CHAPTER SIX


Startup Agility

Executing with Focused Flexibility

“A startup is an experiment: An inquiry into how the world might look under the vision of the startup’s founders.”

—Eric Ries, Co-Founder, IMVU

Despite the eagerness and optimism of passionate entrepreneurs, there is no such thing as a sure thing. Each new venture is a learning lab in which the founder’s ambitions and ideas are tested against market realities and cold financial facts. The birth of a business is an inherently creative process in which possibilities are generated, torn apart, refined, and reconstituted, all to adapt to environmental uncertainty that will persist long after the startup phase.

Passionate founders must especially guard against betting the bulk of their resources onto a singular, unforgiving strategy. As we move into the second decade of the twenty-first century, commercial markets are increasingly turbulent due to the transformational effect of technology on all facets of business and life, redefining how products and services are designed, produced, purchased, delivered, and serviced.¹ Amid this uncertainty, executing with agility is more vital than ever.

In 2006 and 2007, Mark Williams and his team poured their time, energy, and capital into building out a range of learning products for Apple’s click-wheel iPod, creating digital versions of well-known titles, such as Netter’s Anatomy for medical students, Frommer’s Travel Guides for vacationers, and BrainQuest digital flash cards for kids. The click-wheel device would soon seem as ancient as the rotary phone, but in 2007 it remained one of the hottest mobile devices on the planet.

As 2007 drew to a close, Modality’s early product sales were sluggish—not nearly enough to cover its monthly burn rate—but Mark and his team remained optimistic because of advances in several areas. The iPod’s internal architecture was virtually closed to third-party developers, so Modality built software that would write content directly to hidden database files on users’ devices. Although technical barriers prevented Modality from selling products through Apple’s iTunes platform, it created a web portal to allow iPod owners to directly buy and install the company’s products. And, in a move that symbolized its growing support, Apple provided a spot in its popular retail stores for a test run of Modality’s BrainQuest learning products.

Thanks to the team’s passion and tenacity, Modality was beginning to gain momentum. It had finally figured out how to sell and distribute early products, and relationships with Apple and publishing partners were improving week by week. Mark Williams looked toward 2008 as the year when his team’s innovation and persistence would pay off.

But in January of 2008, he learned that paradigm-rattling changes were on the way. After years of closely guarding the operational guts of its devices, Apple was preparing to open up the iPhone to software developers around the world. The company planned to release a Software Development Kit (SDK) in March, hoping to spark a flood of innovative iPhone applications from both professional and amateur programmers. Mark had kept an eye on the iPhone since its release six months earlier, thinking it would be the next logical device for his products. But Apple’s 180-degree shift from super secrecy to wideopen invitation caught nearly everyone by surprise.

Apple’s turnabout presented a painful choice for Mark and his team. Switching their full focus to the new iPhone would mean stalling, and ultimately abandoning, their hard-won progress on the click-wheel frontier. But staying with the click-wheel iPod would leave them as undisputed masters of a once-great but forgotten technology. Mark decided to give up his “bird in the hand” in hopes of seizing what new opportunities might lay in the bush.

The next few months were a whirlwind of innovation, salesmanship, and surprise for him: Trips to Cupertino, California, to share his iPhone-based prototype with Apple; word from Apple that Steve Jobs loved the prototype; and then an invitation to join Jobs on stage at Apple’s World Wide Developer Conference (WWDC) in June. The June 2008 WWDC functioned as a coming-out party for the AppStore distribution channel and for the new generation iPhone. When called upon, Mark took the stage and made the most of his twenty minutes, walking the audience through a demo of the Modality Netter’s Anatomy application that featured high-definition, colorful, zoomable screen shots of human heart, brain, nerve, and bone anatomy. Apple’s online AppStore, the channel that would forever change the face of mobile computing, would soon make its debut, featuring Modality’s first iPhone-based Netter’s Anatomy digital flash cards priced at $39.99.

Mark had bet big on the iPhone and the AppStore, and he needed a significant revenue payoff to make it worthwhile. “If we don’t get a good bump from this,” he said at the time, “we might need to talk about how to close this thing down.” Fortunately, by mid-August, sales had gone through the roof: five Netter’s Anatomy titles alone had grossed more than $600,000 for the month of July. For the time being, Modality had survived a dangerous blow, and had positioned itself as a force to be reckoned with in the emerging mobile learning space.

