This means that an entrepreneur has an insatiable hunger to invite only the right people to the start-up table—and make sure that no wrong people slip in.

My research reveals CEOs’ possible answers to five key questions about how best to build the start-up team:

Is it in the venture’s best interest to invite friends onto the founding team? There is no clear answer to this question. Often it’s a bad idea for friends to start a company together unless the friends have business skills that both complement each other and will help the venture grow. For example, if two friends—one a salesperson and the other an engineer—co-found a tech venture; there’s a chance that their combined skills will help the start-up succeed. However, if they disagree on strategy, the venture and the friendship could end.

 

5 Gaining Share: Satisfy Your Customers’ Cravings

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THERE IS NO MORE IMPORTANT HUNGER for a start-up than the one for getting and keeping customers. Because potential customers are reluctant to risk doing business with an unproven company, it’s a challenge for start-ups to attract and keep those deeply needed customers.

Start-ups must find a problem to which customers crave a solution. More specifically, a start-up’s ability to feed its profit-hungry coffers depends on satisfying customer cravings for a solution to a painful unmet need. Unfortunately for their cash flows, many start-ups I interviewed have found that not only do customers want those problems solved, they want these valuable solutions at no charge; I call this a “quantum value leap” (QVL).

My research reveals that delivering QVLs must be done with a clear answer to the question: Who is the customer? Sometimes, the start-up’s customer is just the product’s user. Some start-ups decide that both distributors and end users are their customers; others even add suppliers into the mix of their customers.

 

6 Adapting to Change: Don’t Let Others Eat Your Lunch

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DESPITE THE MANY RISKS they face, hungry start-ups enjoy at least one big advantage over their larger rivals: They make decisions faster. But as startups enjoy success, they run the risk of becoming like their bigger peers: slowed down by the conflict between protecting their profitable products and adapting to market shifts.

In order to prevail, start-ups must respond to change and they must do that in spite of their initial success. The irony is that by filling their bellies with market share, capital, and people, start-ups are at risk of losing their hunger to change. And if they lose that hunger, they will become vulnerable to other hungry start-ups seeking to eat their lunch.

To adapt effectively to external threats and opportunities, entrepreneurs must answer difficult questions. These questions and my findings follow.

What part of the start-up’s business strategy should change over time? The answer to this question varies by start-up. Based on my interviews, the most common change is to the company’s product. In general, startups offer customers new versions of their product, get feedback on those versions, and make the next version better. Start-ups commonly build new partnerships and expand into new countries as a way to tap the profit they expect to follow from their product advantages over competitors in these markets.

 

7 Straight Talk from Start-Up Capital Providers

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HUNGRY START-UP STRATEGY argues that start-ups should delay raising outside capital as long as they can. Moreover, as we saw in Chapter 3, when entrepreneurs do seek out capital providers, they view it as both a risk and as an opportunity.

The risk is that the founder could lose control of the venture if there is a dispute with the investor. And the opportunity is that the founder can hire a boss who’s a “servant leader”—helping the founder achieve the shared goal of turning the venture into a market pacesetter. Naturally, the founder will attempt to minimize the risk and maximize the benefit.

Despite the love-hate relationship between entrepreneurs and capital providers, the two have hungers that only each other can satisfy. The startup needs the capital to pay its bills and the providers need the start-ups to generate a great return on their investment.

But since hungry start-up strategy is about helping entrepreneurs, I want to help them satisfy their hunger for control and capital by showing entrepreneurs how their start-ups look through the lens of the capital provider.

 

8 Can Big Companies Train Entrepreneurs?

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MANY UNIVERSITY STUDENTS are drawn to entrepreneurship but they’re not ready to start companies while still in their senior years. These budding entrepreneurs are hungry for information to help them decide whether to start their companies.

Some students conclude that, thanks to their ability to subsist on Ramen noodles and an absence of financial obligations to others, graduation is the perfect time to start a company. Others decide in college that they will always need the structure of a big company and hope to find one that encourages some degree of innovation. Still others know that they want to start a company but believe that they need big company experience before they jump into entrepreneurship’s bracingly chilly waters.

While everyone is different, most aspiring entrepreneurs can get useful advantages from big company experience, including

Acquiring knowledge of an industry

Learning how to make effective business decisions

Developing contacts that can help provide access to customers, capital, and talent

 

9 Resources

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CHAPTER 9 CONTAINS RESOURCES to help readers interested in learning more about start-up strategy. It contains the following:

Table 9.1. 162 Start-Up Executives Interviewed

Start-Up CEO Interview Guide

Framework for Deciding Whether to Become an Entrepreneur

Table 9.2. Framework for Deciding Whether to Launch a Start-Up

Table 9.3. Start-Up Capital Provider Investment Screener

Table 9.4. Big Company as Start-Up Training Ground Assessment Framework

TABLE 9.1 Start-Up Executives Interviewed

I asked company founders the following questions:

In nontechnical terms, how would you describe what your start-up does?

Can you provide an example of how a specific customer gets value from your company’s product?

What did you do before you started your company?

Why did you found your company?

What is the company’s mission? What are its long-term goals? What short-term goals have you set to motivate your team to achieve those goals?

What market does your company focus on and why did you pick that market?

Why do you think that market is likely to become large and what are the key trends propelling its growth?

 

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