Meet Steve and Larry
Both of them studied at the same university and got good grades, and after graduation, both worked at a high-tech startup where they quickly grew into key roles. After a few years, they both got hit with an idea for a startup and decided to quit their jobs and venture out on their own.
Even though I’ve given them names to make them more personable, I want to emphasize that what makes them similar isn’t their age, gender, or geography, but that they both were struck by a “big idea” and decided to act upon it.
Now, what differentiates them is how they look a year later.
A year later, Steve is still building his product. He has no product revenue and relies on part-time freelancing work to fund his product development. And he works alone.
Larry, on the other hand, has a growing customer base, growing revenue, and a growing team.
How did each of them end up in such a different place?
To answer that question, let’s take a flashback…
One year ago…
Steve is at his desk, lost in thought. Earlier that day, his manager told him that their parent company (following on from a recent acquisition) would be shutting down their offices in a couple of months. And Steve was given the choice to either relocate to headquarters or take a severance package.
Steve reads this as a sign.
He had always planned on starting his own company when the timing was right. After graduating from university, he made a conscious decision to join a promising startup, in order to gain some firsthand experience before venturing out on his own. Even though this startup had a few bad product starts, they did eventually manage to get acquired. Steve felt really proud to have been part of the core team.
“This may be as good a time as any…” he thinks to himself. He decides to take the evening to think things over.
Steve estimates that if he keeps his expenses in check, the severance package and his savings will provide him with a year of runway to get something off the ground. He does have this one augmented reality/virtual reality (AR/VR) idea that he’s been noodling around in his head for a few months already…
The next day, he decides to take the plunge and accepts the severance package.
Off to the Races
Steve wastes no time getting to work. He anticipates that if he stays focused and works full time without distractions, he should be able to launch the first version of his product in three months.
He wants to go about things the “right way,” so like a craftsman, he meticulously begins designing and building his product.
But little things start taking longer than expected, and the delays add up—weeks quickly turn into months.
Six Months Later
Steve is starting to get nervous. The product isn’t up to his standards, and his revised estimates put the launch date out at least another three months, or maybe even six.
He’ll be out of money by then.
He realizes he needs help.
Steve hits up some of his close friends and tries to recruit them, offering up generous equity in exchange. But they don’t see what he sees and find it hard to justify leaving their secure, well-paying jobs.
Steve attributes this setback to a “lack of vision” on his friends’ part.
“I’ll prove them wrong”, he mutters under his breath. He is even more determined to find a way to finish his product.
He decides to hit the pitching circuit and raise money.
He starts by contacting his previous startup’s founder, Susan, who readily agrees to meet with Steve. Susan likes the idea and offers to introduce Steve to a number of investors.
She leaves him with this advice: “Make sure you put together a bullet-proof business plan first. You have only one chance to make a good impression.”
Steve has never written a business plan before. So he downloads a few templates and picks one he likes. As he starts writing, he finds that he doesn’t know the answers to many of the questions being asked, but he does his best anyway to complete the plan.
He’s especially encouraged by the financial forecast spreadsheet.
The more he plays with the numbers, the more he’s convinced that he’s on to something really big. He decides to tweak a few numbers downward, though, to downplay the fantastic model he has created—it’s so good, people might not believe him!
He knows a lot is at stake, so he spends many more days developing his elevator pitch, outlining his product roadmap, and polishing his 10-page slide deck.
He reaches out to Susan a few weeks later, who helps him set up a half-dozen meetings with investors. Steve is a nervous wreck during the first few meetings, but thinks they go okay. He starts to get more comfortable with practice and feels a lot better about his later meetings.
He doesn’t get an instant “yes.” But at least he doesn’t get an outright rejection either. He debriefs Susan later, who reluctantly bursts his bubble: ”Sorry Steve, but ‘you’re too early for us’ and ‘let’s touch base in six months’ are code for ‘we’re not interested, but we’re too polite to say no!’”
Catch-22
Steve is in a classic Catch-22. He can’t make people see his #vision until he completes his product, but investors won’t give him the resources to complete his product.
What is he to do?
Steve still believes in his product and is determined to build it. He retreats back into his metaphorical garage and decides to self-fund his idea with part-time freelancing.
Progress is slow, but at least he’s still working on his product, nights and weekends, towards moving his idea forward…
Now, let’s turn to Larry. He too was hit by an awesome idea a year ago, but unlike Steve, he doesn’t start with a build-first or investor-first approach.
That’s because a build-first or investor-first approach is backward.
A Different Way
Larry recognizes that a build- or investor-first approach used to work at a time when building products was hard and expensive, but the world has changed.
We live at a time when it’s easier and cheaper than ever to build products, which means that there are many more people “starting up” all over the world.