Mark Williams’s story illustrates a common experience for entrepreneurs, who must often let go of cherished strategies or hard-earned assets in order to seize new opportunities and deal with emerging threats. With the benefit of hindsight, Mark’s decision to aggressively redirect his resources into iPhone development seems like an obvious move, a no-brainer. But at the time, it meant trading away a newly stable platform for a disrupting dose of uncertainty. It required a psychological openness to change and a high degree of operational agility, attributes that would continue to be vital as Modality’s operation grew in size and complexity. The broader lesson here is that highly successful ventures almost always diverge from the founder’s original intentions, a fact that places a premium on openness, learning, and agility.

In this chapter I’ll outline two core attributes that drive strong and agile execution. The first is an ability to manage the paradoxical tension between whole-hearted commitment and wide-eyed flexibility. The second is developing a healthy approach to iteration, meaning that you rapidly iterate your business idea, capture lessons learned, and capitalize on your learning by making smart, tough calls about how to change your product, your business model, or, in certain cases, your venture’s core identity.

The Paradox of Strong Execution

Chapters Three, Four, and Five each dealt with one of the fundamental domains that form the strong core of any new venture:

Chapter Three addressed the principle of founder readiness, how to best prepare yourself and your team for the startup challenge.

Chapter Four focused on the importance of developing a market orientation, understanding the customer problem you are solving and allowing your venture to be shaped from the outside-in.

Chapter Five emphasized the value of a compelling math story, your organizing logic, your money-making formula, and your path to breakeven and beyond.

These three domains are the core components of your startup blueprint—the more skillfully and fully you address these components and the questions and issues that fall within them, the more promising your venture’s odds of success. Shortcuts or compromises in these areas can leave your new business vulnerable to the downside risk of overheated passion or misdirected enthusiasm. But as fundamental and important as these domains are, your venture is going nowhere without skillful emphasis in a fourth domain, that of effective execution.

Figure 6-1 illustrates the four-quadrant framework for new venture success that my consulting partners and I use to assess and improve new venture performance. It highlights four core factors that differentiate successful growth ventures from those that stall or fail. In a perfect world, issues associated with the first three quadrants—the founder, the market, and the math—would be clearly understood and predictable, in which case strong execution would simply require the flawless implementation of a rock-solid, well-conceived plan. But in the real world, things are never so simple. All four domains are in constant motion, driven by external events, internal learning, and interdependence with each other. The cycling arrows within the model represent the always-iterating, ever-shifting nature of the startup journey.

Figure 6-1. Four-quadrant framework for new venture success.

COMMITTING WITHOUT ATTACHING

In order to execute with agility, founders must successfully deal with a paradox. Effective entrepreneurs are able to completely commit to an idea, while remaining open to changing it. This ability to commit to a path without becoming attached to it is no simple skill. In athletics, the most agile athletes operate from a base of readiness, always under control, reading the field around them and quickly responding to teammates and competitors. They come with a game plan but quickly improvise if needed to respond to unfolding events. They skillfully manage the tension between rehearsed and spontaneous movement.

A similar tension permeates every startup journey. By following your early plans, creating your first products and winning your first customers, you create a base of strength and a platform from which to move forward. But both successes and failures bring unforeseen opportunities and threats. You will need to reconsider early decisions and most likely shift your offerings and your model. This ongoing tension between your pride in what you have built and your unending desire to improve it is inherent in the process of bringing a concept to life. It is the nature of an evolving, iterating idea becoming real.

The greater our passion, the more likely it is that we will fall victim to cognitive biases that encourage us to stick with an early idea, even in the face of contradictory signals. The cognitive bias of anchoring, for example, leads us to give too much weight to our first big idea or strategy. We unconsciously filter new information so that it fits within our established view of the venture, instead of provoking us to see it in entirely new ways. Also coming into play is the sunk cost fallacy, the cognitive bias that pressures founders and investors to stick with an existing plan to avoid wasting previously invested time, money, and effort. The real mistake, however, comes in thinking that prior investments somehow justify the continuation of a losing strategy.

