In the past ten years, I’ve gained valuable experience, talked to many potential FinTech founders from more than 100 different countries, and participated in mentoring programs to help new business owners launch their own companies.
I’ve gained a lot of knowledge and would like to share my experience with young entrepreneurs to help them avoid the same problems and protect them from the most dangerous pitfalls on their way to success.
So these are the seven lessons I’ve learned during my ten years as an entrepreneur.
Lesson 1. The right people
Your personal success depends on several strategic parameters, and you must focus on achieving the best possible combination from the start.
The first and most important step is to find the right people to work with. I spent 5 years working with not exactly the right people and projects. Try to avoid making the same mistake at all costs.
If you don’t trust your co-founders or you aren’t sure that you can rely on them and overcome the challenges, don’t start a business with them.
But how do you find the right partners to start a business with?
Shared values
It is really hard to find the right person with the same values because you can not evaluate, these need to be felt. You must be on the same wavelength, think in a similar way, understand each other and have similar dreams, and speak a common language. Also, you have to support your partners. If you have any doubts about a person, trust your heart.
A business partnership is often compared to a marriage. Actually, it is much more serious than marriage.
Exploring new things
Concentrate on learning new things. Starting and running a startup is a difficult journey that requires constant learning. A typical company that succeeds in the marketplace is made up of hundreds or thousands of highly skilled people. All of them together know quite a lot.
Imagine starting a business with some of your friends. Now you are competing with all these professionals who are already in the market.
Make learning new things the main priority, because you can be quite far from what they already know.
Scientific thinking
It is a learning approach based on asking the right questions and trusting facts, not assumptions.
When you draw a conclusion based on something other than data, pay attention – that’s the tipping point. Realize that it is only a hypothesis that needs to be tested, but not a final decision.
An experiment with performance monitoring is the best technique to definitively prove a hypothesis. Repeat the experiment several times and compare the results to ensure that the validation procedure is reliable. They must be identical or barely different; this would show that the procedure and measurement are correct.
You can use the data and results of a proven hypothesis to improve your product. The results are also used to establish a foundation for the next experimental cycle.
To start an IT business IT you have to validate thousands of hypotheses. Try as much as you can to build a great product for your customers.
Being open to feedback
Be open to criticism from your teammates, partners and, of course, your clients. Although it can be painful to deal with negative feedback, do not be defensive or ignore it.
On the contrary – pay more attention to the comments you have received (and even those you did not really want to hear) and structure them. Consider them a source of priceless insights and think about how you can improve your approach or product.
It is important that your business partner has the same attitude because you will get mutual feedback. Sometimes you will have to say things that people do not like to hear.
Therefore, both you and the other person at the helm should know how to effectively handle feedback in order to use it to the company’s advantage. To use feedback to improve the business, you and another person at the helm need to take it in quickly and effectively and draw conclusions from it.
Commitment is key
Running a startup is not a walk in the park. I remember the day my business partner and I transferred almost all of our money into a corporate account to pay salaries to our team. It was about 60,000 euros, and we realized that we might never get our money back.
Commitment means working hard for the company, no matter what the circumstances. If you are committed, you have many opportunities to succeed even with a mediocre product and an unattractive market. In my case, it was the commitment that allowed me to share these lessons with you today.
Lesson 2. The right idea
Now that you’ve found the right business partner, what’s next? How do you decide which business idea is the best? What product should you launch?
Ten years ago, we explored many ideas, trying to create something unique that no one had done before. But every proposal resembled what had already been done and ended up in the trash.
Today, I can admit that trying to be unique was a big mistake and a completely wrong way of choosing company concepts. But why?
Pain and value
A startup is about adding value to many customers who experience pain by solving their problems.
Let’s start with pain and value. Customers struggle with some problems every day, but sometimes they are not satisfied with the traditional way of solving problems. That’s a pain. So when your product solves a customer’s problem and eliminates the pain, that’s the value.
10X value
The ability to maximize value for the customer is the bottom line. Consider the 10X rule, which states that a product must be significantly better than a common method of solving the same problem to be successful.
A well-known example is the evolution of cab companies. Fifteen years ago, a popular method was to order a cab by phone, which could take 30 minutes of calling, talking, explaining the exact meeting place, and waiting. Now it only takes a few minutes without even calling. This is a good example of the 10X rule. Ordering a cab today is 10X better than it was 15 years ago.
