Why founders should never build the one-stop-shop

Are you okay? The founder was reacting to my painful facial expression. The pain I felt wasn’t physical, but it was real, nonetheless. The unpleasant sensation stemmed from a proclamation the founder had just made. One I have heard too many times before.

We are going to build a one-stop-shop platform! the founder had stated seconds earlier.

Right then, I knew I had a long and difficult conversation in front of me.

I began (again): Look. Many startups founders get the idea of building the one-stop-shop. The logic is obvious. Each individual element to a platform has value. If the platform has a lot of elements, it has a lot of value. And if the platform has ALL elements possible, then it has the most value. Thus, it will be superior to competing products.

The founder nodded.

Unfortunately, the logic is wrong, I said. The founder looked a bit confused.

I continued: Imagine we do a startup. We decide to build an online room planner for private homes. Millions of people need to design their home when moving or renovating, and we know the pain from having moved our self.

We launch, create some buzz, and a few hundred people start using it. However, the number of users is less than we have hoped for. And after a while, we realize that the hockey stick isn’t happening.

The scenario was exactly what the founder was currently experiencing. So, she was very attentive.

What do we do? I asked rhetorically.

Well, maybe there aren’t enough people who need a room planner for private homes, we might conclude. But if we add an office layout, then office managers could use it too. It is easy to add office furniture to the inventory library, so we do it.

What we hoped for happens. Offices are being designed on the platform. But it is still not a hockey stick. At the same time, we learn about multiple competitors that offer office planning. What to do? I asked again, rhetorically.

Well, we just learned that when we added the office elements, we broadened the scope of our product. This meant more people could use it. So, we decide to add more elements.

Factory planning! We add factory layouts and create 3D models of conveyor belts and machines. Now we have the only platform where users can plan homes, offices, and factories. We have no competition.

Still, the hockey stick eludes us. Worse still, we see a reduction in the number of private homes being planned. Maybe because we haven’t fixed all the bugs before we started focusing on the factory elements. Anyway, we have found a way to grow and escape competition, we think.

Next, we enable planning for yachts. Then restaurants. Then concert halls. With each element, we broaden the relevance of the product to even more people. Or so our logic goes.

Finally, we have built the ultimate room planner. The only place you can design any space regardless of function or size. We are the “standard”. The go-to-place. The one-stop-shop. Nobody else offers anything as complete as our software. And then God abandons us.

The founder looked a little confused. Maybe it was because I brought God into the picture. So, I elaborated:

What we would learn is what eBay learned when they added video conferencing (Skype) to its auction site. Or Burbn founders learned before they simplified their app and renamed it Instagram. Or Endomondo experienced when they added e-commerce and social networking to their running app. And these companies are among the surviving examples. The failed projects that have learned the same lesson are endless.

I looked directly at the founder and said: We would learn that the impressive breadth of use cases our software handles is utterly worthless to our customers. I continued:

The thing is that additional elements only provides value to the user if they are integral to the same problem. As an example, it’s valuable if a webshop also offers payment and delivery. The problem the user is trying to solve is to obtain a specific item. If users had to go to a third-party payment solution to transfer money. And to go to another service to arrange delivery, the friction would be unbearably high.

The question is: how integral must problems be to add value to the same platform? Well, more integral than you think, I said.

Take the running app Endomondo, I continued. Endomondo enables runners to track their runs. But runners also need running apparel. So, would Endomondo be a better product to runners if it also featured a shop with running apparel? I asked. The founder looked unsure. So, I continued: It turns out not. Endomono tried that, and it wasn’t a success. Why. Because tracking your run and buying apparel are very different problems. And no runners have these problems at the same time.

Our imagined room planner startup would suffer the same lesson. Nobody needs to design a home, an office and a factory at the same time. The section that supports office planning is worthless when you want to plan your bedroom. In fact, it’s confusing and adds clutter. The idea of the one-stop-shop is false.

Now, it was the founder who felt pain. And then came the inevitable question. But what about Amazon? The founder asked. I had expected it and said: Amazon is a perfect exampleAmazon sold only books for a long time. In fact, they decisively refrained from selling anything else before they had nailed the book problem. Amazon did not become successful because they sold everything. They became successful, exactly because they did not sell everything. Later, they added another element one by one. And so, should you, I said.

