What is a startup?
A startup is an effort (company or otherwise) of an entrepreneur/founder(s) related to conceptualising, developing, validating, and growing an innovative product or service. It is characterised by high uncertainty and therefore short (if any) planning horizon, possible rapid growth, frequent pivots, evidence-based (with the future customers/users, so-called early adopters) validation with short improvement iterations. Startups in different stages of growth use external support, such as in funding, training, mentoring, networking.
I have an idea for an innovative product, what should I do now?
First, determine if you have a good product-market fit.
Product-market fit is a measure to determine to what degree the product satisfies the market demand.
In other words, if you have a good product-market fit it means that there are a lot of people who need your product, and who are willing to pay for it. So before spending cash on product development, MVPs, marketing… ask yourself if your product really solves a customers' problem, and if they are eager to pay for it. If the answer is yes, you have a good product-market fit and you should run with it, but if the answer is no then pivot, change the product, do something to make it a better fit to the market.
Once you are satisfied, validate your idea through short experiments using MVPs. Minimum Viable Product (MVP) is a development technique in which a new product is introduced in the market with basic features, but enough to get the attention of the consumers. The use of MVP is guided by the idea that “first products aren't meant to be perfect”. The goal with the use of MVPs is to start the learning process as soon as possible.
Unlike prototypes, MVP is not designed to answer product design or technical questions, but its goal is to test the fundamental business hypotheses.
The complexity of the MVP can range from a simple smoke test (little more than an advertisement) to actual early prototypes (with missing features). The decision on how complex an MVP needs to be requires judgement, which is developed through experience. However, one can follow a simple idea when it comes to the needed complexity of the MVP – “when in doubt, simplify”, because most entrepreneurs overestimate how many features are needed in an MVP.
MVP is designed based on the value hypothesis. It defines the arguments on whether a product or service really delivers value to customers once they are using it. Some of the questions that the value hypothesis testing should answer are: Does the customer have the problem you are trying to solve? Does the product actually deliver value to the customer? Do customers actually need your product?
The value hypothesis life cycle can be defined as follows:
- Articulation of a testable value hypothesis;
- Validation of the value hypothesis:
- Document and categorise the (sub-)assumptions to help test, validate and adapt the value hypothesis in order to achieve a strong and meaningful direction;
- Define candidate MVSs (Minimum Value Service - similarly to MVP, an MVS is a minimum service that you can provide to your customer, which proves that you are delivering a solution to the problem that a customer has) to identify the narrow target sector where the value hypothesis best resonates;
- Define candidate MVPs that will enable the company to test the value hypothesis as quickly as possible while minimising cost/resources;
- Articulate and laser-focus on your value proposition, which you have arrived at by having a fully validated value hypothesis.
How mature is my idea?
The maturity of the innovation is typically determined today by Technology readiness levels (TRL). The TRL scheme was introduced in the mid-1970s by NASA, and is used to determine the maturity state of technologies based on the scale from 1 to 9 (1 is given to the most basic technology and 9 is given to the most matured ones) [read more].
TRL allows the people that use it to understand how much further the technology needs to advance in order to be utilised.
The meaning of every level of the TRL scale can be seen in the list below:
- TRL 1. Basic principles observed - the lowest level of technology readiness;
- TRL 2. Technology concept formulated - once basic physical principles are observed, then at the next level of maturation, practical applications of those characteristics can be invented or identified;
- TRL 3. Experimental proof of concept - at this step in the maturation process, active research and development (R&D) is initiated;
- TRL 4. Technology validated in the lab - at this level, the design, development and lab testing of technological components is performed.
- TRL 5. Technology validated in a relevant environment (industrially relevant environment in the case of key enabling technologies) - the basic technological components are integrated with reasonably realistic supporting elements so they can be tested in a simulated environment.
- TRL 6. Technology demonstrated in a relevant environment (industrially relevant environment in the case of key enabling technologies) - a representative model or prototype system, which is well beyond that of TRL 5, is tested in a relevant environment.