However, why is this so important?
Because the inertia of people’s behaviour matters. Normally, people do not like to change their habits. Imagine how small the market share will be of a startup that offers little value to the market. Nobody will change their behaviour without a good reason.
Only if your product significantly improves the lives of your customers, your startup has a chance to conquer the market.
Market size
A babysitter brings value to a particular family, but his or her job is not a start-up. Running a marketplace for finding babysitters could be a startup because there are many customers solving the same problem
You have discovered a market where many potential clients are dealing with the same problem. But exactly how big should it be?
According to some VCs, a company with potential should have a market size of at least $1 billion annually. As an entrepreneur, you should focus on clients, not statistics. So, I prefer to look at the market in units.
Let me demonstrate the point with a simple example.
There are about 10 million parents with children in the USA, and they spend $2,500 per month (or $30,000 per year) on babysitting, according to statistics. So the goal of your startup is to improve the lives of 10 million American families.
Consequently, a startup idea that deserves attention should significantly ( 10X ) improve the lives of millions of potential customers.
Lesson 3. The right business model
What’s the next step once you have found a great business partner and market opportunity? Choose the appropriate business model.
The best position for your company is to have customers who will use your product for a lifetime. It is right to look for a product with a potential lifespan of decades, as the customer lifecycle of many products is only a few years.
The right business model (some terms)
Let us assume the example family in need of a babysitter uses your product for ten years and spends $120 annually. The LTV in this case is $1,200. Before you reach this value, you will definitely need to invest some money in marketing and advertising – these are the customer acquisition costs.
Calculations
Let us assume that your CAC is $200. Make sure you have a very long payback period, which in our example is 18 months. The payback period is the time it takes to recoup the investment in the CAC. A normal payback period for small retail customers is about 5 months.
Ok, you “buy” a customer for $200 and he brings you $1,200, of which the remaining $1,000 is your budget for everything else, including the cost of revenue (direct costs for servers, customer support, etc.)
$1200-$200=$1000
Let us assume your cost of revenue per customer per year is $40 per customer per year or $400 per customer lifetime. This leaves you with a budget of $600 for 10 years or $60 per year to pay bills and develop your product.
$1000 – $400/10=$60
Even with 1 million active customers, you will only make $60 million a year. That’s not much, and this business idea does not look promising for a startup.
$60*1,000,000 = $60,000,000
So rethink the idea, market or business model to find cost-effective customer acquisition channels and increase monthly revenue.
It sounds so simple: you maximize customer LTV and minimize CAC. In reality, however, it’s easier said than done. Besides, even a small startup needs a budget for customer acquisition and product development, so we’ll talk about investments next.
Lesson 4. Investment
I have met with many potential investors over the past ten years, and at first, I did not understand why some of them did not want to invest in my company. However, I eventually received money from unprofessional investors. Now I understand that this is the worst situation for a startup. Do you want to know why?
- Firstly, stay calm – you do not need money to grow your business… if you can prove that your idea is worthy. How can you do that? Talk to VCs – this is a good way to verify that you have done your homework well. If professional VCs want to invest in your idea, you are on the right path. If not, take their feedback home and improve the idea.
- Second, and most important, unprofessional investors can steer you in the wrong direction by asking the wrong questions and measuring success from the wrong angle. The likelihood that they will introduce you to the right people – potential employees, business partners and future investors – is extremely low.
- Third, not every market and every company is investable. They are chasing unicorns and decacorns, so some markets are not big enough for them.
With the right idea, you can survive without investing at all. However, if you attract professional investors and sell them shares in your business, you are buying years of your life. It’s priceless and definitely worth it.
Another important thing is that you will always have competitors in the market. You have a few months before they show up. Many of them will be very good, and they will have investments from VCs, be willing to buy customers and hire the best staff.
It won’t be simple to survive without money. The reality is that businesses with great ideas but little financial support are going to lose out on customers.
Investment is the fuel for your rocket, in other words. To win time and the market, you must have it.
Lesson 5. Competition
Competition to me is a Formula 1 race where you are the driver, engineer and pit crew at the same time. It is a good sign for you when other teams have fantastic cars with powerful engines, new tires and other essential elements for the race. There is no market worth entering if there is no competition.