The ability to commit without attaching has benefits ranging far beyond the world of startups. Donald Sull, professor of management practice at the London Business School and a global expert on managing in turbulent markets, advises companies to “keep the vision fuzzy and the priorities clear,” emphasizing the value of laser-like focus and crisp execution in the short term, while recognizing that longer-term events are ultimately unpredictable. “A fuzzy vision works,” he writes, “because it provides general direction and sets aspirations without prematurely locking the company in to a specific course of action.”²

Describing his approach to the same challenge, J.C. Faulkner uses the term perch management, evoking the example of a bird flying through a forest with a clear focus on the next landing place. Each leg of your startup journey will lead to a new “perch,” from which a new vista opens up and another destination is chosen. “Long-range planning is important, but it’s always wonderfully imperfect,” he says. “So you should focus on what it takes to get to the next perch, to execute on your next logical step.”

LOOKING THROUGH THE LENS OF POTENTIAL: LESSONS FROM A VISUAL ARTIST

Launching a new venture is a creative act, and challenges faced by passionate entrepreneurs run parallel in many ways to the work of professional artists. Like entrepreneurs, artists give shape and life to new ideas through processes of experimentation and discovery. And like most entrepreneurs, artists invest a great deal of passion and emotion in their work. Entrepreneurs can learn much from an accomplished artist, someone who has grounded a career in the creative process and who teaches creativity and innovation to business leaders.

I first met Shaun Cassidy as part of an entrepreneurial session at the Innovation Institute, a program in Charlotte, North Carolina, that brings professional artists together with senior executives to help them unleash personal creativity and build more innovative workplaces.³ Shaun is an artist leader with the Institute, a professor of sculpture at Winthrop University, and an internationally recognized sculptor and painter. Much of his teaching centers on the theme that creativity is an iterative process, where one idea leads to the next, with each iteration building on a prior result toward an increasingly valuable piece of work. His creative process echoes my own founding experience and that of many successful entrepreneurs I have observed and studied.

Shaun tells the story of how his idea for an acclaimed public work started with a mistake. Working on a commissioned sculpture for a beer company during an art residency program in New York in 2005, he spilled wet concrete on an old sweater that had been a gift from his wife. In an effort to save the sweater, he let the concrete dry. “The next morning,” he says, “I pulled the concrete out and found that the fibers from the woolen sweater had become embedded in the concrete.” He set aside the concrete chunk for a day or two, and “began to recognize that this chance happening revealed a really interesting potential. And the potential was that if you cast concrete over woolen objects or fabrics, a residue of the fabric is going to get embedded into the concrete.” This led him to an entire series of works where he cast concrete over woolen gloves, hats, and socks, then pulled the objects out, leaving a negative space in the concrete along with fibers from the clothing.

A year later, Shaun was awarded a commission to do a major public art project, a sculpture in a Charlotte park. The city sponsors wanted something highly durable and vandal proof to be built on a low budget. He and his assistant went around the community collecting clothing from the people who lived around the park. They then cast a long winding bench out of concrete, into which they embedded and removed the community members’ clothing, leaving overlapping impressions of the community’s personal belongings in the bench as it stretched through the park.

“The idea for that project,” Shaun says, “could never have come had I not recognized the potential in that first mistake. And, to me, it is an example of how one thing can lead to another, and to another. If you trust the process and you let the process play out long enough—sometimes over years—your solutions to problems will be more innovative because you’ve got a richer pool from which to draw. If someone had sat me down and said, ‘Well, design me a public art project,’ and I hadn’t had that experience in New York, I don’t think that the solution would have been nearly as interesting.”

Of the many lessons from Shaun Cassidy’s work and teaching, here are some that are especially relevant for new venture founders:

Allow solutions to come through a process. Shaun says that his conceiving is always the result of an iterative process. “It’s never just sitting down and thinking of a good idea or coming up with a way to solve a problem. It’s always the result of a process that might begin with something weird or accidental but then builds and improves over time.”

Look through the lens of potential instead of rejection. Shaun works with leaders to help them “develop a lens that will allow them to see the potential in almost anything instead of rejecting it instantly.” Every iteration of an idea, he says, “contains a nugget of potential that can lead you to another iteration of the idea. So in that sense, nothing you do is ever wasted.”

Don’t settle too soon. Shaun believes that too many people are content with early ideas, rather than pushing themselves to higher standards. “I think people settle way too soon,” he says. “They’re hell bent on coming up with the answer right now, instead of allowing it to develop and reveal itself. So, this idea of ‘not settling’ is very important to me. If you become static, you’re lost.”