The founder was quiet, but slowly her painful facial expression lifted. Then she said: I guess Uber did the same thing. They started out offering expensive limousines, and not until later added cheap taxis and food delivery. Because….well none needs the same thing at the time. She let it sink in.

Then I could see her facial expression change into a very familiar one. Determination. Thank you, she said. I know what I must do. She got up and left. I looked out the window and thought about how often I have had this conversation. And then, I started writing this blog post.

How to spot a scalable startup and why I got it wrong in the past

There is a lie that permeates the startup industry. And venture capital especially.

The lie is this: startups are binary outcomes. They either become big or die trying.

After having logged my first decade as a VC, I know it’s not true. On the contrary, most startups become small businesses. They simply fail to scale.

This is an important fact. Because studying these non-scaling companies offers valuable lessons about the true nature of scalability.

What scalability is not

Economists teach us that scalability is about low marginal costs. Meaning it is cheap to serve an additional customer. In this view, services are never scalable because the cost of servicing one more customer isn’t falling.

In contrast, production can be scalable because a machine can produce one more widget cheaply. And SaaS is very scalable because letting one more customer access the software costs next to nothing.

The theory of low marginal costs makes investors love SaaS companies. And for good reason. There is just one problem. Most SaaS companies never scale.

Clearly, low marginal costs do not define scalability.

What Scalability is

After a decade of investing, I have come to understand scalability somewhat differently.

In venture capital, scalability is defined by a time constraint. Funds must exit the companies with 7-9 years. This means scalability is more about the speed of growth than marginal costs. Put differently, a scalable company is one that can grow fast. To this end, marginal costs matter very little because marginal costs define profitability, and not speed.

Growth can come from two sources. Beta and Alpha. Beta defines the growth rate of the market. Alpha defines how fast the company can grow (relative to its competitors) in the market.

The strength of Beta and Alpha can vary. As an example, the SUV market has long enjoyed moderate Beta. The SUV market grows more than other car categories. But it is a far cry from the strong Beta the electric car market enjoys.

Extreme Beta also exists. It happens when a market is “unlocked” and all the new actors rush to the marketplace at once. Like it happened for Airbnb when they “unlocked” a global latent market of private hotels. Or Uber did with ridesharing.

Strong Alpha occurs when the product enjoys a reinforcing value loop, and the loop spins faster than the competitor’s loop. A reinforcing value loop is one where the product becomes more valuable when the company wins more customers, which in turn makes the product more valuable, which will attract more customers, and so on. This self-reinforcing nature of such a dynamic means that the company will quickly become dominant in its market.

A company like Templafy (Accelerace alumni 2014) enjoys such s value loop. Each new customer creates new templates than can be added to the product for the next customer. This means Templafy has strong Alpha.

A perhaps even stronger example of Alpha is a company like Trustpilot (Accelerace alumni 2009). For Trustpilot, new users create reviews, that make the site more valuable to other users, who will create even more reviews that in turn increases the value of their product offering to the businesses who are reviewed. The businesses start using Trustpilot ratings in their marketing, which makes new users aware of Trustpilot, who then create more reviews. And so, the reinforcing value loop accelerates.

And as you will see, these forces greatly influence scalability.

What Scalability looks like

In our first fund (vintage 2011) with 49 investments, I have witnessed cohorts of very similar companies start around the same time. But over the ensuing years, they experienced unbelievable different trajectories.

A few have become bigger than even the founders imagined. And many never scaled, but still lives. For years the reason for this difference eluded me. Because it wasn’t marginal costs, market size, team, IP nor competition. In fact, one company is by far the strongest in all these parameters. But it still failed to scale.

In 2012 we invested in a SaaS company in a vertical with very little competition. We will call it WorkWeek (not the real name). The founders have industry insight. The product is great. The customers love it. The market is worth billions. The CLV is very high because customers never churn. The board is among the strongest I have seen.

We did the seed round, and the company projected to reach 10M ARR within three years. Today, eight years later they are at 3M ARR.

