How exactly do you create the next Airbnb? Or the next Instagram? Perhaps, the next Slack, Whatsapp, Twitter, Uber, Snapchat, Google, and we could go on forever. How do you create a tech startup?
You know, it’s interesting that several years ago when I was still working in my first corporate job I was already highly focused on developing my entrepreneurial addiction. And as so many people, – and especially because I was working in a technology company – I’ve started by teaming up with some software engineers so we could develop mobile apps.
All kind of mobile apps, I’ve worked at least on 4 apps or something. For example, one of my ingenious undertakings was teaming up with two guys to work on a mobile app called “Morecats”. Ahah, it was basically a slider with infinite photos of cats. You could keep swiping and watching images of fluffy cats for the rest of the day.
What a good idea for the next tech giant, huh?
Anyway, does this sound familiar? – I’m not talking about the cats, I’m talking about starting with mobile apps or those type of ideas that you think have billions of people as their potential target market.
At least several years ago this made plenty of sense to me. Whatsapp had just been acquired by Facebook for 19B$ and the entire world was fascinated how you could create something so simple and without any revenue that would be worth that kind of money.
And if you ask me, that’s why SO many entrepreneurs dream of creating the next big thing, the next big tech startup unicorn, especially those quite skilled developers that can do pretty much anything their minds allow them to imagine.
Now, fast forwarding all these years, I can easily understand that back then I had absolutely no idea how to create a tech startup. And I trust that the vast majority of people don’t have either.
So, before we dive in the exact and concrete steps you’ll need to take to kick-start something that can eventually become a tech giant someday, let’s focus briefly on the typical scenarios, so we’re on the same page – basically, so you know whom I’m speaking to.
And here they are, the two most common cases:
1. Young Graduates from Business School: naturally, students from management and entrepreneurship. More and more students every year decide to create their first startup before they enter the corporate world. So, instead of picking up a job right out of the university, they decide to spend a few years trying to create their own thing. Naturally, they typically decide to focus on something technological like a mobile app, a web platform, a social media platform, you name it.
2. Young adults from 25 to 35 in the Corporate World: another very common scenario are Millenials that are already working in their full-time job for several years and all of a sudden start feeling hopeless about their future and growth opportunities. That’s when they start looking for opportunities to do something they love and be rightfully rewarded, and the idea of creating a startup appears as the very best option. Once again, the type of solutions they typically develop is related to online platforms, from mobile to websites, all kind of things related to the internet.
Now, to bundle up our scenarios, let’s just assume that we’ll be creating an application like Whatsapp, alright? I’m sure everyone knows Whatsapp by now and it’s actually a quite good example because there are no revenues associated. We could pick, for example, Slack, but because Slack has payment plans incorporated in the offer, it wouldn’t truly help the guys looking to create something like a giant mobile app without any sort of revenues, at least early on.
Note: even though we’re going to focus on a Whatsapp-like idea, this process still works for pretty much anything else that is a technical solution that won’t generate any profit in the initial years – for example, a social media platform, a piece of software (SaaS), and even hardware.
So, let’s get going. In the upcoming minutes, you’ll know precisely the core steps to launching or kick-starting an application like Whatsapp. Notice that I didn’t search for the story of Whatsapp, so I have no idea if this is what they’ve done in the past or not. I’m trying to standard procedures, here, for anything that you might want to build in the future. This is merely an opinion based on a lot of thinking and reflection, with the know-how I got from the VC industry.
And besides, I’m not going to tell you specifically how you’ll be growing your operation day by day. Nope, I’ll tell you the core macro steps that I would use to kick-start a business like Whatsapp these days – merely a kick-start, otherwise, this would be too overwhelming and confusing and would defeat my major purpose that is helping you and leading to action.
Let’s jump right in.
STEP 1: Start by understanding your Early Adopters
One step that many entrepreneurs never have in consideration – because that’s not what we usually associate with a “startup” – is understanding in detail why they’re doing what they’re doing.
Often, all we care about is jumping in the development from the get-go. And, let’s face it, it’s way easier to get busy instead of being premeditated, prudent, sober. But what I’d like you to know – and this applies to pretty much anything in business and life – twice the time invested in the preparation stage will bring you disproportional results down the road.
Do you know Abraham Lincoln’s famous quote?
“Give me 6 hours to chop down a tree and I will spend the first four sharpening the axe”.
