Why Startups Need a Well Articulated Strategy (And How to Think About Yours)

Posted on Jun 4, 2013 | 43 comments


I recommend you read Fred Wilson’s recent blog post about the need for a well articulated business strategy before pushing a particular business model.

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Since Arrested Development is back I thought I’d resurrect Gob Bluth’s answer when he was told he needed a “business model” – he quickly figured out that he was missing one so he asked Starla, the Bluth company secretary, if she would be his business model.

He then brought her to board meetings so nobody could accuse him of not having a business model.

I guess this is the ultimate definition of implementing a business model when you’re not clear on strategy!

I found myself in violent agreement with Fred’s blog post(s).

My take on his argument is this:

1. You need to first create a compelling product.

Compelling in the sense that you solve a real problem a target group of potential customers has with a product that is significantly better than the alternatives on that market.

In my opinion no amount of clever marketing or chest beating at conferences can create a market if you don’t have an amazing product to begin with.

My most read post on marketing tips highlights this – please pay attention to tip #4 – you can’t have great marketing for bad or mediocre products.

2. You need product / market fit

Put simply – you need enough users in a segment who care about what you’re doing to dictate investing further in the product or in sales & marketing resources.

If you solve a deep problem for a niche user group but not enough users have the problem you won’t achieve product / market fit.

Or if you solve a problem for a big segment but your solution isn’t significantly better than alternatives – you won’t have a fast-growing, successful business. I often call this “going a mile wide and an inch deep.”

The answer to either problem may mean simply refining your product to solve deeper problems or expanding the product scope to meet a larger group of customers’ needs.

Product / market fit is everything

I see many companies these days just race to raise capital. They see capital raising at the success validator. Sometimes they rush to raise cash because they don’t have a well articulated product / market fit and they think having more money will help them have more time to prove the business.

I know what is going through their collective heads, “the more money I have the more time I have to figure things out.”

True.

On the other hand, sometimes, “mo money, mo problems.”

Raise yours wisely. Spend it wisely. Figure out the appropriate time to step on the gas with more funds. There is no right answer.

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I know that the acronyms or business sayings change over time. But the search for product / market fit has been around in various form for a long time.

A. CROSSING THE CHASM

In the 90’s we all talked about “Crossing the Chasm” in which Geoffrey Moore encouraged us to think about solving really deep problems in a particular customer set and then using that satisfied customer set to move on to tangental markets.

The idea of “going deep” with customers has always shaped how I think. Shallow and superficial and racing from segment to segment in search of some take up has never been a strong strategic plan for me.

B. INNOVATOR’S DILEMMA

Second, I was then influenced greatly by Clayton Christensen’s work, “The Innovator’s Dilemma” in which he argued that “disruptive technology” came from companies who offered products that were significantly cheaper and less functional that the existing market and ended up capturing the needs of customers who previously couldn’t buy products due to price / complexity.

He calls this competing with “non consumption”

It was the most profound business strategy book I had read and greatly influenced how I thought about company building and certainly how I think about investing.

I have written this up before if you’re interested – I call it Deflationary Economics.

But when you create a product for a large segment of users who previously couldn’t afford products due to price or complexity and if that product can work at “Internet scale” you have the chance to do something truly amazing.

Like DeviantArt.

With 30 million registered users on a global basis. 65 million monthly actives. 2.5 billion monthly page views.

All totally free. It has become the largest art community on the web with huge pockets of global users who never had a website in which to express themselves amongst peers and also find ways to monetize their talents on a global basis.

C. LEAN STARTUP MOVEMENT

And finally there is the most modern spin on these concepts by two individuals who have built tech startups and have done an excellent job at describing the process. In Steve’s case it is “going in search of a business model.”

He wrote two legendary books, “Four Step to Epiphany” and more recently “The Startup Owner’s Manual

And Steve’s desciple (or as Steve will tell you, “he’s way past me now!” is Eric Ries who wrote the must own, “The Lean Startup

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I think all of these great works (all must reads) scratch at the same thing – the search to solve a real problem a market has by creating features that add compelling value to your customer such that they will do what customers hate to do – change behaviors (ie use your product).