- TRL 7. System prototype demonstration in an operational environment - TRL 7 is a significant step beyond TRL 6, requiring an actual system prototype demonstration in a real relevant environment.
- TRL 8. System complete and qualified - technology has been proven to work in its final form under the expected conditions.
- TRL 9. Actual system is proven in an operational environment (competitive manufacturing in the case of key enabling technologies) - actual application of the technology in its final form and under target conditions, such as those encountered in operational test and evaluation. At this point, the technology is ready for commercial deployment.
What are the most important elements of my business plan?
Your hypotheses! In addition to the previously mentioned value hypothesis, the growth hypothesis is equally important.
The growth hypothesis is a set of argued assumptions about how many new customers will discover and use a product and how the startup will grow in the future.
This hypothesis should also be tested and even reformulated as this testing goes on. When a company proves one hypothesis, it should come up with a new hypothesis and validate it too. The more value a product has, the more users want to use it. The more proven growth strategies a product has, the faster it grows.
There is one more question you should answer about your business plan: “What are the ways that a business acquires customers?”. A growth model is an answer to that question. It can help with forecasting how much growth a company should expect in a certain period of time. Some common examples of growth models are: paid acquisition, viral invite, two-sided marketplaces, user-generated SEO content.
What to do if experiments go wrong?
Do not worry, a lot of startups do not get their starting hypotheses right, and the experiments do not show what we want them to show.
SpaceIL is an Israeli organisation, established in 2011, that was competing in the Google Lunar X Prize (GLXP) contest to land a spacecraft on the Moon. After nine years of work and millions in investment, however, the company failed to complete the mission as their unmanned spacecraft successfully achieved orbit but crashed upon landing. SpaceIL immediately announced a second attempt, emphasising understanding that the cause of failure meant there was no reason not to try one more time. Accepting failure and learning from it is important for startups, though it is not every day a “failed” project gets national acclaim.
Another option is to pivot.
Pivoting is a term used when a company makes a fundamental change to its business strategy. It is usually done when the value hypotheses are not validated by experiments done with MVPs.
There are many examples of successful pivots. Look at Instagram, it began as Burbn, an app with check-in, gaming features, and photo elements. Such a cluttered app would lead to decreasing popularity, so they pivoted. They stripped the app of all the functionality except photos, and now it is one of the biggest platforms on the internet. Pivoting does not mean that you will need to start from scratch. Sometimes it just means that you should rebrand, change some language, or some features, etc.
Where to find support for startups?
Startup support competencies are typically found in incubators, angel investors, and accelerators. Incubators and accelerators provide support typically needed by early-stage startups.
Incubators provide the support required to develop and conceptualise the idea and associated business plan, with the hope to “incubate” a new company. Accelerators support the “acceleration” of the existing company growth.
Incubators work with no schedule; they typically host startups; shared spaces; co-working environments. The support is continual and it includes: information sessions, training, mentoring, networking events, often funded by universities or local governments.
Accelerators are time-framed programmes from weeks to a few months, with small seed investment. The application process is very selective. They are typically privately funded.
The participation in accelerator or incubator programmes is most often competitive. Although acceptance by a startup accelerator or incubator is not a guarantee of success for a startup founder, it is a good incentive and can be a key success factor. Because of that, it is very important to choose the right financing option and to know the difference between an accelerator and an incubator. These terms are often seen together, but they are actually used for completely different purposes, have different results and accept different types of startups.
Accelerators pay close attention to every startup and stimulate the growth of existing companies with a minimum sustainable product (MVP) by providing mentorship, advice and resources to achieve the goal. In contrast, incubators help entrepreneurs build a startup, turn a concept into something that fits into the product market, and realise their ideas.
Where to set up the startup?