Push for improvement until the very end. Early in his career, just before graduate school in England, Shaun worked for Sir Anthony Caro, a legendary abstract sculptor, who would sometimes force radical changes at the last possible moment. “He would force us to weld these big sculptures. They would take six months, sometimes, and we would think we were closing in and finished. And if he thought there was a 1 percent chance that we could make these sculptures better, he would have us drag out the torch and cut these things in half, and flip them upside down. He would force us to make incredibly radical moves very, very late in the process. So this notion of laying it on the line all the way through the process, not just the beginning and the middle, but even at the end, in order to make something innovative and breathtaking, that was a real education.”

Use disruption as a positive force. One of Shaun’s many artistic residencies was with the Djerassi Resident Artists Program in California. “In my own studio I have a lot of equipment welders, overhead crane, all this kind of stuff,” he says. “I got to California and the director led me into the studio where I would be working. There was absolutely nothing in the studio, just polished concrete floor. Of all the residencies I have been on, that was the most disruptive to my normal creative habit. I had to spend the first week of that residency walking and thinking and reflecting upon what I wanted to do and responding to the emotional and physical characteristics of the site. I went to the hardware store with the facility guy’s truck and bought a whole lot of wood, and bought a chop saw, and bought a cordless drill, and built this huge installation out in the landscape. And it never would have occurred to me to do that had I not been so disrupted from my normal flow. I think that I learned more about myself on that residency, and made probably the best work of my life because of that disruption.”

As both Modality’s change of direction and Shaun Cassidy’s creative lessons illustrate, we can’t fully predict what opportunities will emerge as our ideas become real. Therefore, the ability to read and adapt along the ever-changing startup road is vital to early-phase survival and longer-term growth. And although agility is essential, it is not enough. Equally crucial is our ability to learn—to shine a light through the fog of startup uncertainty and gather the relevant lessons to be found there.

The New Venture Learning Curve

Most founders look back on their startup journey as the most intensive educational experience of their lives. Even serial entrepreneurs, full of war stories, are amazed at what can be learned with each new venture. Rather than thinking of learning as a bonus, something to be gained while chasing customers and revenue, wise founders view learning as a primary objective of their startup launch. They are insatiable students of successes and failures, large and small. They dig for cause-and-effect relationships and erase uncertainty wherever possible. This mindset of discovery ensures that positive results are evaluated and put in perspective, and that the inevitable mistakes and misadventures bring value to the venture as well. Learning cannot be separated from your startup’s performance because it drives startup performance.

Three practices will help you avoid a certainty-driven approach and, instead, launch your venture as a flexible process of discovery. The first is rapid, healthy iteration, a process that will drive and enrich your new venture learning curve. The second is to ensure that your cycles of iteration are occurring at multiple levels, beyond simply cranking out new product features. And the third is to capture relevant lessons in a balanced and holistic way, utilizing the four-quadrant model for new venture success.

HEALTHY ITERATION DRIVES LEARNING

Eric Ries, a software engineer and entrepreneur who launched his Lessons Learned blog in 2008 and quickly became a leading champion of “lean startup” principles for dealing with the pervasive uncertainty faced by new ventures, often opens his startup workshops with a pair of absurd videos.⁴ The first features a confident Ali G (one of comedian Sacha Baron Cohen’s fictional alter egos) pitching a product idea called the “Ice Cream Glove” to investors, including Donald Trump and a series of unwitting venture capital pros. The Ice Cream Glove is a rubber glove that Ali G claims will take the world by storm, because it allows people to eat ice cream cones without getting ice cream on their hands. Later in the video, he unveils his “hover-board,” basically a skateboard without wheels, which he hopes will be converted, thanks to venture capital funding, into a flying platform. These ideas are so comical that the most priceless aspects of the footage are Ali G’s sincerity in pitching his concepts and the dumbfounded looks on his listeners’ faces.

Ries’s second video is an infomercial for the Snuggie, the “blanket with sleeves” that served as the butt of many jokes in late 2008 and 2009. The Snuggie-clad characters in the ad are hard to watch without guffawing, which is why so many first-time viewers of the ad thought it was a fictional spoof. But the Snuggie was no joke from a revenue and marketing standpoint. It sold more than 4 million units in its first few months and caught fire as a pop culture phenomenon, leading USA Today to proclaim in January of 2009, “The Cult of Snuggie threatens to take over America!”⁵

Ries says that when he first saw the Snuggie ad, he found the idea so laughable that he was sure it was a hoax or a joke, just like the Ice Cream Glove. His point in sharing these videos is that you cannot know in advance how the market will react to your new product or service. “Most entrepreneurs, when they are pitching their products to investors, to potential partners, and even to future employees,” he writes, “sound just like Ali G pitching the Ice Cream Glove: in love with their own thinking, the amazing product features they are going to build—and utterly out of touch with reality.”⁶ Your best plans, predictions, and upfront analyses are meaningless unless, and until, they are validated by customer behavior.