That’s the mentality you want to have. So, start by asking yourself: which problem am I really trying to solve? And who’s my REALLY narrow avatar profile? Who will be my early adopters because they’re the ones who truly value my product and have a specific burning pain I’m solving? What do they eat? How do they think? What do they like to wear? What do they do on Saturday mornings?
Now, this may not seem obviously important for someone trying to develop a Whatsapp that aims at the entire world, right? But trust me when I say this: you’ll only grow internationally if you start by a solid foundation that attracts a tiny set of early adopters. You have to speak LOUD to a tiny set of early adopters and those are the guys that are going to spread the word about your product. Without them, there’s no virality.
This is why having strategic reasoning is paramount. You need to understand and embrace the idea of FOCUS in everything you do. Read more about this in this article.
STEP 2: Squeeze your Product
I love this concept. It is part of a framework that I present in the Raising Money For Your Startup. And usually, I introduce this concept as the MVP 2.0.
First, MVP means Minimum Viable Product. It was a notion introduced by Eric Ries (I believe) and it tells you that you should start by developing a core and basic version of your product without investing too much time and money, so you can validate your idea and move forward.
Well, in “Squeeze your Product” we’re going one step further – that’s why the 2.0. Here, I’m asking you to avoid wasting ANY money at all in the development of the solution before you have some initial traction.
But let’s go step by step.
First, before you develop any code for the solution, talk to a designer or use some tools that you can easily find online like Balsamiq, and DESIGN the end-version mockups of your solution. Alright? So, we’re talking about a costless, minimum version of your FUTURE product. This is something that you haven’t yet developed and won’t develop if you don’t have the right resources. And here are the resources you’re looking for:
- Technical know-how or money
So, bottom line, start by designing the mockups of what your product is going to be. Design the package, you see? It is an empty box, but a box that will show people your vision, still. And this is going to be important for the next step.
STEP 3: Get your initial funding
Now, as I’ve mentioned, there are two resources that you might need “to fundraise”: knowledge and cash.
The first one is kind of obvious, right? You need technical development skills to develop a platform like Whatsapp. If you don’t have those capabilities, here’s what you should do:
Find a Technical Equity Partner to join you in the project. You have multiple ways to find equity partners, from freelancing platforms such as Freelancer.com to job posting websites or even by reaching out in incubators, amongst other options. But definitely, the best way will always be approaching someone that you already know and trust. If you’d like to know more about Finding Technical Partners through online platforms, feel free to read this article about starting a business without money.
And here’s what you should NEVER do – at least as a rule of thumb: Outsourcing. That’s right, outsourcing the core knowledge of your business is typically a big no-no, but the reason why so many people fall into this trap is because the results only appear when the job’s already done. Let me give you some insights:
1. You will pay for something that you do not control because you do not understand: every time you outsource code development if you do not have the internal know-how to keep on developing or, at least, maintaining that platform, you’ll always have to depend on an agency or freelancer to help you.
2. Don’t forget that these agencies are in business for a profit, so you’re paying them an additional profit margin that you could save if you have that internal know-how.
3. Thirdly, it’s not guaranteed that the work will be impeccably done, while when you have someone working by your side you can directly influence the quality of that work. You can, at least, guarantee that the end result is aligned with what you request, and that’s not 100% sure when working with a digital agency.
4. Finally, the work tends to be delivered late and with a lot of bugs. You see, these agencies typically work also for big customers, large corporations that are extremely demanding. So, the agency’s resources – human capital they have – is typically exhausted, that’s why so many pieces of software end up not being well tested, and you’ll need to iterate multiple times with the agency to get those issues fixed.
Now, moving on to the second resource that OFTEN you also need to raise, just to get started: Cash.
And, first, a note here: notice the OFTEN word here. I’m not saying that you’ll always need to raise a small portion of cash to get started. If you have all the technical skills and time, you can do it yourself. That’s definitely the best way to develop a product – doing it manually, by ourselves and learning at our own pace.
However, we must face the reality: in the vast majority of cases, people have some sort of full-time job that consumes a lot of their time and daily energy, so they don’t have the same freshness to develop the platform when arriving home at the end of the day.
I once made some frightening calculations: to develop my Raising Money For Your Startup course – something that took me months of work and investment through daily focus and absolute commitment – it would take me nearly 1.5 years or more if I had a full-time job at the same time as I could only work 2 hours per day. (If you’re curious about these calculations, shoot me an email and I’ll explain you).
