High-Tech Startups: It's About the Business

Steve Blank, co-author of The Startup Owner's Manual, who also co-launched a course at Stanford University on starting a high-tech company, says one of the biggest mistakes engineers make is celebrating that they have a great product. It brings up that old question of why McDonald's blows away most fancy steakhouses in sales. Because it's not just about the product—it's about the business.

"Having a technology idea is not the same as having a company," Blank says. "There's often a disconnect between engineers and scientists and what commerce and capitalism is about. These people are often the smartest but you don't get paid for being the smartest in the world in a start-up. You get paid for being the one who put it together the right way."

"In my class the real shock to the system is that I throw them out of class the first day," says Blank. "You have an idea? Well get out and start talking to the potential customers. Call up your peers and friends and start testing key assumptions. Find out who would buy your product and how much would they pay? How much will it cost you to produce it?"

And some of the answers may even be in their eyes. "Look for their pupils dilating, for that excitement," he says. "Or for eyes glazing over and knowing you missed your mark. Until you get a reaction, you don't know where you stand."

Understand Your Customer

The Startup Owner's Manual, co-authored with Bob Dorf, describes discovering who your customer is in four phases: 1) The authors break down the business model into product, customers, channels, demand creation, revenue models, partners, resources, activities, and structures. They recommend writing a page for all hypotheses and deciding on the research to find out if they're correct. 2) Test the hypotheses. 3) Try out a "solution" through a "minimum viable product" for customers. 4) Analyze the experiment results to assess if you understand the customer's "problems, passions or needs," confirm the value proposition for those same three things, and decide if you would have enough customers who will buy at a price point that will allow for profitability.

Take Feedback Seriously

Remember, you don't have to complete the product to find out valuable information. "Keep building your product as you get feedback on part of it," Blank says. "People don't need to see everything to get excited. Get 'earlyvangelists,' people who will offer money for the product even before it's done. This happens all the time."

"Now are you ready to scale? Does your research show that this product deserves a sales force, a formal training department, and can you raise the money for this because you have proof of need?" Blank asks.

Proof of need is vital. In The Startup Owner's Manual, the authors mention Webvan, an online grocery store company that raised around $400 million and had $8.5 billion in market cap the day of its initial public offering, but went bankrupt less than three years later because, in the authors' opinion, it tested less and grew more.

But even if you're sure the business model fits, the last key can be among the hardest to master: staying with the process. "Sometimes the same people who are great at starting something aren't the best at the day-to-day," Blank says. "They get bored. You need to keep policies in place, make the sales numbers—that's why most founders don't end up running their companies but hire people who can. It's important to be honest about your personality."

Eric Butterman is an independent writer.