The problem is that WorkWeek enjoys no Beta. The market is stagnant. There are hundreds of thousands of customers in their vertical. But if the market is not growing, no new customers are appearing without a solution to their problems. Consequently, their Beta is zero.

In addition, WorkWeek enjoys no Alpha. There is no reinforcing value loop within their business. The product does not become more valuable to the next customers, regardless of how many customers they have.

The founder team estimated they would have “conquered” Germany within two years. It would take them five years to get the first German customer.

The problem was that the customers in Denmark didn’t make the product any better for the German prospects. On the contrary, each new sale gets harder because all the “low hanging fruits” have been sold to. What remains are customers who are hard to convince to change their ways.

WorkWeek is what you get when both Beta and Alpha are absent, but everything else is great. The company grows 50% per year and have done so since inception. Such growth rate means that if a company has 50.000 EUR in revenue year one, they will have less than 1 million EUR in year seven.

In contrast, Trustpilot and Templafy are what you get when strong Beta and strong Alpha are present simultaneously. Trustpilot rose during rapid growth in e-commerce which gave them strong Beta. And their Alpha is simply unique. Templafy enjoys strong Beta from the seismic shift to cloud-based office programs, and the user-generated templates create strong Alpha.

Today, I understand that to be truly “scalable”, companies must enjoy both Beta and Alpha simultaneously.

If both factors are in place, the growth from each source will compound, creating the famed hockey stick as a result. Witnessing a hockey stick unfold in real-time is quite remarkable. But low marginal costs and big markets are not enough if you want to see it for yourself.

The Art of Startup

2500 years ago, a true polymath authored a book so powerful that it made emperors, kings, and generals.

When I first read the Art of War by Sun Tzu in my youth, I set a goal. To one day understand my own domain well enough to produce a similar set of insightful directives.

About 15 years into my quest, 2 startups founded, personally mentoring more than 100 founders, managed 3 VC funds, and made a few angel investments I feel, for the first time, that I can produce my first version of these directives.

i. On startup ideas

  • When conceiving of an idea for a startup, write it down and return to it two weeks later. If the idea still seems good, pursue it.
  • When conceiving of an idea for a startup, ask yourself if you have empathy for the customer. For the first couple of years, the customers will reject you. Make sure you have enough empathy to see it through.

ii. On (founder) team formation

  • When forming the team, everyone must have a profound trust in and respect for each other.
  • When forming the team, everyone must be willing to work for the lowest possible salary to stretch the runway.
  • When forming the team, it must be complete enough to design, build and sell the product for the first year without relying on other people or money to pay other people.
  • When forming the team, it must have a person with an intimate insight into the life and thinking of the customer.
  • When forming the team, the members must select a clear leader who is given the title of CEO, and whom everyone agrees will have the last say in case of a dispute.
  • When forming the team, the members must select an advisor who can bring perspective and be a sounding board.
  • When distributing shares, all members must own enough shares to give up all other projects and keep motivated during the hard times.

iii. On culture

  • The culture must be written down as a simple list of commandments about behavior everyone obeys.
  • The culture must be one of honesty, clear and timely intellectual communication and debate, and utter and complete acceptance of whatever decision is made in the end.
  • The culture must be one where time is regarding a scarce and valuable resource.
  • The culture must be one that celebrates every win and victory with feasts, toasts, and hugs.

iv. On hiring

  • When hiring, the founders must perform the interview themselves.
  • When meeting a candidate, the founder must tell a breathtaking purpose that will offset a non-competitive salary.
  • When evaluating a candidate, the founders must devise practical samples of relevant work the candidate must complete.
  • When evaluating a candidate, the founders must prioritize culture fit, curiosity and helpfulness highest.

v. On employees onboarding

  • When onboarding a new team member, make sure everyone else knows the new team member’s name and background before the first day at work.
  • When onboarding a new team member, place a welcome card the desk signed by the founder or CEO.
  • When onboarding a new team member, explain to the person exactly how his/her job contributes to the success of the company.
  • When onboarding a new team member, explain to the person exactly how his/her job affects the job of other team members.
  • When onboarding a new team member, explain exactly what behavior will impress and what behavior will disappoint.
  • When onboarding a new team member, give the person everything they need to do their work on the first day. Expect them to work the next.