And in the word’s of my friend Bill Gross, “Your product has to be 10x better than what exists in order to be a success

If you don’t want to click through to the link I’ll tell you the answer – if you’re in a competitive market and you aim to solve problems assume you’ll have strong competitors so if you need to aim for 10x innovations to end up being 3x as good as the market and you need 3x as good as the market for rapid adoption. But if you have time later – please watch video with Bill. He’s awesome to learn from.

3. Business Model

Fred’s third argument is that you need to be careful not to try and scale up your operations (sales staff, marketing, etc) until you feel clear you’ve achieved product / market fit.

He published another MUST READ post about being careful not to confuse early revenue traction with product / market fit.

The money quote

One of the things I have observed over the years is that a hard charging sales oriented founder/CEO can often hide the defects in a product.

Because the founder is so capable of convincing the market to adopt/purchase the product, the company can get revenue traction with a product that is not really right.

And that can hide all sorts of problems.

That’s Sofa King true.

The Need for Strategy

It’s something I worry about with companies.

Are we winning because we create compelling marketing materials and have hard-driving sales people that get customers buying product or are we solving a deep-seated customer need?

If it’s the former your company will definitely start to top out at some point.

It’s why I never get too excited about sales unless I can scratch the surface of the elusive “why.”

  • Why are they buying from us?
  • What are their alternatives?
  • What problem are we solving?
  • How will it benefit them financially (more sales, fewer errors, reduced customer churn, etc.)?
  • How will it save them time /drive productivity?

If you’re not solving a deep seated problem you’ll become “shelfware” and won’t have a repeatable, scalable business.

So that’s why I believe companies need a well articulated strategy. Not a mission statement, mumbo gumbo bullshity, groupthink happy clappy statement to be published on your website.

But a clear, crisp articulation of:

  • What problem you are solving for today’s users of your product (really. why did they buy? no spin)
  • What in your product is truly differentiated in the market to solve this problem (where do you believe you’re strong against the competition in functionality or delivery). [note: this is not a statement about strengths / weaknesses in marketing. It is about product.
  • Where do you think your customers’ needs will evolve to based on your world view of changes in the marketplace in the next 2-3 years (ie changes in computing devices, regulations, end user adoption of technologies such as wearable computers, watching online video, whatever)

Based on the problems you’re solving in today’s customer base, your unique skills in solving these problems and where you see the market going, the big question becomes …

In which direction should your company evolve?

Admitting that you will have limited resources and strong competition both in today’s market and in the markets you want to enter is the right start of the conversation.

You need to pick wisely because whatever you do, you must do better than other people staring at the same information as you. (also known as your competitors or future competitors)

I work with many companies.

In some – like Maker Studios – we have a very clear & shared purpose for what makes us unique, why we are growing so rapidly and where we think the market is heading (and thus how we must evolve). The team has stated it and has built metrics around key goals for future success.

At other companies we have very strong revenue growth and an intuition on why we’re doing well but a less well articulated case for why people love us today, where we stand relative to alternative options and where we want to evolve as we perceive our customers requirements will evolve.

What I can tell you is this:

I don’t work with a single team that isn’t trying to pull together a stronger case for our strategy.

In the early days of the company it’s ok to launch a product that you believe will solve a customer problem with a strong intuition about where the value will lie.  That can be your “going in strategy” but you know it will need to evolve.

And as you know the initial product strategies are like war plans, “they never survive first impact with real customers.”

Customer use.

That’s when you learn. That’s when you must reflect on how your customers are using your product. That’s where you must cull or refine features people aren’t working. That’s where you need to separate out your market spin from your internal reality of how customers are (or are not) using your product.

It’s why in early-stage teams I personally invest in strong teams not in strong product strategy.

I sometimes see VCs debate ad finitum about a company’s strategy. They think they know “here’s how your product will be adopted, blah, blah, blah.”

