How Startup Founders Create New Business Value
Guide for winning and dominating the crucial game of business growth.
Chapter 1
Finding the value
Find and recognize your unique and game-changing value.
Action
Identify your customer's needs and preferences.
Understanding your customer’s needs and pain points is crucial for expanding your business. Many companies make the mistake of developing an idea before identifying potential customers (the market).
Consider how Amazon starts with what’s best for the customer. Amazon’s focus on the customer has been a key to its success. Amazon identified pain points by analyzing customer behavior and developing solutions that meet their needs.
The company’s “one-click” checkout system was designed to make online shopping more accessible and convenient for customers. Does it help them buy more, perhaps? But, mostly, it brings faster and higher customer satisfaction since no one likes to spend their spare time checking out.
Similarly, Apple’s success is primarily due to its customer-centric approach. Apple has developed intuitive and user-friendly products by understanding the customer’s needs and wants.
For example, the company’s iPhone was designed to focus on the user experience, making it easy for customers to navigate and use the device. To truly understand your customer, it’s essential to use a range of metrics, such as surveys, feedback panels, and ethnographic field studies, as Google does.
By collecting data from various sources, you can gain a deep understanding of your customer’s needs and pain points, allowing you to develop solutions that meet their needs.
Find and recognize unique and game changing value.
When considering starting a new business, it’s important to identify and leverage your unique advantage.
Venture capitalists seek out startups with assets that are difficult to replicate, and you should take a similar approach by building your business on an existing proprietary advantage. This could be anything from unique data or processes to innovative technology or intellectual property.
For instance, Apple’s proprietary operating system, iOS, is a valuable asset that sets them apart from other smartphone manufacturers, while Tesla’s cutting-edge electric vehicle technology has positioned them as a leader in the automotive industry.
To find your own unique advantage, start by assessing your existing assets and identifying what sets you apart from your competitors. This could be a unique skill set, access to a niche market, or proprietary technology. The key is to think in terms of market value and understand how your assets can be valuable to potential customers.
Remember, many companies already have valuable assets, but they may not recognize their potential value to customers. By identifying and leveraging your unique advantage, you can create a competitive edge that sets your business apart and leads to success.
Aim to scale up.
When considering new business opportunities, it’s essential to identify and leverage your unique advantage. Venture capitalists seek out startups with assets that are difficult to replicate, and you should take a similar approach by building your business on an existing proprietary advantage.
This could be anything from unique data or processes to innovative technology or intellectual property. Apple’s proprietary operating system, iOS, is a valuable asset differentiating them from other smartphone manufacturers. Further, Tesla’s cutting-edge electric vehicle technology has positioned them as a leader in the automotive industry.
It’s worth noting that some industries have larger TAMs than others. For example, technology, media, and telecommunications; industrials; and healthcare are all sectors with annual revenues greater than $5 trillion and collectively account for almost a third of the top 100 unicorns.
By focusing on transformational value, assessing TAM, and increasing the new business building rate, you can increase the chances of building a successful and profitable company.
Companies must increase their rate of business building by more than 200% to meet revenue growth expectations as the core business faces economic pressure. Amazon’s expansion from an online bookstore to a global e-commerce giant exemplifies successful business building.
Case Study
In 2012, the founders of a graphic design software company identified a need for easy-to-use graphic design software that could be used by anyone, regardless of their design skills. They noticed that many existing solutions were either too complex or too expensive for small businesses and non-designers. Within a few years, this software, Canva gained significant traction and is now a go-to graphic design tool for small businesses, entrepreneurs, and non-designers. It has now more than 60 million monthly active users and is valued at $40 billion, making it one of the most successful new-business building stories in startups today. The takeaway is that Canva was not the original product the founders built. But as they had need themselves for an easy to use graphic design tool, Canva was developed. Remember, new business opportunities can come from simply needing to meet your own need.
Roadblocks
Disagreement
It is important to have aligned expectations in a new business development project. Misaligned expectations can lead to conflicts such as disagreements on how quickly the business should become profitable or how to allocate internal resources. These conflicts can hinder the success of the new business formation. Therefore, it is crucial for the CEO to ensure that leaders within the parent company are supportive of the new business and work towards the same goals.
Disengagement
Starting a business is a big task that requires both time and resources. Successful entrepreneurs usually invest about one-third of their growth capital, which is twice as much as those who struggle to keep up. It’s crucial to dedicate the necessary resources and effort to build a profitable business. Some companies even create separate business structures with allocated capital to ensure that the team can work without any obstacles.