While this explosion in startup activity represents an incredible opportunity for all of us, it comes with a dark cloud: More products translate to more choices for both investors and customers, making it harder to stand out.
Investors used to value intellectual property and funded teams that demonstrated they could build stuff. But this is no longer the case.
Also, because building products were prohibitively expensive, teams that managed to raise funding used to have a significant unfair advantage over others because they could get to market faster and learn faster than their competitors. Even if they got the product completely wrong the first time around, they could still manage to course-correct and get back on track because there were few competitors nipping at their heels.
A Traction-first Approach
Traction isn’t about being first to market but first to market adoption.
Traction is evidence that people other than yourself, your team, and your mom care about your idea—aka customers. More importantly, traction is evidence of a working business model.
Investors today don’t fund solutions that work; they fund business models that work.
But how do you demonstrate traction without a working product?
Aren’t we back to the Catch-22?
Not really, because Larry knows that customers today are constantly bombarded with a multitude of product choices. When customers encounter a half-baked product, they don’t turn into beta testers and give you feedback; they leave.
Without customer feedback it’s too easy to fall prey to the “build trap,” where a breakthrough always seems one killer feature away but remains ever-elusive. You end up spending needless time, money, and effort building something nobody wants, until you run out of resources.
Larry has experienced this build trap one too many times before with his startup’s past products, and he decides to level up his game and start with a better foundation for his product.
Avoiding the Build Trap
A fundamental mindset shift for side-stepping the build trap is starting with problems before solutions.
Customers don’t care about your solution; they care about their problems.
Larry understands that if his product doesn’t solve a big enough problem for his customers, no amount of technology, or patents, or giveaways can save his business model.
This leads to a number of epiphanies for Larry:
Mindset #1: The business model is the product.
Mindset #2: Love the problem, not your solution.
Mindset #3: Traction is the goal.
Larry spends half an afternoon sketching out a business model design for his idea using a 1-page template (Lean Canvas) that was recommended to him by one of his trusted mentors.
He then tests the viability of his business model using a quick back-of-the-envelope calculation, and from there builds out a traction roadmap that highlights his key milestones. This helps him map out a bottom-up go-to-market validation strategy
A key difference of his validation strategy from Steve’s is that he prioritizes testing what’s riskiest versus what’s easiest in his business model.
Larry correctly recognizes that in the new world what’s riskiest for most products has shifted, with customer and market risks outweighing technical risks.
The challenge question today isn’t “Can we build it?” but “Should we build it?”
This is why he decides to take a traction-first approach versus a build-first or investor-first approach.
Mindset #4: Right action, right time.
And here’s the really counterintuitive bit: You don’t need a working product to uncover problems worth solving, or even to land your first batch of paying customers.
Unlike Steve, who is still perfecting and polishing his product a year down the road, Larry manages to define his minimum viable product (MVP) in less than eight weeks, with a growing customer pipeline.
A minimum viable product (MVP) is the smallest solution that creates, delivers, and captures customer value.
Following this approach, Larry avoids spending needless time, money, and effort building a product he hopes customers will buy and instead builds a product he knows customers will buy.
Steve is following a Build-Demo-Sell playbook, while Larry is following a Demo-Sell-Build playbook.
This puts Larry’s idea on solid footing, and he spends the next four weeks building out a first version of his solution which is aimed not at everyone, but at his ideal early adopters. Once his MVP is ready, he doesn’t do a big-bang marketing launch, but rather soft-launches his product to just 10 early adopters and starts charging them from day one.
His logic for starting small and making a bold promise is putting his money where his mouth is. He thinks to himself: “If I can’t deliver value to my first 10 handpicked customers, what makes me think I’ll be able to do that with thousands of customers trying the product on their own?”
Mindset #5: Tackle your riskiest assumptions in stages.
A nice side effect of starting small is that Larry can afford to provide a high-touch customer experience. This lets him sidestep a few shortcomings of his MVP and still overdeliver on value, while maximizing learning from his customers.
His first batch of customers is blown away by Larry’s attention to detail and responsiveness to their needs. He manages to convert all of them into true fans while continually refining his MVP.
Mindset #6: Constraints are a gift.
Even though Larry is a jack-of-all-trades, he recognizes that he can’t scale his business on his own. So he invests a third of his time in pitching his vision to potential co-founders. He doesn’t look for people just like him, but rather searches for people with complementary skill sets to his.
He knows that:
- Good ideas are rare and hard to find.
- Good ideas can come from anywhere.
- Finding good ideas requires lots of ideas.
The fact that Larry already has happy paying customers (early traction) and a growing customer pipeline enables him to attract and recruit his dream team.
Too many teams take a divide-and-conquer approach to testing their business model, where they split their focus based on individual team member strengths. For example, hacker types typically focus on products, and hustler types typically focus on customers. This spreads the team thinly across many different priorities and is suboptimal.