I don’t mind having the debate but a VC who thinks early on that he/she REALLY knows what is going to happen in the market his fooling him/herself. Markets decide. We simply have a ring-side seat and hopefully make our next moves based on market signals.

From customer feedback you need to define your company’s strategy.

When you know the value of what you provide to a constituency (either your end users or somebody who will pay to interact with your end users) then you can begin to define a strong business model.

Hopefully one more scalable than Gob Bluth’s.

  • crc

    Thanks, sound common sense and fundamentals; fits with ‘Tenacity+Mastery+Inspirational Leadership= Entrepreneurial success’. Scenarios thinking also helps in crafting continuous improvement from customer feedback.

  • http://bothsidesofthetable.com msuster

    And your description sounds like my most recent 1-minute video: http://videos.gust.com/video/Tenacious-Detail-Oriented

  • http://www.eventora.com/ Nick Tsamis

    Nice post, Mark. Summarizes a lot of things that founders should think about and take care of.

  • http://beta.rocketlistings.com/ Brian Sirkia

    Definitely agree with the points here, and would just add that customer referral is a great metric to judge product / market fit. If customers are enjoying the product so much that they are willing to share it (or if you’ve created a strong referral incentive program), you want to know what features they’re most excited about and why they’re sharing them.

  • http://bothsidesofthetable.com msuster

    Customer referrals / testimonials are everything. Thanks for adding.

  • crc

    but of course, I had just watched it! Your perfect one minute summary.

  • Timothy Mohn

    funny, @semil was just on twitter saying that people in the valley generally don’t like the word “strategy”. i find that quite reckless… thanks for putting forward pragmatic fundamentals – i’m constantly thankful to be part of the LA ecosystem as opposed to the feverish hyperbole to the north.

  • Simon Dennett

    Great post as always. I am interested in digging deeper into one of your tenets and would appreciate an answer if you have time. The idea I’m interested in is that a great product needs to solve a problem for a group of users. Aren’t there products that don’t solve problems but still get mass adoption, and change peoples lives. I am thinking directly about products like twitter and popular games like angry birds. Doesn’t thinking in such utilitarian terms limit the potential to create new and interesting services that don’t solve existing problems but can still find product market fit?Interested in what you think about this.

  • http://www.playbasis.com/ robzepeda

    Great, great post. In the words of the great Howard Stern, your blog is something I “study like the Torah”. We did 80K on sales last month, which was only our second month generating revenue at all. The initial reaction is to say “we’ve got an ARR of 1m dollars!” but you and I both know its not that easy. SaaS businesses need to understand this particularly well since we bill on a monthly/annual basis, and if our product doesn’t produce the results we promised, we’re dead ;)

  • Tomas Grigalis

    What a great article (and all others in this blog)! You write and express your ideas very clearly and crispy! I like that, thank you!

  • http://www.valideval.com/ Adam Rentschler

    Compelling stuff, Mark. A must read for some of the e-treps I’m mentoring at the moment.

    Thanks for everything you do for our community.

  • stacy murray

    This is the seminal post on this subject. Thanks for bringing it all together in a way that’s actionable.

  • MFishbein

    “a VC who thinks early on that he/she REALLY knows what is going to happen in the market his fooling him/herself. Markets decide.” Love that quote. Everyone is entitled to their opinion, but in the end, the only opinion that matters is that of your customers! Validation comes from customers…not friends, investors, or teammates.

  • MFishbein

    My take is that starting a company that doesn’t solve a problem for a group of customers is a very risky proposition. For products that solve a problem, you can get validation, and even traction/revenue, without a product. That let’s you know you’re building something that has value. Without validation you’re making a very risky proposition. There are of course several that have succeeded, but countless that haven’t. It’s kind of like scratching a lottery ticket.

  • http://www.theitvale.com/ Saad Fazil

    Mark, sorry I am (almost) repeating my comment from Fred’s blog. But since both these posts are so much in agreement, it makes sense to pose the same question(s) to you.

    1) Finding a Product-Markit Fit OFTEN (even if not ALWAYS) requires launching a product.