vi. On employees

  • When having employees, the founders must embody the culture and always act like they want employees to act.
  • When having employees, the founders must attribute all success to their employees internally and in public.
  • When directing employees, the company must have no more than 3 company KPIs that is always pointed to.
  • When directing employees, the employees must be told exactly how their role contributes to the 3 KPIs.
  • When directing employees, the employees must be told what the priorities are, so they can make individual judgment calls.
  • When an employee does not perform, the founders must exclude that employee immediately and then help that person find something better.

vii. On fundraising

  • When fundraising, focus on investors who are known to invest in the stage, geography, and industry you are in.
  • When fundraising, ask other founders for introductions to their investors.
  • When fundraising, have a world-class pitch deck because it might be all the investor sees.
  • When pitching, only ask for an amount that the investor normally invest.
  • When pitching, know the other companies the investor has invested in.
  • When pitching, tell the investor why you are seeking investment from that investor specifically.

viii. On investors

  • When finding investors, founders must find one of two kinds. Investors who bring money and stay away. Or investors that bring money and provide a recent and relevant experience. Anyone else is harmful.
  • When having investors, founders must update the investors monthly. And whenever something interesting happens.
  • When having investors, founders must attribute the success to the investors in the press and on social media. This will make the investor even more vested in your success.
  • When having investors, founders must invite investors to any celebrations of success.

ix. On sales

  • When starting to sell, the founders must learn how to do it themselves until the task can be given to anyone else.
  • When starting to sell, the founders must focus on the smallest possible sub-segment of the market (the beachhead) until they have a monopoly in this segment.
  • When starting to sell, the founders must emerge themselves with their customers until the founders understand their customers better than the customers understand themselves.
  • When the customer has bought the product, the founders must make sure the customer actually starts using it. Only then, the sale can be considered successful.
  • When the customer has used the product for a while, the founders must ask for a referral.

x. On marketing

  • When making noise, make sure the message is so compelling that people will share it. Also the employees.
  • When making noise, distribute free education to potential customers in return for contact information.
  • When making noise, use referrals from happy customers.
  • When making noise, distribute free samples or free accounts of your product to the first critical mass of customers.

xi. On boards

  • When forming the board, select a chairman who is not a shareholder.
  • When forming the board, have no more than five people.
  • When having board meetings, place plenty of drinks and foods so people are not distracted by thirst and hunger.
  • When having board meetings, have a standard agenda and follow it every time.
  • When having board meetings, if a board member comes unprepared, let the board member know he/she has no business showing up.
  • When having board meetings, only have the founders and investors in the room.
  • When having board meetings, spend most of the time on sparring and decision making.
  • When having board meetings, and if big issues arise, form a separate working group to deal with.

xii. On exits

  • When receiving acquisition interest, deny it. If they really want it, they will try harder.
  • When getting an acquisition offer, hurry and talk to their competitors.
  • When negotiating an acquisition, be most interested in how the company/product will become a success with new owners.
  • When negotiating an acquisition, negotiate great terms for your employees.
  • When negotiating an acquisition, ask for cash with no handcuffs for all owners.

Why Urban Mobility, Global Mobility, Health, and Omnipresence remains to be my meta-thesis going into 2020

When my venture capital career began about three years ago, I formulated a meta-thesis around four areas I believe will be continuous themes of innovation in the next hundred years. Those were: Urban Mobility, Global Mobility, Health, and Omnipresence. When revisiting my thesis going into 2020, I find that the framework holds. But I have updated the thesis to reflect my current views and provided some recent startups examples from Accelerace (Copenhagen) and Overkill Ventures (Riga) where I serve as General Partner.

Urban Mobility

Originally, cities were a solution to reducing transaction costs. The Egyptian invention meant that we could easily interact and get our business done. Traveling for three days to get stuff sold on the market was a thing of the past. Productivity skyrocketed. However, this only worked to a point.