The setup depends on the country’s track record, human resources availability (quality of high education) and cost, tax conditions and incentives, funding schemes, stability/growth, infrastructure, and work culture.
To be successful in the startup world, entrepreneurs need to be aware that the success of the startup is conditioned by multiple internal and external factors. It is not enough to have a great idea, to be quick in its creations, to conduct effective experiments through the use of MVPs, to quickly and precisely measure the results of those experiments, to draw valid conclusions based on them, and to meet the customer demands and desires, as these factors are only internal ones that need to be satisfied.
The countries in which startups are developed, institutions that startups need to be in contact with, etc., can make a big difference to the startup development, as they are an external factor that can be a source of the startup’s competitive advantage, or a barrier to its growth.
Quality of institutional frameworks can be evaluated through indicators such as: Ease of doing business, Corruption Perception Index and Index of Economic Freedom, and the research shows that the gap between the quality of such frameworks in developed and lagging countries is very much present, as well as the gap in social capital (networks with shared values, knowledge, norms, rules that facilitate collaboration and cooperation between individuals or groups) and human capital (economic value of assets such as education, training, skills, health, loyalty, experiences and motivation determining people's capacity to work) [learn more].
These gaps can be reduced through improving the legislation towards greater political pluralism, civic participation, and freedom of speech, economic freedom, independence and social trust. The institutions should allocate more funds for loans for research and development, help the commercialisation of results of innovations, provide training, consulting, and information services for startups, as all of this can help the lagging countries to catch up to the developed ones [learn more].
There is a direct correlation between the trust of founders of startups in the government, legal system, political system and the potential of startups on the market, which means that with the improvements of these systems, the number of startups should rise in the lagging countries. In addition, that number will also rise if access to financial capital is made easier.
Estonia is an excellent example of how an institutional framework and inclusive environment for new ventures can contribute to the development of the startup ecosystem. Estonia’s Startup Visa program gives foreign entrepreneurs the opportunity to settle in Estonia for up to 18 months to establish their startup. Applicants do not need to pay 65000 EUR, which is obligatory for a regular entrepreneurship residence permit, but only 88 USD for a visa fee and demonstrate the possession of no more than 2000 USD in personal funds [learn more].
Where can I get funding for my startup?
There are multiple sources of funding that you can tap into, but there are also multiple stages of funding that a startup goes through.
Seed funding is the first official equity funding stage. It typically represents the first official money that a business venture or enterprise raises.
Often, seed funding comes from angel investors, friends and family members, and the original company founders. An early-stage startup may also look for funding through bank loans, but angel investments are usually preferred. Seed funding is used to start the company itself, and consequently, it is a fairly high risk: the company has not yet proven itself within the market. There are many angel investors that specifically focus on seed funding opportunities, because it allows them to purchase a part of the company’s equity when the company is at its lowest valuation.
The purpose of seed funding is simple. It is intended to give a founding team enough capital to pursue a certain idea or market to prove if the concept works. Different investors may have different requirements for a seed-stage company but generally, they are pursuing “product-market fit” (product/market fit means being in a good market with a product that can satisfy that market).
Sources of seed funding for the startups:
- Friends and Family – this should be the easiest way to seed fund the startup, as the founder has a close and long connection to their potential investors.
- Crowd Funding – this is the practice of funding a project or venture by raising money from a large number of people who each contribute a relatively small amount, typically via the internet. Sites like “Republic” and “StartEngine” allow startups to raise equity rounds from individuals so check sizes can be as little as $100.
- Other - Angel investors, Personal money, Accelerators and Incubators
An angel investor (also known as a business angel, informal investor, angel funder, private investor, or seed investor) is an individual who provides capital for a business or businesses startup, usually in exchange for convertible debt or ownership equity.
Angel investors usually give support to startups at the initial moments (where risks of the startups failing are relatively high) and when most investors are not prepared to back them.
A small but increasing number of angel investors invest online through equity crowd-funding or organise themselves into angel groups or angel networks to share investment capital, as well as to provide advice to their portfolio companies.