    2) Business Model. Agree with some of the earlier comments: A lot of times without a business model, there is no business. Twitter’s example is misleading in a lot of ways, for one, they had lots of cash in the bank. Second, while Business Model and Strategy both will evolve with time, you have to have both done upfront. That is, you gotta have a hypothesis on the business model early on. Lastly, does your argument (business strategy > business model) go against what the book/movement Business Model Generation has been talking about?

  • Katherine Emmons

    “So that’s why I believe companies need a well articulated strategy. Not a mission statement, mumbo gumbo bullshity, groupthink happy clappy statement to be published on your website.”

    So, what do you really think about mission statements? … A good vision/mission articulates the “clear and shared purpose for what makes
    us unique” … and is the foundation of a “strong case for strategy” both “going in” and as guidepost over the long haul.

  • JamesHRH

    This post is very solid and Fred’s post was rock solid.

    The quote you pull from Mark’s post is the one weak link – people like USV (network effect theme) and Vinod Khosla (first of the great theme investors, see: bandwidth them in late ’90’s for instance) do know what is going to happen in a market. Its just at the macro level.

  • Ian A.

    Great article! As business-oriented people, there are times when we have to think like ruthless CEOs, or leaders that have so many things to juggle or prioritize. But haste makes waste as well, and I believe racing to raise a heftier capital is not always a good idea.

  • http://www.calebsimpson.com/ CalebSimpson

    While I don’t agree with wasting time with traditional business plans, I definitely agree all the things you mentioned above must be in place. i.e. solid product, a target market, a well differentiated product, etc. All businesses should have a good grasp on those things.

    I especially agree with the lean startups, but I also think it’s possible to be in this category without “going in search of a business model”. While my company doesn’t have a business model or plan on paper, we know the market very well, and the direction we are heading, and we are doing so at a sustainable pace that doesn’t require debt, and has requried we raise very little funding.

  • http://www.corusapp.com/ seankelly

    Spot on!

  • MFishbein

    The problem with only looking at the macro level is that the macro level doesn’t buy stuff…customers buy stuff. If your product isn’t solving a problem or delivering value to a given customer segment, it’s going to be pretty hard to build a business. I think it’s important to look at both.

    Also, do they KNOW what’s going to happen or have the formed a thesis? I agree they’re very smart — but remember VC is a high risk/high reward bet.

  • JamesHRH

    I think you can ‘know’ a market endpoint.

    Vinod Khosla ‘knew’ that telcos were going to do almost anything to increase bandwidth. So he invested in a portfolio of companies that would do that for telcos. He did not need EVERY investment to pan out, just 2 in every fund to pan out big time. I think he knew KPCB was going to hit that fund out of the park.

    Fred Wilson and the guys @ USV absolutely know that investing in groups of people who are highly engaged turns into network effect businesses. I think that helps when you are asking LPs to invest.

    The 2 in every fund model is very powerful way to connect a macro thesis to a real outcome.

  • MFishbein

    Right – bandwidth was a pain point for telco customers. Spot on.

    With regards to USV – yes, network effects create a competitive advantage. And each of the companies they invest in solves or problem for, or is delivering value to, some customer segment. (ie look at both market and traction)

    With regards to raising from LPs – separate discussion all together, but yeah giving LPs specific exposure to exactly what they want makes sense.

  • Jason Kutasi

    This is a particularly good post which I’ve already shared a dozen times this morning!

    The one piece I found missing is *user acquisition*

    Too many falter with the Field of Dreams Approach = “If I build it they will come.” [thanks to my buddy Giancarlo for teaching me this one…the hard way]

    If you build a great product nobody knows about, you’re doomed. So I suggest a) figure out the idea, then b) how to get people through the door which will, in turn, help shape product/market fit.

  • http://www.bluecoastrecords.com/ Cookie Marenco

    Thank you for writing such a clear blog on this topic. I read Fred’s blog, which was wonderful and your follow through kicked it up a notch.