The continuous urbanization has enlarged cities to a size where friction returns. During my frequent family-related visits to China, I experience this first hand. Getting simple things done, like buying a new kitchen sink easily takes an entire day. First, you have to move through insane traffic. Then you have to negotiate prices. Finally, you have to validate that the product you receive is the item you intended to buy. Millions of people face this daily.

Luckily, technology will increase the mobility of people and goods in urban environments. Drones can circumvent traffic. Collaborative consumption can create liquidity in the availability of cars, housing and storage space. Review and trust systems make quality providers easy to find. Payment technology saves us valuable minutes in every transaction. We want the benefit of cities without the pain.

Going into 2020, recent Accelerace and Overkill startups such as Donkey RepublicDigura and Minrecept are examples of startups that make cities scalable.

Global Mobility

The division of the world into independent countries happened because of limited mobility.

Ancient empires attempting “globalization” struggled with the mobility problem. Collecting taxes in Britain and transporting the coins to Rome was a problem. And every attempt to sustain these empires failed. Consequently, countries grew independently and developed distinct laws, languages, and institutions. Today, we suffer from this. The asymmetry of laws, languages, and institutions makes little sense in a world where the next generation expects to travel, study, work and live anywhere.

Technology like Blockchain can help circumvent institutions such as banks, courts, and government. Consequently, it will be easy to buy assets in other countries, easy to enforce rights and agreements across borders and eliminate the friction of language differences.

Going into 2020, recent Accelerace and Overkill startups such as DiplomasafeOrangebooks, and Clockwork are examples of startups making the world a smaller place.

Health

Life expectancy has more than doubled in the last 100 years. In large part because of medical advances. Sadly, we mostly extend old age. 6 out of 10 people end their life in prolonged states of frailty and growing incapacity. In practical terms, it means that you don’t recognize your children and you are being spoon-fed while wearing a diaper. Needless to say, we still have some work to do.

Health is the answer and technology is the remedy. Health adds to the other end of life. It extends our youth and vitality. Technology can provide accurate health information, ensure the mental stability and hack our biology.

Going into 2020, recent Accelerace and Overkill startups such as InnovosensManpremo, and Studymind are examples of startups prolonging our youth and vitality.

Omnipresence

All living creatures depend on information. We use it to make decisions. Biological evolution has formed bodies with sensors that obtain information in our surroundings. Humans obtain information from five senses (sound, taste, touch, sight and smell).

However, our senses are not particularly good. Animals often have far better senses than humans. Instead, humans have superior processing of the information. Still, imagine we had senses on par with dolphins, fish, and bees.

Indeed, humans have always dreamt about owning superior senses. In fact, ancient Gods were just that. Odin and Zeus were people who could see and hear everything. They were omnipresent. And because of this advantage, they ruled Earth. Seeing and hearing everything is the ultimate state of being.

Technology is bypassing evolution. Instead of waiting for nature to give us the sight of an eagle, we can fly drones equipped with high-resolution cameras. We can participate in lectures at universities on other continents, and we can follow packages on the way to our door. We are becoming omnipresent and our adoption of this kind of power will be quick.

Going into 2020, recent Accelerace and Overkill startups such as MemorixDorothy, Fabcontrol and are examples of startups making us godlike.

The best startup advice you have never heard

Startup advice is everywhere. This is not one of them.

A story goes like this: In 1963, Martin Luther King was attacked by a white supremacist while preaching at the 16th Street Baptist Church in Birmingham. The hateful man threw himself at Martin Luther King, fist first. Instead of fleeing, the preacher responded by quickly closing the distance and embracing the man. King held him tight while saying: my brother I love youmy brother I love you. The man furiously tried to pound on King, but the preacher maintained his embrace while repeating his sermon. Upon hearing these words from the very man the supremacist was trying to hurt, the attacker went limp and burst into tears.

The story is beautiful, and maybe even true. Regardless, it holds a rarely told truth for startup founders. One that I learned myself.

My own lesson began around 2006. Rumors began circulating about Apple turning their next iPod into a phone. Then came the vision that would define me.

I foresaw that our phones would be on the internet. The clarity of my prophecy made me evangelistic, and I preached the coming revolution to everyone that wouldn’t listen.

I turned a couple of friends, and we decided to lead the revolution and built a product that would demonstrate we were right.