Disintegration
When stakeholders have conflicting priorities and differing opinions on how to build and run a business, disintegration may occur. This can lead to individualistic behavior becoming the norm, with partners or groups of partners becoming isolated and unhappy. Instead of a cohesive unit, the firm may become a collection of fiefdoms. In partnerships, this problem can be magnified, as partners often see themselves as co-owners.
Chapter 2
Initiating a New Venture
You must establish a strong foundation for your new business venture.
Action
Choose an approach that suits your situation.
The Corporate Accelerator
A popular approach among technology companies is for internal employees to pitch new ideas to a corp venture capital board. This works well for established companies with a clear vision for the future of their business and industry and a promising pipeline of early-stage ideas. Area 120 was created by Alphabet and Google CEO Sundar Pichai in March 2016 to create experimental apps and services that could be later folded into established profit drivers.
The Growth Accelerator
A tech company can establish a wholly-owned and separate subsidiary that’s dedicated solely to building new businesses. This approach is appropriate when an established organization already has a solid pipeline of new ideas and concepts for products or services that have been validated with early adopters and partners, but may need specialized talent, resources, and expertise. For example, Google’s parent company Alphabet has set up subsidiaries such as Waymo for self-driving cars and Verily for life sciences.
Fresh Start
Establishing a new, stand-alone startup may be the best option when the executives have discovered a substantial and promising idea for a new business that goes beyond their company’s primary focus. This approach has been successful for companies like Alphabet, which created Waymo as a separate entity to focus on autonomous driving technology, and Amazon, which launched Amazon Web Services to provide cloud computing services. By starting a new company, the incumbents can fully dedicate resources and talent to the new venture and avoid any potential conflicts with their existing business.
Entrepreneurial leadership recruitment.
When building a new business, it’s crucial to find a leader with the right mix of qualities, whether they come from inside or outside of the sponsoring organization. They should possess a strong entrepreneurial drive, the ability to sell their vision and ideas, and experience launching new ventures. Additionally, they should understand corporate concerns and be able to navigate and challenge corporate policies diplomatically.
To support the new-business leader, an effective innovation board should be established with representatives from the incumbent business and venture capital and any necessary expertise the incumbent organization may lack. This approach has been seen in action with technology companies like Apple, who famously brought back former executive Tony Fadell to lead the development of the iPod.
Build a sustainable culture of business innovation and growth.
An effective strategy for building new businesses is to develop a diversified portfolio. This increases the chances of a breakout success while extending the experience across different areas. To manage such a portfolio, companies can create a centralized capability that supports all new ventures being developed. This support should include standardizing best practices, instilling financial discipline, developing milestones, and allocating talent and capital tied to those milestones. Additionally, specific capabilities like M&A should be available.
Many technology companies have successfully implemented this approach, with Alphabet’s portfolio of businesses under its umbrella being a notable example. By investing in a range of ventures such as Waymo, Verily, and Wing, Alphabet has increased its chances of success while leveraging shared resources and expertise. Research has shown that companies that have launched at least four new businesses in the past ten years are twice as likely to generate returns of over five times their investment. Therefore, building a diversified portfolio can be an intelligent way for companies to enhance their growth prospects and generate substantial returns.
Case Study
Microsoft, established Microsoft Ventures, a venture capital investment arm, to support start-ups and accelerate innovation in the tech industry. Microsoft Ventures provides funding, resources, and mentorship to start-ups with the potential to become major players in the industry. Through this program, Microsoft is able to identify and nurture promising new technologies and business models, while also gaining access to innovative ideas and talent outside of the company.
Roadblocks
Outdated Systems
Assessing a company’s resources is crucial when starting a new business. Identifying and utilizing the most beneficial ones involves distinct leadership teams, technology infrastructures, governance procedures, management strategies, talent practices, career development paths, and reward systems.
Analysis Paralysis
To improve quickly, testing and adjusting based on customer feedback is crucial. Amazon uses small, independent teams called “two-pizza teams” to experiment and make decisions based on customer feedback, enabling constant innovation and adaptation to changing demands.
Monolithic Teams
Diverse teams improve performance by bringing different skills and perspectives. Microsoft and other tech companies promote diversity. Studies show diverse teams outperform less diverse ones by 35%. Successful founding teams have a mix of tech, natural science, and business backgrounds.