    In our case, we entered a totally new market too far ahead to get investors. At first I was disappointed, so we turned to customer development (about the time I started reading yours, Fred’s and Steve Blank’s blogs 18 months ago). We went ‘deep’ into our niche and found 27,000 (to date and growing) individuals who also shared our level of pain. Our ‘resolution revolution’ didn’t go unnoticed by manufacturers. The surrounding industry went from one available device to more than 100 hardware and software companies supporting us in those 18 months.

    Our early customers have been our “partners”…. an army of promoters who are better than any sales staff I could have hired –and they have become are our investors by buying our content. They not only share in our success they revel in it. With our customer-partners we are about to embark on a new partnership (which I can’t talk about yet) with a major company in the industry. The patience involved for the strategy to reveal itself was many times unnerving but we did it — cheers to my crew. The business model for growth is about to be unveiled, I’m sure, but it’s not our main concern.

    I completely agree that early revenue (regardless of how inviting) may not reveal the ultimate strategy for growth. Our newest partner has more than 100,000 employees who we hope to earn as enthusiastic customers. That will be a challenge.

    I’ve been thinking alot about the strategy of moving from early adopter to early majority revenue and how our product needs to change to fit while not upsetting our current 27,000 partners. But you know, just writing this blog has given me a terrific idea. :)

    Thanks for making me ‘think’ this morning, Mark!

  • http://davidhclark.tumblr.com/ David H. Clark

    Very true! This is something I’ve always focused on and realized the power of. The ease of sharing offline purchases, products, and promos is something that hasn’t been tackled yet in the offline retail space. And I’m solving that problem now.

    Often times people share a product or service they’re happy with not only because they’re satisfied, but more so because the product they’re referring or sharing on their social networks is a way for them to create their own personal identity online. What you buy (where you eat, where you shop, etc.) reveals a lot about people and they share as a form of expressing who they are.

  • http://davidhclark.tumblr.com/ David H. Clark

    PS how’s your Schaffhausen watch treating you? I like the all black :) Go through your instagram and see how often you’re sharing a new product, a fun place you’re at, or food, or a drink… See? Big value there.

  • Deekron Krikorian

    Well said, Mark S. This is the basic blueprint for a startup’s foundation. I first learned not be fooled by ‘early adopter’ revenue from Lean Startup. Steve Blank also points out that ‘heroic’ sales wins by a capable CEO a repeatable business model do not make.

    It’s tempting to just ‘push’ ahead with sales and marketing. It’s much harder to keep testing, measuring and learning ‘why’ customers are buying the product and how you stack against other options in the market (i.e. competitors).

    But getting to that ‘why’ is a must if you want to have a solid, predictable business model, vs. one that required ‘hustle’ all the time just to make the next sale. And ordinary people (friends, family,etc.) will not get this concept. All they see is the revenue side, which can be surface aesthetics without the sold pieces mentioned in this article.

    While our company has had both ‘heroic’ sales wins and early adopter revenue, we’re begrudgingly taking a step back and learn our customers ‘why’ at a deeper level.

    This post reassures me that we’re making the right choice.

  • http://hirethoughts.blogspot.com/ Donna Brewington White

    If someone was compiling the essential blog posts that an entrepreneur MUST read, this post would need to be included. Truly fantastic. Thanks, Mark.

  • polo

    I am a little bit lost !
    I understood that a business model’s heart is the value proposition (from some books you mentioned). Aren’t “compelling product” and “product/market fit” more or less included in a good value proposition ?

    Don’t you use the word “business model” only for “revenue model” ?

  • Danny Antwi

    What happens or what does it mean if after seven or more years of huge marketing and purchased fans your biz is not profitable. It’s that a tell tale sign of something akin to not having a strategy, a business model, product market fit, etc or just a bad investment?

  • http://altah.net/ Elizabeth Golluscio

    I always cringe a bit at “product market fit”, since I think of it as “market product fit”, i.e. the market drives the product evolution (in most cases). Too few entrepreneurs actually like to talk with prospects, like listening to strangers’ complaints, and like hearing negative feedback on their early product designs. It’s painful.

  • https://www.reesio.com/ entrepreneurSF

    “It’s why in early-stage teams I personally invest in strong teams not in strong product strategy.”

