Dave Concannon

Ben Horowitz has a great contrarian article about ‘Fat’ startups which has caused immediate reaction around twitter and the Lean Startup community. Unfortunately, his article has very little to do with the Lean Startup concept and a lot to do with reactionary CEOs flipping out about the infamous Sequoia presentation. It also has a little to do with how choosing a name is important. For the record Ben Horowitz is right, but let’s backtrack a little bit.

What is the ‘Lean’ in ‘Lean Startups’

The ‘Lean’ in ‘Lean Startups’ comes from ‘Lean Thinking‘ as used in the streamlined production process pioneered by Toyota. This process is designed to banish waste in a production process. In the specific context of the Lean Startup process, it is to ensure that if you’re going to add a feature to your product there had better be a customer there to love it.

What the ‘Lean’ in ‘Lean Startups’ is Not

‘Lean’ in this context has nothing to do with spending less money. It is about effectiveness. It is about preventing your developers writing code that will never be used. It is about making sure that when you only have only one hundred hours to spend writing code, that as many of those hundred hours as possible are spent creating features that customers actually want. Fundamentally, it is about increasing the amount of validated learning you can get out of your process. To do this might involve increasing the amount of money you spend. It may require spending more money on people who are continually testing that your hypotheses are correct on actual users.

What’s the difference?

In Ben’s article we see CEOs reacting to the Sequoia memo, which makes a lot of sense. Around the startup community it was like a meteor had hit. Guy Kawasaki said that if you weren’t paying attention to this memo then you were clueless. Any available investment money dried up overnight. What Horowitz sees in these investment pitches is CEOs trying to display their cluefulness to potential investors by preaching the ‘Low Cost’ mantra. But he’s claiming that sometimes you need to spend big. Is there a disconnect?

Where the ‘Lean Startup’ becomes a ‘Fat Startup’

The critical mission of a Lean Startup (from Eric Ries’s concept) is to get to Product-Market fit.  Horowitz’s VC partner Marc Andreessen describes it as the only thing that matters. This is where the two stories link up. It’s the next stage in the same process – when you have product-market fit and there is a scalable and repeatable sales model you crank up the volume! All that validated learning turns into a method where a smaller amount of sales effort turns into a much larger amount of money. You spend to get there, and then you spend a whole lot more.

Facebook

Pumping too much money into a small start-up is unhealthy for both the company and the investor. On the other hand, Facebook has raised several hundred million dollars and is on track to produce fantastic returns for all of its investors. So what’s a start-up to do?

The difference here is one of timing. Facebook had phenomenal growth – users on college campuses all across the country were signing up at an amazing rate. That’s a pretty good indicator of product-market fit, and a different ballgame entirely. At this point the organization needs to scale to meet the demands of the market, and to do that you need money. A lot of it.

Hypergrowth Markets

Both Opsware and Facebook had product-market fit and were racing to gain a dominant position in a market where no clear leader had emerged. The decision to shoot for break-even revenue vs land-grab for market share is a strategic play at this stage. They both chose the process that Geoffrey Moore describes for capitalizing on hyper-growth markets in “Inside the Tornado“, which is a place that most startups can only dream of getting to.

Final Lesson?

Sorry Eric, “Lean Startups” is a terrible name for this movement. There’s been too much confusion with people translating “Lean” into “Spend zero money”.

Two weeks ago I wrote a Tuesday push about loopthing.com. Despite having a nicely designed site,  Loopthing isn’t something that resonates with me in terms of a business model. Until the service matures I believe that they’re sitting in the category of web business which I describe as “Me too! (dot zero)”. The Me2.0 businesses are missing one or more of these essential ingredients:

• At least ten percent innovation on their competitors to make them stand out (Satisfying the criteria of “value to customer” versus “uniqueness”).
• A niche that’s small enough that they can dominate without significant competition before branching out into new markets or niches.
• A superstar web or entrepreneur personality who can drive traffic immediately just by having their name attached to the project (E.g. Jason Calacanis, Guy Kawasaki, Gary Vaynerchuk, Kevin Rose, et al) – It’s possible to succeed as a “Me too!” if you have a “celebrity” name attached.

Revahealth

This week’s Tuesday Push is for yet another business listings portal, in the guise of Revahealth.com. So what’s different here? For a start, Revahealth have been around for a few years, giving them time to solidify their business model and  giving them a head-start on any recent competitors. Secondly, and most importantly by far, they’ve picked a small but extremely profitable niche that isn’t going to go away any time soon – Healthcare.

Business Model

The business model is straightforward. Business for healthcare services like Dentistry, Cosmetic surgery, and Laser eye surgery  practices are competitive. Your average small-to-medium sized clinic isn’t likely to have a web page, and even if they did it’s probably unlikely that they have much time to update it regularly. Revahealth fill this gap by funnelling clients to grateful clinics who reward them with a referral fee. In addition, Revahealth offer the “freemium” model where clinics can list their business for free, but there’s a much nicer upgraded profile available for a fee. The model is proven – Internet marketing “superstars” such as Jeremy Schoemaker have commented on it before. The difference between Revahealth and the countless other “business portal / connect users to business” sites is in the niche.

The healthcare niche is by no means small, but certainly not as big as “a list of all businesses”. This means that it’s possible for one player in the field to make a name as the go-to place for healthcare information and dominate, with the added benefit that there’s revenue immediately. Once they are a recognised brand in the  healthcare sector, there’s nothing stopping them from moving into another area using the same basic technology and business model.

Management Team

In Micheal Cusumano’s eight-point lens for business evaluation, the management team is the primary criteria. Revahealth benefits from Caelan King’s experience in marketing and as a product manager, and the experience of Ray Nolan as a board member, who has built Web Reservations International into the (very profitable) market leader in hostel bookings. Tapping into Ray’s experience of the problems faced in building a niche service like hostel bookings is a very useful skill to have on board when moving into another area.