The product was a ticketing platform. We knew that events are fundamentally a social experience and that most people buy tickets together with their friends. So why not create a platform that allowed people to buy tickets directly from their phones.

We started pitch event organizers and demonstrate our platform. If they created events on our backend, users could buy the tickets from a mobile device. I told them it was the future.

The problem was that these people did not live in the future. On the contrary, they very much lived in the present. And in their reality, they had an event next month that they needed to sell enough ticket to. Because our platform had no users, we did not alleviate their anxiety.

I responded the way most self-development books tell you to. I persevered. But at large, the event organizers remained dispassionate. And then something important happened.

I started to hate our customers. Not immediately. But a resentment towards these dispassionate naysayers grew in me. Gradually, the feeling spread to the rest of the team. Perhaps because I started referring to our customers as idiots, dinosaurs and stupid.

Unsurprisingly, our emerging company culture of hating our customers did not produce a healthy environment for building a great solution to event organizers. Ultimately, it became a core reason for our failure.

Since then, I have seen customer resentment develop in multiple other startups. What happens is this: the founders create a piece of tech. They do customer discovery. Pivot a couple fo times. Finally, they find themselves targeting a customer segment that is somewhat alien to them. But the segment has money and a definable pain point. Advisors and investors agree.

The founders have built a product that is objectively valuable to their customers. It saves time, money and unlocks new opportunities. But for some unfathomable reason, the customers are wary. And most of them don’t convert.

At this point, resentment creeps in. Taking rejection upon rejection from people you are trying to help simply does that to a person. That is unless you are Martin Luther King, and have true and deep empathy for those you are trying to convert.

When founders ask me if they should go for market X or market Y, sometimes I put all the data aside, and simply ask them this: Who do you want to spend your life trying to help, knowingly they will reject you over and over?

Doing a startup is in large part an experience of suffering rejections from the very people you are trying to help. And in order to succeed, your natural response must be embrace. Something that is only possible if the founders truly empathize with the people they are trying to turn. Surely, Mr. King would agree.

Choosing a customer segment for whom you have deep empathy for might not be the most business-savvy advice. But sometimes, I find it is the most important.

Also, check out Acceleraceand Overkill Ventures. We invest in startups.

Why Milestones Kill Startups and how the Roman Empire points to a better way

Most startups founders are faced with milestone provisions by their investors. The investors do it because they think it helps them steer the startup in the right direction. And because they think it gives guidance for deciding on further funding. The headline reveals it is a mistake. This article will explain why milestones kill startups and suggest how to actually measure progress. 

When Octavian was 19 years old, his ruthless uncle was brutally assassinated by a group of political opponents. The young man resolved to achieve what his uncle had not. Founding the world’s largest and longest-lasting empire.

And so, Octavian began materializing his vision. He called it Pax Romana. We know it as the Roman Empire.

To people of his time, Octavian wasn’t a celebrity. He did not display the same early sweeping conquests as his assassinated uncle, Julius Caesar. Nor the bravado and charisma.

Instead, Octavian was a founder. His ambition went beyond military success, fame, and power. He wanted to create something lasting.

Gauging the career of Octavian, one notices the wide range of things he accomplished. Surely, he enlarged the empire through military campaigns. But more importantly, he created structural development. Like tax reforms. Setting up a firefighting brigade, and a professional police force. And obviously erected many buildings, temples, and monuments.

The result was peace. The reward was a natural death at an old age. Something rarely bestowed rulers of his time. And as you will see, the story of Octavian holds an important lesson for startup founders and their investors.

Lasting companies and lasting empires are similar

Small projects can be planned, managed and tracked. In contrast, Large projects, like building an empire cannot. The complexity, timescale, and unknowns will not allow it.

Instead, large projects require a founder (or founder team) with a deep resolve to materialize a vision that is larger than himself/herself. Just like Octavian. But more importantly, the founder must focus on a wide range of issues. Also, just like Octavian.

The large range of elements that goes into building a lasting empire requires something quite different from a plan. It requires awareness and courage. Awareness of coming issues and the courage to do something about them. It was true for founders of lasting empires. It is equally true for founders of lasting companies.