Chapter 3
Rapid Deployment Strategy
Develop a value-driven business model
Action
Develop an MVP (Minimum Viable Product)
It’s crucial not to get too hung up on technical feasibility when creating a product. Instead, prioritize developing a minimal viable product that customers will love by focusing on crafting “signature moments” that elicit an emotional response. For instance, Apple’s iconic “unboxing” experience, with its sleek and minimalist packaging, is a signature moment that creates excitement and anticipation in customers. By prioritizing these signature moments, companies can build an emotional connection with their customers, leading to increased loyalty and engagement.
Iterate quickly and continuously to accelerate growth.
A tech company can establish a wholly-owned and separate subsidiary that’s dedicated solely to building new businesses. This approach is appropriate when an established organization already has a solid pipeline of new ideas and concepts for products or services that have been validated with early adopters and partners, but may need specialized talent, resources, and expertise. For example, Google’s parent company Alphabet has set up subsidiaries such as Waymo for self-driving cars and Verily for life sciences.
Companies like Google prioritize data-driven decisionmaking, using analytics tools and dashboards to keep track of key metrics and insights. Testing initial prototypes and concepts with real customers can also provide invaluable feedback and insights that can inform the development process. Being willing to pivot and adapt based on what is learned is critical to success. In fact, research has shown that successful new businesses are almost 70% more likely than unsuccessful ones to base their decisions on data and tested hypotheses.
Cultivate a deep understanding of your customer's needs and desires.
To truly understand customer preferences, it’s important to observe their behavior rather than simply asking them about it. Social media is an excellent tool for this, as it allows companies to see how customers are responding to various pain points, value propositions, and calls to action. For example, companies like Airbnb and Uber have leveraged social media to gather insights and feedback from customers.
Another effective approach is to invite customers into the design process from the very beginning and continue to collect qualitative feedback throughout the development process. Building a contact database of people involved in early rounds of testing can be a valuable resource for companies, as it allows them to develop an active wait list or seed a customer beta program for rollout three to six months prior to launching the minimum viable product. This strategy has been successfully used by companies like Dropbox and Slack, who built a strong community of early adopters and advocates before launching to the wider market.
Case Study
Users track their daily water intake and receive reminders to drink more water throughout the day. Before investing in a full-scale launch, the company decided to conduct a lowfi test by setting up a simple landing page with a description of the app and a sign-up form for interested users. They then used targeted social media advertising to drive traffic to the landing page. By monitoring the number of sign-ups and analyzing the demographics of the interested users, the company was able to gauge demand for the app and identify potential user groups. They were also able to collect valuable feedback from early adopters to improve the app before its full release.
Roadblocks
Feel-good metrics
When it comes to business, it can be tempting to focus solely on superficial metrics that give us a sense of accomplishment, such as the number of likes or followers we have. However, these “vanity metrics” do not necessarily provide an accurate reflection of our business’s true health. For a more accurate measure of success, it is crucial to prioritize metrics that truly matter, such as customer referrals, conversion rates, customer satisfaction, acquisition cost, and churn rates. For instance, successful companies like Airbnb track their net promoter score, which gauges the likelihood of customers recommending their service to others, as well as their host retention rate, which measures host satisfaction on the platform.
Disrupting the status quo
Diversity in teams can greatly improve their performance by bringing a wide range of skills and perspectives to the table. This diversity can include factors such as gender, ethnicity, professional background, and problem-solving abilities. Microsoft, among other technology companies, recognizes the importance of diversity and has implemented initiatives to promote inclusion. Studies show that companies with diverse teams are 35% more likely to outperform their less diverse counterparts. Successful founding teams often have a mix of backgrounds in technology, natural science, and business, with about 40% of founders having a technology background, 25% having a natural science background, and 25% having a business background.
Chapter 4
Business Expansion Strategy
Maintain business concentration for sustainable growth.
Action
Focus on key performance indicators
It’s crucial to monitor and analyze both leading and lagging indicators daily. When evaluating revenue, prioritize annual recurring revenues (ARR) over one-time sales, and aim to increase per-customer revenue over time by identifying customers who purchase multiple products. Successful technology companies often focus on a “star metric” that best reflects their business’s success, such as user retention or customer satisfaction. The first ten clicks a user makes are often a significant indicator of whether they will continue using a product. Scaling is a critical factor in creating value for a new business. In fact, two-thirds of a new business’s value creation comes from successfully scaling. Therefore, it’s essential to plan for growth and allocate resources accordingly to achieve long-term success.