Social Marketing

Calelan puts a lot of effort into the Revahealth blog (well worth a read), is active on twitter, and regularly presents at conferences such as Bizcamp. While this isn’t marketing to the specific audience of their product, it ensures brand awareness of revahealth within the technical and entrepreneurial community, and at the very least indicates that there’s no plan to let their technology stagnate.

Summary

From a business perspective, Revahealth ticks a lot of boxes – a solid management team with a compelling offering in an attractive market. The site itself has lots of content, the design is clean, spacious and easy to use, and the layout seems entirely geared towards the company’s organic SEO efforts. I can see Revahealth doing very well – Healthcare services are an necessity, and they have a great targetted service which I think will continue to grow profitably.

Here’s a presentation that Caelan King gave on monetising web applications at Barcamp Belfast, which goes into more details about Revahealth’s revenue model. (Via Ken McGuire’s excellent Tuesday Push for RevaHealth).

Way back in ancient history, I reviewed Guy’s book Rules for Revolutionaries, a “manifesto for creating and marketing new products and services”. This review is his latest offering, a fantastic guide to any entrepreneurial offering.

“The Art of the Start” is a guide for anyone who wants to start… anything, presented as a list of lists. This list format is perfect for picking back through the book as a reference guide. One criticism I have heard of Mr Kawasaki is that he is a “miner of miners” in that he sifts through the distillations of others and distils them further, combining the result into a coherent whole. This could well be true; were it not then he may not have succeeded in writing one of the most complete and immediately useful guides I’ve read. Each chapter provides ample references on subjects covered to allow the reader to further research areas of interest or just get a different opinion.

In my previous review I clarified that I’m a big fan of Guy’s work, so I’m going to spare you my sycophantic blubbering and simply say that the writing style retains his characteristic humour while delivering a succinct yet informative payload. Here is a brief summation of the contents:

• Causation – This section covers how to get the ball rolling; how to use inspiration to decide to create a product or provide a service which will make the world a better place. Once you have this initial idea you follow through with a basic mantra to remind you that you’re following the right path, and milestones which define your success or failure.
• Articulation – This section covers positioning your product or service – essentially the answer to a potential client asking you “What do you do?”. Once you have the fundamental answer to this question, a chapter on pitching explains the best manner to deliver this information to your audience in a convincing manner, whether the audience is potential investors, partners, or customers. The final chapter in this section formalises the founder’s intentions with a killer business plan.
• Activation – This section takes the formulated plans and lights the touchpaper. The chapter on Bootstrapping explains how to get useful moving on minimal resources. This section also covers how to hire the right kind of people, and how to get some much needed finance to grow the company.
• Proliferation – The proliferation section is all about taking your seedling company and exploding; creating useful partnerships which provide mutual gain, branding your products or service in a manner which inspires evangelists to spread the word, and creating business leads and connections.
• Obligation – This final chapter explains how to use success to make the world a better place.

Summation: Buy it!

My latest read from Joel Spolsky’s MBA reading list is “Rules for Revolutionaries” by Guy Kawasaki. Guy is founder and current CEO of garage.com, a firm that provides seed capital to technology startups. His pedigree is impressive – he was involved on the original team that developed the Macintosh, and was the Chief Evangelist of Apple.

I had stumbled across Guy’s weblog a few months ago and it immediately became one of my top five reads; Guy has a wealth of knowledge that he manages to convey succinctly in staccato bullet points and in a self-deprecating, humourous style that I wish I could emulate. Hagiography aside – Guy writes informative and entertaining books that richly deserve their place on an MBA reading list.

It is difficult to categorise “Rules for Revolutionaries” – the essential pigeonhole would be “Evangelism”, which I interpret as a mix of marketing, business strategy, and vision amalgamated into a driving force to turn your dreams into reality, your reality into products, and your products into customer magnets (to quote directly from the book sleeve). Kawasaki divides these goals into three main sections: “Create like a God”, “Command like a King”, and “Work like a slave”. Each section covers fundamental issues at each stage of bringing a product from imagination to cash cow.

This is the kind of book that I find far more useful then a dry academic tome in that each point is backed up with a real-world example I can relate to. Every section is peppered with interesting and relevant quotes from industry mavens, and finishes with a recommended reading list which would compose an MBA reading list on its own. Picking some points completely at random and out of context:

• Ne Te Terant Molarii – This literally translates to “Don’t let the plodding millers grind you down”; Guy describes it simply as “Don’t let the Bozos grind you down”. The world is full of people who will shoot down an idea, tell you to quit, and naysay until they’re blue in the face. It takes temerity and indomitable spirit to be able to focus on your own vision with enthusiasm and prove them wrong.
• Churn! – You may create a product for an initial purpose, but it might not be the one that you stick with. Continually soliciting (and listening to) customer feedback is the only way to ensure that the product you develop satisfies the needs of your current customers; churning back these new concepts into the initial design means you can capitalise on markets you hadn’t envisaged originally. Synonymous with the concept of Kaizen.
• Avoid death magnets – Companies can try to follow paths which seem to be positive ways to drive the business, but are actually paths which lead to a deep pit full of faeces-covered punji stakes. Concepts such as planning on making a product which is not quite as bad as the competitions, religiously obeying a budget to the detriment of common sense, or relying on a brand name above any evidence that the product has quality. Conventional approaches lead to conventional results – more often than not this means failure.

In summation, this is one of the most enjoyable books I’ve read so far on the reading list. Above the excellent information that it imparts, it’s genuinely funny. As a result I’ve ordered two other of Guy’s books and at the tentative half-way stage through reading his latest book I can also recommend “The Art of the Start” (review pending…).