The elements that go into building something lasting are entangled and interdependent. In other words, a lot of things depends on other things. Revenue requires sales channels, that requires partnerships, that requires multilevel value propositions, that requires customer insights, that requires nurtured relationships and so on. When one thing changes, most other things changes. Octavian knew this. So do most startup founders. But for some reason, many investors seem to have missed this.

Milestones are flawed and destructive if not done right

Many investors place ‘milestones’ in their investment agreements. And these milestones tend to be flawed, if not downright destructive. The problem is that the milestones often have little connection to the actual job of building the company.

Instead, the milestones seem to reflect the faulty idea that the progress of large projects can be measured on a single dimension. Like the number of users. Downloads or revenue. But that would be like evaluating the progress of an empire by area or population. The first could easily be achieved by annexing uninhabited desert. The second by paying people to become citizens. Octavian did none of those things. Why? First of all, he wasn’t stupid. Secondly, he didn’t have investors who were.

Octavian focused on whatever made sense. He shifted his focus to what was needed to advance his project to the next stage and ensure its long term viability. So do the best startup founders. At one point they recruit. Then they release the next version. Then they build partnerships. Then they fundraise.

Founders successively focus on specific dimensions of their company. And when they do, the company progresses. But not in a linear function. It happens in steps. That means each dimension is stagnant for a period until the founders find it relevant to focus on it.

When investors make founders focus on a single dimension by enforcing simplistic milestones, they do one of two things. Either the investor presumes that he/she knows better than the founders what dimension needs focus. Or the investor is ignorant of the mechanics of large complex projects. Both should be colossal red flags to a founder considering an investor.

In cases where milestones are put in practice, the result is that the founders start doing stupid things. Why? Because humans follow the reward. And the easiest way to hit the milestone and claim the reward is rarely to do the right thing. Those who experienced the Great Leap Forward in China between 1958 to 1962 would agree.

That said, milestones make sense. Both for the founder and the investor. Understanding if a project progresses is important to avoid what economists call the sunk cost fallacy. In other words, keep doing something you should stop doing.

However, milestones only make sense if they actually capture the progress that is natural to the development of the company. What is natural, changes almost daily. And only the founders have the information to make this judgment.

Still, it is possible to define the potential areas of progress. An early-stage startup can grow in four dimensions. Those are: human capital, technology capital, customer capital, cash capital. E.g. if a startup recruits a rock star, it is progress. If a technology breakthrough happens, it is progress. If customer loyalty increases, it is progress. If the free cash flow increases, it is progress.

Consequently, the only sensible way to craft milestones for early stage startups is to include any and all type of relevant progress, and simply trust that the founders know where to allocate their attention. If investors do not trust founders on this, it is not the milestone that is wrong.

The Startup Adoption Lifecycle

This article tells the story of how farmers in Iowa shaped the way startup founders think. Furthermore, it argues that we need a new way for startups to identify their early customer segments. In the end, founders will know how to obtain product-market fit, and why the article features a picture of an airline crew on heavy cases.

In 1927, scientists developed a new hybrid seed-corn. They knew their invention would give farmers 20% more yield. What they didn’t know was that the seed-corn would define how we came to understand innovation.

The new corn was offered to farmers in Iowa. Oddly, not everyone adopted it. The situation caught the attention of two sociologists at Iowa State University.

In 1941, the two researchers Bryce Ryan and Neal Gross went to interview the Iowa farmers. What they learned was puzzling.

Even though the new hybrid corn was objectively better, some farmers simply resisted using it. In fact, it would take about 10 years for all of the farmers to adopt the new corn. And that was just Iowa. It then took another decade before it was fully adopted throughout the US.

Bryce Ryan and Neal Gross concluded that some people are just prone to try new things before others. Today, we know their theory as the Technology adoption lifecycle. For close to a century, the theory has defined how we understand the adoption of innovation.

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Why the Technology adoption lifecycle is important and useless

The Technology adoption lifecycle basically explains that in the beginning, only a small group of people adopt a new technology. Later, the majority follow suit. Finally, the last little group of resisting people gives in.