Besides, many of the guys working in the corporate world dream of leaving their jobs to focus entirely on creating their startup. And that’s absolutely fine, but here’s when the first major issue typically arises. People working in a full-time job will typically believe that to build a Whatsapp (for example) you need to raise capital from investors from the beginning so that you can have a salary.
Well, that type of perspective will always fail (or at least 99,99% of cases), I’ve seen multiple people trying to do that and always failing, not to mention the cases that I’ve seen for myself when I was in my Corporate VC role. And we’re going to talk about this on the 5th step, so bear with me.
Now, if you need to raise some initial cash to pay your salaries for, say, 6 months until you can, then, raise a more serious round of capital to start scaling your operation, these are the 3 most important tools you can use:
1. Customers Funding: this might be hard when we’re building something like Whatsapp because there are no revenues associated, but generically speaking you can ask for pre-orders to your customers or you can even have one or two of them funding the whole development of the project in exchange for having the product for free in perpetuity.
2. Crowdfunding: you can use platforms like Kickstarter.com, IndieGoGo.com, GoFundMe.com, and even later, when you already have traction, you can raise your first rounds through equity crowdfunding in Seedrs.com, CrowdFunder.com, etc.
3. Bootstrapping: naturally, another possibility to fund the initial months of development is through bootstrapping – borrowing money from friends and relatives. If you opt by this tactic, pay attention to the way you manage your warm circle expectations so you avoid any break in an important relationship.
If you want to detail these subjects, go ahead and give a check on the following articles:
- How to Have Your Customers Funding Your Business
- All You Need to Know to Raise Money through CrowdFunding
- How to Borrow Money From Friends and Family
Remember the initial costless mockups of your future product? This is where you use them. With those mockups, you’ll be able to show people what you’re going to build, and that’s how you raise an initial round of capital to start developing your technology. Without those mockups, you cannot possibly expect people to understand what you want to do by only explaining them through words.
A final comment about this step: notice that we’re not talking about venture capital yet. It is TOO SOON to address an investor. Your goal here is getting some initial traction, having success raising some money to pay you (and an eventual partner) the salary for several months so you can build the product. Raising Capital from investors will only come later when you already have sound traction. We’ll talk about this in a second.
STEP 4: Developing the product, Getting Traction and Creating an Operation
Your main goal in this stage is making sure you use your time the best you can – WITHOUT getting burned out; it is crucial to have a balanced life – and that you focus entirely on building your MVP or prototype and getting powerful signals of traction. Alright?
Here’s when you start getting an operation that derives from the product you’re creating.
So, two comments only to have in consideration:
- Focus on developing an outstanding prototype – doesn’t need to be perfect or close to the mockups you originally designed but must have the core features that make this product unique and valuable.
- Generate signals of traction along the way, as you invite others to test and use your product, or you actually start selling it – in case you have some sort of price plans.
Let’s just quickly go over what Traction means and why it is so important:
By traction, we mean some sort of proof that your product is appealing to a lot of customers. You have multiple ways to show traction, from simple pre-orders intentions through 1-page websites and Google AdWords to having a customer funding your entire business.
At the end of the day, and as a rule of thumb, you want to have customers paying you or a significant base of users. Period. This is the first and core metric you should definitely set for your business: if you do not have people paying for or using your product, don’t shift the course to next step, keep focused on getting traction and fine-tuning your product until you achieve the results you’re seeking.
Traction is the lifeblood of any fundraising. And as you’ll see, we’re going to talk a bit about raising capital from investors because that’s the next quest on your journey. And to do so, you’ll need a set of things, amongst which Traction plays a vital role.
So, there’s where you must focus early on.
STEP 5: Time to raise venture capital
Alright, so now we arrive at the critical step.
First of all, let me tell you that even though I help my students in raising money and I understand that this is a major part of any tech startup development, I really like the idea of bootstrapping and growing slow, organically, step by step, manually.
This is how you build remarkable businesses. The money cannot speed up the most crucial ingredient of all businesses that also applies in our own relationships: Trust. And trust takes time to be built, it doesn’t appear overnight.
Now, having said this, let me explain you exactly why you really need venture capital to kick start and sustain a tech startup like Whatsapp or any other that you might imagine – and, once again, this is something that some entrepreneurs don’t typically understand from the beginning.
Imagine you have a profitable restaurant that generates 5k$ in profits every year. It’s a positive operation, right? I mean, you’re able to generate profits. But now let’s assume that you’d like to grow and open a new, bigger restaurant. And for that, you need to invest 300k$.
How many years will you need to accumulate in profits to amount 300k$?