Pizza vs. Uniqueness
It may sound strange, but there are many situations where it makes more sense to run a pizza restaurant in a city where there are hundreds of them than to come up with something original. Pizza offers more chances to win than an original product that no one else provides. Have you ever thought about the fact that no other business offers this product because maybe no one needs it?
For a startup, it is better to enter a competitive market with a newly invented product than to focus on a high priority on uniqueness.
Mr. Second
Remember that the iPhone was not the first cell phone, Facebook was not the first social network, and Google was not the first search engine.
If you analyze your competitors’ strategies and focus on what your customers need, your startup has a chance to succeed.
On the one hand, there is no ingenious invention that works forever, and something better will surely be offered in the future. On the other hand, there are growing expectations from customers who want the same UX they have come to expect from other world-class services. Therefore, keep reviewing what your customers need and reinvent your offering. This could completely change the direction of your startup.
Lesson 6. Execution is King
When you are competing fiercely with big companies, you have an execution problem. When everything looks great on paper but is terrible in practice, it’s easy for anyone to let a startup fail.
Playing with a value proposition, making assumptions in Excel, talking to VCs and motivating each other by dreaming of a great product and brilliant opportunities in the future is not the same as facing tons of development, marketing and support problems at the same time.
Assumptions do not work
Be ready from the start that your assumptions may be wrong and that you have underestimated everything several times. It can take up to six months of work to create a simple website that you can present to someone without feeling embarrassed.
Organic traffic through search engines is a channel for attracting customers, but do not rely on it for the first year, because you need to put a lot of work into search engine optimization before you can get visible results.
The hypothesis testing life cycle, the A/B testing lifecycle, the product development lifecycle, and the software development lifecycle all need to be put in place for a IT startup.
Team & Efficiency
You need to hire highly skilled people to help you achieve your goals, and you need to pay them competitive salaries. The top companies already have the best talent among their employees and pay them well. You need to make your startup attractive to talent.
As your startup grows, it can become a slow organization and lose efficiency unexpectedly quickly. It’s difficult to start a business that does not struggle with unproductive meetings, poor communication, useless red tape, etc. This can turn into a problem.
Lesson 7. Exit plan
When founders make plans for their startup, they rarely think about exiting. It is a big mistake. There are several exit options founders can choose before starting a business.
The Death Valley
The first – and most common – exit is to close the business, with debt and problems.
The numbers below are quite striking:
- 5 out of 10 new businesses fail in the first 5 years of operation (according to the U.S. Bureau of Labor Statistics)
- 7.5 out of 10 high-risk startups fail
- 9 out of 10 startups fail (source and some other statistics)
You are starting a business in Death Valley. Remember, it is your decision and you are responsible for taking such a risk.
Moment of glory
The second exit strategy is a moment of glory when you find a buyer willing to purchase your company and pay your price for the shares. This kind of news usually gets people excited about how much money investors make in mergers and acquisitions and how high the value of startups is.
However, the reality is that mergers and acquisitions often end with the death of a startup. But let us face it, this type of failure is definitely preferable to the former.
Take Instagram as an example, which was sold for $500 million after Snapchat rejected a takeover bid. Even today, when Snapchat’s shares are seven times cheaper than when it was acquired, the company’s valuation is 16.6 billion.
Way to glory
The third option for a startup is no exit at all. Many other startup founders, including Jeff Bezos, Mark Zuckerberg and others, are still running their companies. Remarkably, a true dream startup may not even have an exit.
Zombie or cash cow
Unfortunately, it is more likely that founders will not be able to sell their company because there are no buyers for it. It is normal for a small business that is not interesting to investors.
Such companies can exist for years without having any real business opportunities. They are called “zombies.” Do not waste time and close your zombie company as soon as possible if you have one.
A lot of hard work ahead
Do you still believe that in 1-3 years you will be done with your work and sitting at the top of the pyramid, living the good life while others work for you? Very unlikely. It’s much more likely that 10 years from now you’ll still be sitting in the office every week at 9pm on Saturdays. In other words, get ready to be satisfied with an office as a jet-set life from now on.
One thing if you are running your own business, you can be sure that there’s a lot of hard work coming your way.
