We were recently asked to do a webinar about startup strategies for an audience of angel investors. The reason we were asked to talk about this topic is because even savvy investors are confused about the difference between a strategy versus a tactic. We thought we’d share our list of misconceptions about strategy with you, our readers, as well.
Let’s start with a definition. We define strategy as “the process of linking today’s choices and actions with tomorrow’s destination, under uncertainty.” You see, there are many, many actions any startup can take. Having a strategy means having a plan for where you are going. With that overarching plan, then daily and weekly choices have “bumper rails” because only actions that fit with the overall strategy should be taken. The startup’s strategy helps take alternative actions off the table. This helps guide the everyday choices and actions employees throughout the firm might take—but also recognizes that there is uncertainty as to what might work.
We are going to do this list like a “David Letterman Top 10.” We’ll start with number 10 and work our way to the top. And these are misconceptions, so the opposite is true!
#10 Pre-revenue is too early to have metrics. It’s NEVER too early to have metrics. Sometimes, the pre-revenue metrics are disappointing. We hate to look at them. But you should still have them. Pre-revenue metrics start with progress against milestones. A startup should have a list of activities it is trying to accomplish. Are these getting done on time? Is it taking longer than expected? Next up is conversion metrics – what % of the people we talk to are interested? This could be for both investors and customers. Conversion rates are notoriously dismal. They are even more dismal for early startups. An aspirational conversion rate is 10%. But even email open rates, a simple type of conversion, are typically 3% or less. Think about how good you will feel as your conversion rates improve. The third good pre-revenue metric is cost of customer acquisition. Opposite of conversion rates, this metric will start high and should come down over time. It can also vary widely, from $10 or $20 for a consumer app, to over $10,000 for a physician specialist or business. Knowing where your metrics start and how they improve is the key to success.
#9 In a startup, the founder is accountable for everything. Gosh, we hope not. That would be a lonely and painful experience. Startups are a team sport. Get others on your team, especially ones who have skills that complement yours. In fact, if a founder repeatedly says, “I…” - this is a warning sign that they actually are in it by themselves.
#8 A founder with prior success is better at strategy. The concern here is the “one-hit wonder.” While startup experience is great, sometimes people do just get lucky. Do they have the capabilities for detecting when things are not right? Do they know how to recover from bumps? Can they overcome challenges? People who have failed and rebounded might actually be better at startup strategy than those with a single success, who try to generalize their success to all startups.
#7 Markets change too fast for a business plan to be worthwhile. Even in fast changing markets, companies are more successful when they plan. And planning starts by understanding what the market’s growth pattern actually looks like. In earlier blogposts, we reviewed three different models of market growth: Bass Diffusion of Innovation, Crossing the Chasm, and the Hype Curve. Understanding which growth curve may be affecting your startup will change both your strategy and your actions.
#6 Corporate strategy does not apply to startups. Most startups will not be a single product/service company. One key corporate strategy is deciding whether to specialize by product and expand across markets or to specialize by markets and expand across products. Even early on, startups need a working hypothesis about how they might expand. And every startup needs to be more than a single product.
#5 Strategy is all about market positioning. Market positioning is mostly about how you describe your value to customers – your value proposition. Strategy is broader than that. It’s about your business model. A business model is the story about how the business works. Yes, it specifies a customer. It also should have a value proposition. And it also includes how you are going to make money which covers how you are going to deliver that value at an economic cost. Some simple examples of business models: Microsoft = sell software for $120 that costs $.50 to make and Lyft = connect people needing rides with drivers for 80% of the ride price.
#4 Competition is bad/”Blue ocean” is good. We have said this before – launching into an existing category and differentiating yourself is a far easier and cheaper path than being completely unique. Your competitors will help train the market. They help you shine brighter and help build a frame of reference for potential customers.
#3 Strategy is about the WHAT. Actually, it’s about the HOW. The WHAT will change, but HOW you get there should be consistent.
#2 Pivoting is a strategy. Sometimes, a startup needs to pivot or even punt. When things are not working, a change is needed. But pivoting constantly and frequently is also a problem. It’s not strategic. Thoughtful experimentation to figure out how to scale is better than knee jerk reactions to market feedback.
#1 Strategy is a road map. Really, it’s more like sailing instructions. Everyone participates in getting to the destination and does not just rely on the driver (founder). You know where you are headed but not exactly how you are going to get there. It’s an iterative process where adjustments are made depending on weather, rough waters, and hidden obstacles. This gets back to the “process” part of our definition.
Startups have to be flexible in order to find product/market fit. But they still need an overarching plan called a strategy. That strategy sets the direction for daily decisions. As tides shift, winds change, and the unexpected occurs (which it will), that strategy keeps a startup focused on where it needs to go. Time spent planning the strategy will pay off in the long run.
Oh and if you want to watch the VisionTech Partners webinar, here’s the link – Startup Strategy.