Wernher von Braun, the famous NASA rocket scientist, said “one test result is worth one thousand expert opinions,” a principle that applies perfectly to the startup journey. “You cannot figure out what products create value for customers at the whiteboard,” Eric Ries writes, “where all you have to draw on are opinions.” To avoid sinking all of your resources into a nonviable idea, Ries urges new entrepreneurs to get “out of the building” as early as possible and expose their concept to actual customers, to the fact-based scrutiny of the marketplace.⁷

Iteration is an indispensable tool for putting your startup on a discovery-driven track. As shown in Figure 6-2, the basic cycle of iteration is not hard to grasp. An idea leads to action, which leads to a result that can be evaluated. You try something; you observe or measure the outcome; and you develop a new and improved idea to carry into the next iteration. This cycle will look familiar to those with experience in the continuous improvement or lean production movements (echoing the Plan-Do-Check-Act cycle and similar frameworks).

Figure 6-2. The basic cycle of iteration.

Note that the iteration cycle echoes the core pattern of the passion trap, as described in Chapter Two, providing clues as to why highly enthusiastic founders often fail to effectively iterate. First, founders fall in love with their original idea and strive to perfect it, putting most of their resources into the idea step. “We know this is a great idea,” the thinking goes, “Why do we need a trial or a proof-of-concept? Let’s put smart people and plenty of money behind it, design it just right, and go to market with a bang.”

Second, if iteration does occur, the founding team’s commitment to their solution can lead to a weak evaluation step in which founders show little interest in unedited customer feedback and deny or rationalize negative feedback received. For these reasons, a vital distinction exists between superficial iteration, going through the motions with little to show for it, and healthy iteration, which is like the shedding of a skin. Dead ideas and unworkable strategies are cast aside to make way for the stronger core. As Ries observes, “within every bad idea is a kernel of truth.”⁸ Successful iteration discovers this truth.

CYCLES OF ITERATION OCCUR AT MULTIPLE LEVELS

An important principle of healthy startup iteration is that it occurs at many levels, beyond simply cranking out new features or products. By “levels,” I’m referring to the relative scope and scale of a potential change. At the fast-cycle, narrow end of the spectrum are feature-level iterations, adding wrinkles to existing offerings. These can include changes in functionality, size, color, and many other aspects of a product. At the longer-cycle, broader end of the spectrum are identity-level iterations that lead to a shift in the entire venture’s purpose and identity. A florist, for example, begins sharing space on its delivery vans with other retailers and within a few years has morphed into a full-fledged transportation and home delivery company. This kind of identity shift occurs over longer time horizons and typically has a more seismic impact than a feature-level iteration.

Figure 6-3 provides an example of how various levels of iteration relate to one another in a typical venture. Levels shown here include features, products/services, systems/processes, strategy, business model, and identity. Let’s look at examples of each.

Figure 6-3. Levels of iteration.

FEATURES – This includes any attempt to enhance or otherwise reshape an existing product or service. Eric Ries and other developers often refer to making feature-level changes as “shipping code.” He notes that, in the early days of IMVU, the virtual chat and social networking site, he and his team would ship new code many times a day, putting new features in the hands of users and instantly tracking the response.⁹ This kind of continual interaction with early adopters creates a learning and development cycle that can dramatically reduce early-stage venture risk. It allows the product or service to be shaped by real user feedback and data, rather than by laboratory speculation or wishful thinking.

PRODUCTS AND SERVICES – In 2007, as Modality began building prototypes of its first products, Mark Williams and co-founder Nate O’Keefe began locking up rights to publisher-owned educational content. At the time, they had opinions but no hard facts about what kinds of content iPod owners would covet in digital form, so they hedged their bets by securing rights along a wide spectrum. These included Netter’s Anatomy for medical students, BrainQuest for grade school kids, Princeton Review SAT test prep for high schoolers, Cliff’s Notes for college students, Law in a Flash for law school students, and Frommer’s Guides for travelers. Over time, as certain products caught fire and others struggled, it became clear that Modality’s early “sweet spot” would be in the health sciences education market, primarily medical and nursing education, the source of more than 80 percent of revenues by the end of 2009. Modality’s ability to iterate rapidly at the product level, resulting in a portfolio of more than 140 titles for sale by the spring of 2010, allowed the company to find, cultivate, and better understand its growing core customer base of healthcare students and professionals.