    Bingo — you hit the nail right on the head. The top priority for every early stage investor should be looking at the team of the startup over every other factor, because the right team will figure it out.

  • Maneesh

    if anyone wants a page like this for their company, hit us up via Twitter @mightytext – we’re happy to share the code — pulls twitter favorites

    http://mightytext.net/love/

  • http://www.converser.io/ Barry Nolan

    So I was saving this to pocket, and was struggling with what tag to apply. Created a new one “Fucking Great Advice”

  • Nick Jaworski

    I think the why is key to success in early start-ups. Being the new kid on the block often generates high sales automatically and the company gets excited enough to rapidly expand. Suddenly sales drop like a rock, there is no infrastructure, and they have huge expenses they need to pay off. Knowing why customers are coming and having clear strategy in the beginning will help keep things in perspective.

  • http://www.crystalmd.com/ Shadab Farooqui

    Mark, in the founding stages of SaaS where early sales fuels product development, wont you think that having a kickass product with mediocre sales, is as bad of a thing from an investors perspective? The market is filled with seemingly interesting and innovative products that die because they never get enough distribution. On the other hand, with consistent sales, the product has an opportunity to mature with direct feedback from customers who pay you.

    Moreover,having achieved PM-fit is highly subjective — majority of investors consider sales as a signal to judge if the problem you are trying to solve is big enough. My questions to you: 1) How do you personally go about judging if a problem is painful enough in the early stages with the high likelihood of it morphing into something completely different 12 months from now? 2) Strategy can be further divided into product, go-to-market etc. How far and deep should one be thinking in the first 1-6-12 month stage of a startup?

  • http://mattamyers.tumblr.com/ Matt A. Myers

    They know because they already see it happening. They can’t know if they will be the winners of course, however they seem to be able to make strong picks.

  • http://www.startupmanagement.org/ William Mougayar

    Lately, I’ve been re-quoting Peter Drucker to startups, circa 1973 from his book The Practice of Management. He said:

    “It is the customer who determines what a business is. Value is never the product. It’s what the product does for them.”

    I elaborated here in my recent post, following Fred’s:
    http://wmougayar.com/blog/2013/6/2/forget-the-product-start-focusing-on-the-model (attached supporting graph)

    More startups need to become Value driven, as opposed to Product driven. Unlocking that Value makes it a little easier to nailing the business strategy & model.

  • haroutk

    Mark
    Love your posts, it’s part of my weekly ritual of “business survival reading”
    Hate to pitch you on your own blog, and and at the risk of sounding arrogant, I want to share my dilemma.
    We have been in business for two years and have managed to create two products that solve deep and wide need (good product/market fit); these products reduce costs and time for business app development by 94% (have customer case studies and testimonials to prove it); and have crossed the chasm by signing up Fortune 500 clients and getting Microsoft as a partner. We have managed to do all these without raising a single dime and staying cash flow positive.
    Now we are ramping up sales and I’m debating the organic vs fund raising and I’m can’t make up my mind.
    My last company we raised $18m and even though the company was “successful” I ended up with nothing to show for it after committing 7 years of my life.
    If you have 30 min and would like to hear the story of Atera Prime and my dilemma please let me know.
    Thanks

  • http://www.mydepartmentplan.com/ MyDeptPlan

    Great article. I’ll add one thing. Once the strategy’s in place and things are booming, start-ups HAVE to communicate well internally. It’s so fundamental to the survival of a business. http://www.turnovercost.com/why-small-businesses-need-better-communication/

  • Milan Budimkic

    Great post Mark…

    Business beginnings are always difficult, but you’ll never know, if you don’t try, right?

    There are plenty of good articles on this and similar topics..For example I love this marketing quote/law:

    Appearing first on the market is amazing. Being the first one remembered is even better!

    Here you have all the “22 laws of marketing” http://mbseoservice.com/22-unchangeable-laws-of-marketing/

  • http://www.EGAFutura.com Juan Manuel Garrido

    Business Model is the 99% of the whole thing.