Larry instead harnesses the full potential of his team by getting them to collectively focus on what’s riskiest rather than what’s easiest in the business model. As the risks in a business model are constantly shifting, he establishes a regular 90-day cycle in order to maintain a sense of urgency and keep his team externally accountable.
Mindset #7: Hold yourself externally accountable.
Each 90-day cycle is broken into 3 key activities:
- Modeling Larry’s team kicks off each 90-day cycle by updating and reviewing the business models (using a Lean Canvas and traction roadmap). This helps the team constantly realign around a common set of goals, assumptions, and constraints.
- Prioritizing The team then collectively prioritizes the riskiest assumptions and proposes a number of possible validation strategies (campaigns) for overcoming these risks.
- Testing As it’s hard to know which campaigns will work at the outset, instead of making a few large bets, the team makes many small bets on the most promising campaigns using fast iterative experiments. The learning from these experiments helps Larry’s team identify and double down on the best campaigns
Model-Prioritize-Test
Mindset #8: Place many small bets.
Mindset #9: Make evidence-based decisions.
Each 90-day cycle ends with a cycle review meeting where the team reviews what they did and what they learned and plans for what’s next.
This Model-Prioritize-Test flywheel allows the team to systematically search for a repeatable and scalable business model. The journey isn’t a straight shot to success. There are twists and turns, dead ends, and backtracking. But because Larry’s team is moving fast and constantly learning, it’s able to avoid huge big-bang failures by making many small course corrections along the way.
Mindset #10: Breakthrough requires unexpected outcomes.
By the end of the year, Larry’s customer base is growing, his revenue is growing, and so is his team. His business model is on track to achieve product/market fit.
These ten mindsets are what power the continuous innovation framework:
New World, New Mindsets
The difference between Steve and Larry is not differing skill sets but differing mindsets.
Mindset shifts are universal principles, like first principles in science, that serve as the building blocks for developing better critical thinking and problem-solving processes.
While we rightly place a lot of emphasis on doing, thinking precedes doing. And the quality of your output (results) is directly dependent on the quality of your inputs (ideas).
Mindsets define how we perceive the world around us.
Steve is operating like an Artist and is primarily driven by his love for his product (solution). You can easily substitute Artist with Software Developer, Designer, Creative, Maker, Writer, Author, Hacker, Inventor…
He takes a build-first approach, which in today’s world is highly risky.
Larry, on the other hand, is operating like an Innovator.
Innovators turn inventions into working business models.
He recognizes that we are living in a new world where the rules have changed. A new world requires new mindsets. Today, it is no longer enough to simply build what customers say they want because, by the time you build that, you’ll have learned that what they really wanted was something quite different.
In this new world, the only way to ensure you build what customers want is to engage them continuously.
The Stakes Are Much Higher This Time
The old way of building products used to work at a time when there were huge barriers to entry and few competitors. Even if you got the product completely wrong, you had time to course-correct and get back on track.
But fast-forward to today, and it has become cheaper and faster than ever to introduce new products, which means there is a lot more competition than before—both from incumbents and from new companies starting up all over the world.
In the old world, failing to deliver what customers wanted led to failed projects. But in the new world, continually failing to deliver what customers want leads to total business model failure.
This is because customers today have a lot more choices than they did before. If they don’t get what they want from your product, they simply switch to something else.
At the other end of the spectrum, the most successful companies today realize that good ideas are rare and hard to find, and that the best way to find the next big idea is to quickly test lots of ideas.
While the early adopters of this new way of working were high-tech startups like Airbnb and Dropbox, over the years continuous innovation has been increasingly applied in many different domains, and it works even at massive scale. Some of the most valuable companies in the United States, like Google, Netflix, Amazon, and Facebook, all practice a culture of Continuous Innovation.
Speed of Learning Is the New Unfair Advantage
Companies that continuously learn fast outlearn their competition and get to build what customers really want.
This is the essence of Continuous Innovation, and it’s the approach that Larry takes. When you’re going really fast under conditions of extreme uncertainty, you can’t afford to spend long cycles analyzing, planning, and executing your idea. You need a more iterative approach that involves continuous modeling, prioritizing, and testing.
Succeeding in the New World Requires New Mindsets
What separates success today isn't differing skillsets but differing mindsets. We've gotten pretty good at product development but the true product has changed. The true product is no longer building just a working solution, but building a working business model.
This epiphany comes from mindset #1.
As a quick recap, here are the 10 mindsets again that defined Larry's approach:
Mindsets define how we perceive the world, which defines how we act. Once you realize the world has changed, you should change your mindset too. That's exactly what Steve does. And no, we aren't writing off Steve from the story.
Steve, not Larry, is the hero of our story.
From here on out, this isn’t a story of two entrepreneurs but just one entrepreneur: Steve.