As Eric Ries emphasizes, an early key to venture success is to avoid the tendency to overdesign your first product—avoiding the mistake of assuming you know what the customer wants—and, instead, get early prototypes in the hands of customers who can use, enjoy, kick, or otherwise tear them apart. His phrase for this early offering is the “minimum viable product.” A minimum viable product is that version of a new product that allows you to learn as much as possible about the customer with the least amount of effort and resources. This approach is not about pulling a few prospective users into a focus group. It requires that you put something up for sale, find out who will buy it, and then rapidly iterate from that starting point.¹⁰

In contrast to this notion of rapidly iterating a minimally designed product, Lynn Ivey’s commitment to the creation of a custom-built adult daycare facility can be understood as a single, expensive, and very long product iteration. Validated learning about customers would have to wait for more than a year as the product was carefully built. The building was an indispensable centerpiece of the business model, but Lynn’s resources were dwindling by the time The Ivey finally opened for business.

In the case of The Ivey and other ventures that require a large upfront commitment of time, energy, and capital before a product can be tested in real terms, a key issue is how to test the business hypothesis early, with minimal investment. If, through early testing, a concept proves viable, then more substantial investment can be made with greater confidence. If the original concept does not pan out, alternative concepts can be developed. In The Ivey’s case, this might have involved piloting the adult daycare service from a leased space, acquiring early customers and learning about the market until the size of the opportunity clearly merited investment in a new facility. With her chosen approach, Lynn was taking on much more risk, although she and her enthusiastic investors did not necessarily view it as such in the booming Charlotte of 2006. Looking back, Lynn wishes she had mitigated the risk by raising significantly more capital (at least $1 million more) to allow for a slower, steadier customer acquisition and learning process after the facility was in place.

SYSTEMS AND PROCESSES – Every time a product or service is delivered, the venture team has an opportunity improve its operational approach and methodology. Core work processes often come together in ad hoc fashion as specific opportunities are chased and captured. This is healthy, in that it connects your operational design to the marketplace and (hopefully) generates cash, but it can also lead to a patchwork of practices that won’t scale beyond the first year or two of venture growth.

In the heat of customer demand, healthy iteration and improvement of processes can be challenging. Even though you are painfully aware that you need to improve your delivery system, fifteen more customer orders just came through the door, so you sprint down the existing operational pathway, improvising here and there, vowing to take time later to make necessary fixes and improvements. Of course “later” never comes, and the longer you wait, the more difficult and complex the necessary fixes or improvements become.

As I’ll outline in the next section, the key is to establish a regular post-mortem practice, early in your startup trajectory, to look back at each production or delivery cycle, harvest lessons learned, and implement improvements where necessary. In this way, you instill the ethic of continuous improvement into your firm as it grows—the specific learning practices will change, but the will to improve is sewn into your venture’s DNA.

STRATEGY – Writing about predominantly large corporate organizations, Donald Sull notes the competitive importance of what he calls strategic agility, defined as “spotting and seizing game-changing opportunities.”¹¹ This notion of iterating at the strategic level is even more crucial for fledgling ventures that are just beginning to cast innovative products into new or emerging markets. New venture teams can significantly elevate their odds of success by continually assessing broader market opportunities and competitive threats and adapting their strategy where conditions call for change.

In launching D1, J.C. Faulkner and his team planned to open ten lending branches and grow them to the point where each would average $2 million a month in loan volume. After that, the business plan called for expanding the number to twenty branches across the United States, with each branch averaging $2.5 million per month. “When we first got out there,” J.C. says, “our branches grew with a lot more focus and a lot faster than we thought they would.” As the original branches neared an average of $5 million a month, the D1 team questioned its expansion plan. Why open more lending centers, dilute management focus, and take on more complexity and more leases? “We decided we would try to get our existing ten branches up to $50 million a month,” J.C. says. “As it turns out, we got those branches up to $100 million a month, 50 percent faster than we thought we could get the twenty branches up to $2.5 million a month.” The result was a more focused and easily coordinated growth strategy, one that wouldn’t have been chosen without real-time market feedback.