Consolidate through acquisition
Entrepreneurs who successfully build their businesses often make strategic acquisitions early on to aid in scaling. It’s important to choose acquisitions that provide immediate value, which can help the business grow faster. Instead of investing time and resources into unlocking value, it’s better to acquire businesses that have already established their value proposition. Research shows that companies which make two acquisitions by the end of early scaling are 25 percent more likely to be successful than those that make no acquisitions or more than two. Technology companies like Google, which acquired YouTube and Android in its early years, demonstrate how strategic acquisitions can fuel rapid growth and success.
Scale through customer-centric approach
As a business scales and reaches new segments, it’s essential to keep up with evolving customer preferences. This means maintaining a continuous focus on the customer, from the initial concept development to the scaling phase. Successful companies in the tech industry have a strong emphasis on design and research to measure their customers’ experience holistically, ensuring they adapt and evolve with their customer’s changing needs. Apple is well-known for its continuous focus on customer experience. From the design of its products to the layout of its retail stores, Apple prioritizes the customer in every aspect of its business. This has helped the company maintain a loyal customer base and become one of the most valuable companies in the world.
Develop a tolerance for experimentation and failure
To ensure setbacks don’t derail the progress of a new business, it’s important to build in buffers at the budget and resource level. This means having some extra funds and resources available to account for unexpected challenges or delays. Companies like Airbnb and Uber have experienced setbacks in the past, but their ability to weather those setbacks was due in part to having built-in buffers. It’s important to note, however, that a learning buffer doesn’t mean providing the new business with unlimited funding; it’s about finding a balance between having enough resources to overcome setbacks and managing costs effectively.
Think big from day one
As a business scales and expands its market reach, it must be able to seamlessly transition from selling and supporting a few products to a much larger scale without encountering any significant technical issues. Successful businesses have strong technology foundations, including automation and software products, in place before they start scaling. This involves developing a modular tech stack based on microservices and APIs, creating clear and welldefined interfaces to data, algorithms, and processes. For instance, companies like Uber and Airbnb rely on modular tech stacks to achieve scale. Additionally, partnering with a hyperscaler (such as Amazon Web Services or Microsoft Azure) can provide access to platform as a service (PaaS) and infrastructure as a service (IaaS), which are essential for successful scaling.
Case Study
A US-based health tech startup developed a mobile app that uses machine learning algorithms to provide personalized health recommendations to users. The app collects data on users’ health habits, such as exercise and nutrition, and uses that data to generate customized recommendations. The startup also uses predictive analytics to identify users at risk for certain health conditions and provide proactive recommendations to prevent those conditions. The app has been successful in attracting users and has received positive reviews for its personalized approach to health and wellness.
Roadblocks
Customer Acquisition Cost
When it comes to scaling up a business, it’s crucial to have a well-defined understanding of which customer segments bring the most value. A good way to measure this is by looking at the customer lifetime value, which should ideally be at least twice the cost of acquiring that customer. This means that a business is generating enough revenue from that customer to cover the cost of acquiring them, as well as turning a profit. Many successful tech companies, such as Amazon and Netflix, have a clear understanding of their most valuable customer segments and use data to target them effectively.
Excessive Features
When it comes to scaling up a business, it’s crucial to have a well-defined understanding of which customer segments bring the most value. A good way to measure this is by looking at the customer lifetime value, which should ideally be at least twice the cost of acquiring that customer. This means that a business is generating enough revenue from that customer to cover the cost of acquiring them, as well as turning a profit. Many successful tech companies, such as Amazon and Netflix, have a clear understanding of their most valuable customer segments and use data to target them effectively.
Incomplete Evaluation
In the business world, it’s common to have high expectations for rapid growth, often within a short timeframe. However, achieving true success and sustainable growth can take much longer than anticipated, typically 12 to 18 months. It’s crucial to have the agility to pivot quickly and incorporate market feedback and key metrics into product development. For instance, companies like Airbnb and Slack took several years to reach significant growth and success despite facing initial challenges.
Sunk Cost Fallacy
Successful business builders understand the importance of monitoring key performance indicators (KPIs) and setting realistic growth targets. It’s crucial to have a mechanism in place for making the tough decision to cut funding to a business that is not showing potential for profitability. Companies like Google’s parent company, Alphabet, have a history of shutting down projects that aren’t meeting expectations or aligning with their overall strategy, such as their decision to shut down their social network, Google+ in 2019.
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