As trivial as it sounds, it was an immensely important realization. Because it provides a frame for innovators view the world. I know this first-hand.

When I started my first startup in 2006, I was fresh of business school. And like any graduate, I knew the Technology adoption lifecycle. It helped me formulate our go to market strategy. First, we would go for the innovators and early adopters. Sounds right on paper.

But most startup founders learn that understanding who those innovators and early adopters are is much harder. In fact, the framework does not provide any guidance for this problem. At all.

The thing is that the Technology adoption lifecycle was never meant to help tech entrepreneurs. It was a retrospective view of a category innovation over its entire lifecycle. That means it spans decades and each block of adopters represent years of slow gradual adoption. Although important, it is pretty much useless as a practical startup tool.

In reality, most startups face less than 12 months of quickly evaporating runway. And the next months are the only period of any importance because it’s all the time a startup is sure to have.

Unfortunately, the Technology adoption lifecycle is of little help. The model just says: innovators and early adopters. Whoever adopts the technology first, are the innovators and early adopters. That’s called circular logic.

600 startups later a pattern emerges

Today, I am a partner at two accelerator-funds. And for the past seven years, I have met about a hundred startups per year, helping them obtain product-market fit. Or at least tried.

One consequence of specialization is that one obtains a very granular understanding of a narrow field. In my case, I suspect my expertise has become the early phases of the Technology adoption lifecycle.

Having observed so many startups go from zero to their first hundred business customers (or first million users), I have witnessed a clear pattern.

The startup adoption lifecycle

All the successful startups I have worked with have experienced adoption through the same sequence of micro-segments within the very first part of the Technology adoption lifecycle. Let’s shrink into the micro-cosmos of the very first adopters. What I call the Startup Adoption Lifecycle. Here we go:

The first adopters are always friends, family, and colleagues. They sign up to support the founder(s) and cheer on. They rarely have a deep need for the product. This group will constitute the first 10 to 50 customers.

The second adopter group is always the “crazy” people. They don’t know the founder(s) personally, but for some reason, they are obsessed about the area the startup operates in. And I mean abnormally obsessed. This group often send something that looks like fan mail to the info@ or support@. This group varies in size but is probably the next 5 – 30 customers.

The third adopter group is by far the most important. This group is often called the Beach Head. This group is also abnormal, but for a different reason. They are not “crazy”. Instead, they live under unique circumstances that impose extreme or unusual needs. Because this group is small, no one has really cared to serve their special needs. Consequently, they are somewhat “desperate” which makes them actively look for new solutions.

Examples were the first hardcore gamers on a live streaming website called Justin.tv. The founders realized the potential of this little Beach Head and renamed Justin.tv to Twitch.

Another would be airline cabin crew. Few people fly every day, so why bother making wheeled suitcases for cabin crew who do. In 1987 someone finally did. Of course, cabin crew was the first adopters. Today we all have trolleys. (The crew members in the featured picture clearly needed them).

A third example would be victims of the Japanese tsunami in 2011 that starting using a chat app to communicate because the cell phone towers were gone. Today, that chat app has an estimated 500 million users and is known by the name Line.

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In truth, all successful startups eventually must find their Beach Head. It is the most important adopter group because they are the first people who adopt because of a true need. Their need might be unique, but that makes them willing to test a new product from an unknown startup.

Who is the Beach Head for any particular startup? It’s the group that most founders overlook because it is far too small to fit the story of the billion-dollar market. It’s the group that has an unusual job. Or live an unusual place. Or have an unusual interest. Or have been affected by an unusual event. Or perhaps a combination.

The Beach Head group varies in size, but it is rarely bigger than 100 – 500 customers to begin with. Luckily, that is often the perfect size for a startup with an evaporating runway.

If startups can navigate the Startup Adoption Lifecycle they will be well on their way. Because on the other side of the Beach Head is product-market fit. And with that, the beginning of twenty years of movement through the Technology adoption lifecycle . May your journey be smooth.

Tip: If you are a startup founder and want to get help finding your Beach Head, a qualify acceleration program might the right thing for you. At Accelerace and Overkill Ventures, we see this as our main job. Some other accelerators might do as well. At least check out my blog.