BUSINESS MODEL – During 2009, even as Modality continued to develop and release exciting new titles for the iPhone, Mark and his team grew increasingly frustrated with the product clutter and noise in the booming AppStore sales channel. Home to more than 100,000 applications and counting, many of them free or very cheap, with names like “Angry Kittens Attack,” “Flick-a-Booger,” and “Cow Toss,” the AppStore had mostly become a distributor of novelties and games rather than a place for serious learners to find educational products. As a result of this low-end chaos in its primary channel, Modality’s total sales were climbing more slowly than before, and sales per title were slumping.

While redoubling efforts to improve unit product sales through marketing strategies and a revamped website, Mark and his team decided to quietly launch a complementary “publishing services” model, in which they would sell their production capacity to publishers or other businesses, building new apps in exchange for a negotiated fee. Unlike selling licensed products under the Modality name, this wholesale model was non-speculative, generating cash for every title produced and shifting the market risk and marketing burden to the purchasing client. Early opportunities had already made their way to Modality’s doorstep with no marketing, as media companies were looking for ways to compete in the digital space. Mark and his team hoped that they could “turn the knob” and grow this business through more concerted business development efforts. By the spring of 2010, they were enjoying roughly equivalent revenue in each of their two major business lines: the original direct-to-consumer line and newly hatched publishing services.

CORE IDENTITY – The most radical iteration a business can make is to shift its very identity and purpose. Nokia, the communications and mobile phone maker, began as a pulp paper mill in Finland. Texas Instruments started out as an oil exploration service. DuPont, backed by French venture capital, started as a producer of gunpowder. The driving force behind such a change is almost always the discovery of an unanticipated market opportunity that aligns with existing capabilities of the founding team. Returning to the example of Stacy’s Pita Chips introduced in Chapter Four, founders Stacy Madison and Mark Andrus abandoned their plans to start a health food restaurant to pursue an unexpected retail opportunity, because customers waiting in line for a sandwich just couldn’t keep their hands off of pita chips that had been created as an afterthought. The founders were able to quickly direct their talents and resources to begin capitalizing on the pita chip opportunity and eventually decided to close the original sandwich cart business.

HARVESTING LESSONS USING THE FOUR-QUADRANT FRAMEWORK

For an early-stage venture, the question, “What have we learned?” is more important than the question, “What have we done?” As you bring your concept to life, you will move along a learning curve that takes you from passionate belief in your idea to a more basic understanding of how it plays out in the real world. You get to experience your idea in motion. But how do you make sense of all the information available? How do you separate the signal from the noise and harvest the right lessons amid the often-overwhelming stress and urgency of the startup path?

The four-quadrant framework provides a useful filter to direct and balance your learning across four domains that drive new venture success. Gathering facts, generating insight, and reducing uncertainty in these four areas will reduce your risk and help you position for growth. Build a consistent practice of coming up for air to review your plan and evaluate progress. You can concentrate your learning in the four buckets below, using the suggested questions to stimulate and guide your learning process. Treat these questions as starter list, revising and adding to suit your situation.

FOUNDER – As the old saying goes, be careful what you wish for. Many aspiring founders are surprised along their startup journey to learn that the role they envisioned for themselves is not what it was cracked up to be. To ensure that your passion and skills are aligned with your startup challenge, periodically revisit the questions related to founder readiness outlined in Chapter Three with an eye toward what has changed and what is being learned.

What are you learning about yourself as a founder and entrepreneur? What are you learning about your founding team? What has been most surprising to you, and how can you apply these insights going forward?

What have you learned about your passion? Do you feel the “fire in the belly” or a “weight on the shoulders”? What factors contribute to each?

Are you on a path to satisfy your core purpose for making the entrepreneurial leap? Have your reasons and goals shifted? If so, how and why?

Where is the emerging fit between your skills, experience, personality, etc. and the requirements of your new venture?

How can you better deploy your strengths and cover for your gaps? How are your core team’s strengths and weaknesses playing out in the venture process?

Are you bringing your best energy, focus, and performance to your venture? If not, what factors stand in the way and how can you best address them?

MARKET – Without a ready market there will be no venture, so finding your market sweet spot is the primary purpose of early iteration. Here are a few specific questions to ensure that you hear and make sense of what the market has to say.

What have you learned about your core customer? Who are they? Who are they not? What motivates them to use your product or service? How are they using it, and what value are they deriving?