That’s right. Around 60. In the theoretical scenario in which you save all that money and invest it to get a financial return, perhaps 50 years instead of 60. Do you think this is a viable scenario to grow? How many times in your life will you be able to collect cash for 50 years in a row?
And this is why there’s venture capital. Now, this type of risk capital isn’t so common in restaurants, ok? I’m just giving you an example.
Typically, you’ll raise venture capital because you have a tech startup that is innovative in a given aspect, you’re aiming at the world with a through-the-roof ambition (even though you’re humble – very important), and you cannot possibly generate a profit without having scale.
THIS is the typical venture capital scenario. Even if you have a profitable operation only through bootstrapping, as you can see it can take you decades to grow the operation without a boost, and truth be told, in the bulk of cases you don’t actually have a profitable operation, you’re accumulating loss – but that’s how it works, no problem.
Now, there’s a world for us to talk regarding this aspect, from how to find investors, to how to prepare for the meetings, how to pitch and impress, how to negotiate an offer, and if you’re looking to understand more about this point, for the time being, I recommend you download my Free 10-Step Quick Guide on Raising Capital for the First Time.
For now, I’d like to share with you something that is truly paramount to raising money and that the vast majority of entrepreneurs will never know:
The number one reason why so many startups fail in raising money is because they’re raising it in the wrong timing. If you get this right, you’ll skyrocket your odds of finding investment.
So, what’s exactly the perfect timing, right?
You see, raising money should never be done as a backup solution for poor management, neither will investors tolerate that. You must know precisely why you need money from investors and you must be sure that there’s absolutely no other way to grow your business further.
That’s why, IDEALLY, you want to have a solid operation with sound signals of traction before you reach out to investors. And this is quite simple to assess:
If you’re addressing an investor because you need the money to start a business, you have like 99,99% chance of listening to a big “come back when you have traction.”
Investors want to put their money on companies that are doing awesomely well without them, and that their potential with an investor will simply skyrocket.
REQUISITE 1: Having a functional company that generates traction (preferably sales, of course)
So, the first big requisite to addressing an investor is having a functional company that is actually driving successful numbers, even without the investor.
Then, you want to have this clear bottleneck that you can easily convey to an investor, so he will immediately understand the potential of your company if only he helps you solving that issue.
Don’t run to investors simply because you think you need to, don’t use investors as a safety valve, because that will show despair, poor management skills, no premeditation at all, and will work against you.
REQUISITE 2: Show commitment
Now, the second requisite is that you show commitment. Here’s the core essence:
If you’re just starting out, you should never run to an investor.
And here I speak personally. When I was interviewing startups, nothing would piss me off more than interviewing a founder just throwing an idea at the wall to see if it sticks. As an entrepreneur, this is a personal offense. So, this guy would have absolutely nothing, only a PowerPoint, and it’s looking for money to build his idea.
Why would this guy be the lucky one when there are so many amazing entrepreneurs working their asses off to have a shot at living their dream lifestyle? No, I really don’t support luck as a principle and typically neither do investors.
If you’re serious about becoming highly successful and creating something remarkable, you’ll build something to show traction, even if you have no money at all.
And it is precisely THIS fact that you’re giving everything you have to create a successful business that will, later on, be recognized by the investors. That’s what they want to see: Commitment, whether financial commitment, time commitment, or, for instance, that you decided to leave your day job to work full-time in your startup. That shows guts, that shows drive, that shows you’re in it for the big payoff, and you’re not playing to lose.
And there you go, guys, I hope I’m not forgetting any important step; think this covers it all:
- Understand your early adopters in detail
- Squeeze your idea
- Get your initial funding
- Develop the product and get traction
- Raise venture capital – either from a Business Angel, from a VC or a Corporate VC
Remember we’re only talking about kick-starting the whole business. If you’re creating the next Whatsapp – I know how ridiculous this might sound, but come on, let’s stick to the example – by the time you raise your first early-stage round with an investor you’ll then be able to start scaling the operation.
This is typically when you hire 1 or 2 junior interns to start helping the founders with the development of the solution and when you also start having a budget for marketing activities, in case you don’t work with direct sales – because as you’ll see, in most of the cases, the cash that startups receive goes directly to hiring sales people.
You see, it’s a long journey, and quite an interesting dip, if you ask me.
No one said it would be easy, and if it was easy, anyone would do it, so there would be no special payoff for those who manage to climb the mountain up to the top.
If this is what you’re looking for, I hope this article helped you lining up your thoughts.
All my best,