How do I ask investors for funding?
While starting a new business seems exciting, in fact it is initially mostly exhausting. Not everyone has enough money to get their startup company off the ground, so you are neither the first nor the last person wondering how to ask investors for funding.
Considering the fact that investors are mainly very busy and do not have too much time to listen, most of the time you have to be quick and accurate to intrigue them. That is why you will need to tell a compelling story and share what is unique about your product or service, together in a great elevator pitch.
An elevator pitch (also known as an elevator speech or elevator statement) is a short description of an idea that clearly and succinctly explains the concept in a way such that any listener can understand it, in a short period of time. This description typically explains who the thing is for, what it does, why it is needed, and how it will get done. It can be used to entice an investor or executive in a company, or explain an idea to a founder's parents.
Persuading someone to invest in your business is not an easy job, so now, when you have the attention, it is time for the next step – making a pitch deck.
Pitch deck is the presentation of the startup company, prepared for potential investors.
It typically consists of 15 to 20 slides in a PowerPoint presentation. With this presentation, it should be clear to investors what the company's product is, what technology it uses and who is in the team of the startup.
Using a pitch deck template can help you get started, but there are also a variety of tools available online that can be useful. Before pitching your idea to an investor, you need to do a lot of research. First of all, research potential investors carefully. When you are sure what types of businesses they care about, you can tailor your pitch to them.
Be realistic, but use the passion and confidence you have in your business to persuade investors. You believe 100% in your product, but be aware that in reality very few products experience exponential growth in sales and completely dominate the market. When presenting your investment proposition try to think conservatively about the value of your product, its growth potential and the timeline to achieve this.
Keep things simple, keep your pitch concise and do not be pushy. Remember, investors invest in people before the potential products.
My idea is my fortune. How do I truly own it?
Intellectual Property (IP) refers to the creations of the human intellect, the expression of ideas, creativity and invention in tangible form. Intellectual Property Rights (IPR) are legal forms of Intellectual Property Protection. The national legislation related to intellectual property protection varies in individual countries. However, a number of international intellectual property agreements and conventions facilitate the harmonisation of the legislation in the international context. In these processes the World Intellectual Property Organisation (WIPO) plays an important role, especially with regard to the harmonisation of individual forms of the protection of intellectual property. WIPO is the global forum for IP services, policy, information and cooperation. It is a self-funding agency of the United Nations, with 193 member states, with a mission to lead the development of a balanced and effective international IP system that enables innovation and creativity for the benefit of all.
There are many areas of Intellectual Property, but the most well-known types are copyrights, patents, trademarks and design rights.
Trademarks represent words, phrases, names, symbols, logos, images, or their combination, which are or will be used for commercial purposes to differentiate goods or services produced by one producer from the goods or services produced by others.
Trademarks are also called brands or logos. Producers having a registered trademark for their products have the right for exclusive use of their trademark, and they also have the right to prevent its unauthorised use. The term of trademark registration can vary, but is usually 10 years. It can be renewed indefinitely on payment of additional fees. Trademark rights are private rights and protection is enforced through court orders. Most countries require formal registration of trademarks. If there is a case of trademark infringement, the formal registration of the trademark becomes crucial. However, in some countries (e.g., in the United States, Canada, or Germany), unregistered trademarks are also recognized and protected. Trademarks are awarded territorially, so they are fully enforced only on the specific territory, where they are registered. Since trademarks cannot be registered globally, businesses have to decide on which territory they seek the protection and submit the application for their registration accordingly. International registration of trademarks is facilitated by the WIPO Madrid system.
The Madrid System is a convenient and cost-effective solution for registering and managing trademarks worldwide, where everyone can fill a single application and pay one set of fees to apply for protection in up to 125 countries. The cost of an international trademark registration includes the basic fee (about €600; or €900 for a mark in colour), plus additional costs depending on where you want to protect your mark, and how many classes of goods and services will be covered by your registration. In the United States, the protection of trademarks is indicated by two symbols: “™” for the trademark and “®” for the registered trademark.