What have you learned (or what has changed) about the overall market opportunity? What new opportunities and threats are emerging and how might you respond?

What have you learned about competitors? Who is succeeding in your space and why?

What factors are driving sales (or lack of sales)? What is working or not working about your customer acquisition process?

How can you best differentiate your venture and your offerings, based on what you have learned? What is your clearest competitive advantage at this time?

MATH – Once you are up and running and are delivering products and paying suppliers, you can begin to better understand the economic viability of your concept as it plays out in the real world.

How has your math story played out so far, compared to the plan? What are you learning about the basic economics underlying your business model and strategy?

What key planning and financial assumptions underlie your model and how are these testing out? How might your plans change as a result?

What are you learning about the dynamics of profitability and return (R = M × V, from Chapter Five), and what feasible opportunities to increase returns are emerging?

What have you learned about your venture’s ability to generate cash? How are cash reserves relative to your plan?

What have you learned about required resources and capabilities going forward? How might this impact your strategy, costs, and timelines?

What is working well or not working well about your approach to financial planning and controls? How well are you staying on top of the numbers?

EXECUTION – Getting things done in a startup environment tends to be more difficult than new founders expect. A key aspect of your new venture learning curve is mastering the elements that must come together to execute on the business plan and strategy.

Talent. Where are strengths and gaps in terms of talent? Are the right people in the right roles to propel the venture forward?

Systems and processes. What’s working well in these areas and where are weaknesses or vulnerabilities? What has been learned about technology opportunities and risks?

Teamwork. What are you learning about the role of teamwork in accomplishing the venture’s goals? Where is tight teamwork necessary and where should people run independently?

Communication. What communication patterns have developed within and outside the venture? Are goals and priorities clear? Are tough issues being discussed candidly with the right people in the room? If not, why not?

Alignment. How well are the goals and interests of key stakeholders aligned with the goals and priorities of the business? Where are areas of misalignment—where personal motivations or needs are in conflict with the business need—and how can these areas be better aligned?

STAY THE COURSE OR CHANGE DIRECTION: PRINCIPLES FOR MAKING TOUGH CALLS

Rapid iteration builds agility into your business, but it’s important to remember that iteration doesn’t always mean change. Iteration means executing on an idea and then evaluating the result. Sometimes the result will suggest staying the course. Some ventures iterate along steady, stable paths where the costs of changing direction seem to outweigh the value of the change. When dealing with higher-level issues involving major new products, systems, strategies, or business models, entrepreneurs face both higher stakes and unclear choices. As Arthur Rock, a seasoned entrepreneur and venture capitalist, wrote in his classic 1987 Harvard Business Review article, “There’s a thin line between refusing to accept criticism and sticking to your guns.”¹²

Here are a few principles that apply to the challenge of how to make tough calls when faced with difficult forks in the startup road:

Establish a balanced set of decision-making criteria that reflect your longer-term goals and the fundamentals of venture success. Before becoming attached to a potential solution, ground yourself in what you are trying to accomplish and what is most important for the overall venture. A few examples: How does the potential change align with your passion, purpose, and capabilities as a founder? How well does it align with market realities? How does it perform from a customer and market perspective? How will it impact cash flow and your overall math story? How easy or difficult will it be to successfully execute?

Strive to generate multiple alternatives from which to choose, rather than impulsively going with the first change or solution that comes to mind. It usually takes little time to generate and consider additional options, and this almost always improves the quality of the decision.

Distinguish facts from opinions. As you consider and discuss your options, flag assertions or assumptions not supported by data. While intuition plays a valuable role in informing your choices, be clear about what data are available to either support or disconfirm your “gut.”

Design experiments or pilots to gather additional data and work out kinks. Even the most sweeping decisions can usually be tested first on a smaller scale. Rather than committing to a major new partner, for example, try selling and delivering a few projects together to test compatibility.

Preserve future flexibility where possible. Not all commitments are created equal when it comes to future implications. Will this choice lock up a major chunk of your resources with no ability to adapt? Consider how best- and worst-case scenarios might play out over the longer term and how you can weather and adapt to problematic outcomes.

Delay important decisions until the last responsible moment. This is a popular principle among technologists and system designers, who understand the importance of decisiveness in the startup environment. But additional time often brings new data or information that can substantially transform the quality of a solution or a choice, so allow critical choices to “season” as time allows.