In the European Union, trademarks can be registered by the European Union Intellectual Property Office (EUIPO). The European Union trademark (EUTM) provides its owner exclusive rights in all current and future Member States of the European Union, and is complementary to national and regional trademarks existing in the European Union countries.
Industrial design relates to the aesthetic aspects of a product, its specific shape, colour, pattern, or other visual characteristics.
The protection of industrial designs aims to safeguard new, distinctive looking products, which must be original and cannot closely resemble designs, which have already been registered. Industrial designs must be registered with an industrial design office on the territory where the protection is sought. In some countries, industrial design laws also provide limited protection for unregistered industrial designs without the need for registration. Also, industrial designs may be protected as artworks under the copyright law. International protection of industrial designs is provided based on the Hague Agreement and allows for the possibility to have a design protected in several countries by filing one application with the International Bureau of the World Intellectual Property Organisation (WIPO). In the European Union, the industrial design protection is provided by means of the registration with EUIPO. A registered Community design (RCD) grants you exclusive rights in all current and future Member States of the European Union through a single registration, filed online. It is valid for 5 years and it can be renewed for a maximum of 25 years, 5 years at a time.
Patent protection is granted for an invention, a product, or a process, which brings a new technical solution.
The invention, which is to be protected by a patent, must be new, useful, functional, and innovative, i.e., a solution, for which the patent protection is sought, should not be an obvious one. After the patent was awarded, the patent owner has an exclusive right to prevent others from commercial use of the patented invention. It is important to note that patents represent territorial rights granted in a country or a region, in which a patent has been awarded. Patent protection is granted for a limited period of time only, usually 20 years from the date, when the application is filed. The patent owners can grant the right to use the patent to another entity; thus, firms requiring the patented technology should get in touch with patent owners to find out under what conditions they could have access to the patented technology.
International cooperation in the area of the patent protection of intellectual property is granted by the Patent Cooperation Treaty (PCT), which has 152 signatories. The aim of the Treaty is to harmonise procedures for patent application in the signatory states. It is important to know that even though the international patent application can be filed under this Treaty, it does not result in granting an international patent, but it provides opinion on the patentability of the invention. It has to be followed by the national patent application. A patent can cost below €1000 for a do-it-yourself application to more than €10,000 with the help of patent lawyers. A patent protects an invention and the cost of the process to get the patent will depend on the type of patent (provisional, non-provisional, or utility) and the complexity of the invention.
In Europe, the European Patent Organisation represents an intergovernmental organisation with the European Patent Office (EPO) as its executive body which examines and grants European patents. A European patent also needs to be validated by the national patent office in each country where protection is required. Depending on the country's law, some translations or pay fees may have to be provided.
Copyrights are related to legal rights of authors on their original published and unpublished literary or artistic works.
They limit the rights for their use and distribution. Tangibles protected by copyrights include not only books, music, and paintings but also computer programs, databases, and technical drawings. It is possible for two authors to obtain copyrights on similar work, if their work was produced independently. Copyright protection establishes the authorship of the work and allows the owner to obtain revenue from the utilisation of copyrighted material by other entities. In case of co-authorship, the copyright is shared by all co-authors. The owner of a copyright has also the right to authorise or prevent the reproduction of the copyrighted material. In the majority of countries, and according to the Berne Convention, copyright protection is obtained automatically without the need for registration or other formalities. Copyright protection is provided for the lifetime of the author plus subsequent decades (depending on a country ranging between 50 and 100 years). The WIPO adopted the Copyright Treaty in 1996 to provide additional copyright protection, which became necessary due to technological development.
How good my startup is?
Think about how competitive you are. Review below one company's competitive advantages and their main sources in contemporary management theories.