One of my founders at Velocity Accelerator joked this week that we need t-shirts for our cohort that say “Build the Machine.” I say it so often, in my workshops and coaching sessions, that it has become the mantra of this cohort.
I say it so often, because it’s the most important part of the business for founders to focus on, once they’ve proven they are solving a problem people care about.
Too often (almost always), founders get caught up in the running of a business (serving existing customers & building product), instead of the absolutely critical task of experimenting to learn how their Customer Machine needs to work → how they turn a person into a customer using a predictable, repeatable methodology. Another way that I describe this is: how the startup turn $1 into $4 every single time. (One startup in my current cohort is currently turning $1 into $8 every time. Even better!)
All of the messaging, marketing, sales strategies, touchpoints, onboarding, user experiences, pricing, etc are variables or levers in how a specific startup turns a person into a customer.
Most startup founders I meet can only tell the beginning and end of that story.
- Here’s how people find us.
- Some of them become customers.
Everything that happens in the middle — the inner workings of their machine or business model — are unknown. It’s magic.
I asked a founder recently if he could explain how he makes customers and he said “Oh, we’ll do everything.” Yep, magic.
Except it isn’t magic. There is magic in having insight into a problem in the world and a hunch about how to solve it. There’s serendipity in meeting the right people to help form your early team. There is a fair amount of luck in being the right team at the right time in history to build a great business around that early insight.
There is no magic in turning people into customers. There is no business until a founder can tell this story. A founder who just “does things” and hopes they result in revenue is not building a business. They are placing dumb bets at the Roulette Wheel.
So how does a founder tell their Customer Machine story? How do they even figure out what the parts of the Machine are?
At Fluent, one of our core strengths is taking the theory of how to build startups — Lean Startup, Agile, Design Thinking etc —and turning it into tactical, efficient methodology.
The Customer Machine is inspired by Dave McClure’s Pirate Metrics and the theories developed by Ash Maurya in Scaling Lean. It can be distilled down into three core concepts.
The Customer Machine includes three core stages: Acquisition, Activation, and Revenue.
- Acquisition: A person learns about your product/service.
- Activation: They experience your value proposition.
- Revenue: They convert to a customer.
Step 1: Define the parts of the customer journey
With the Acquisition, Activation, and Revenue customer journey, the first step is to describe and define these stages specifically for that startup. What is the interaction like between potential customer and the startup at each of these stages? The things the startup can DO to influence the customer’s experience at each of these stages are the Levers of the Machine. They can be experimented on and optimized.
For example, let’s imagine a subscription box startup that will deliver artisan coffee to your home. They may develop a hypothesis around how they create customers (Activation →Revenue*) that looks like this:
- Acquisition: The customer sees their booth at a local farmers market.
- Activation: The customer tries a sample of the coffee.
- Revenue: The customer signs up for a subscription.
Step 2: Measure each stage to get a baseline
By describing the steps the potential customer takes, the founders can track how often someone who sees their booth and tries their product becomes a customer. If one thousand people walk by their booth at the farmers market, 20 people try a sample, and they get one subscription sign up, they now have metrics to track and a story they can tell using real data, not just theory or magic.
Sometimes it is very difficult to measure the steps in the customer journey. It’s easy to procrastinate on defining the steps and putting the process in place to get accurate measurements. It feels cumbersome or a waste of time when you could be “out selling.”
But again, the founders’ mission at this stage is not to just get customers, any customers, using any method possible. It’s to build a repeatable, predictable process.
Step 3: Improve efficiency and conversion at each stage
Once a baseline is established, it’s much easier to run tiny, fast experiments to prove the steps in the customer journey work repeatably.
At the same time, once the Customer Machine, can be explained and measured, we can also begin to optimize it. What happens if the founders stand in the middle of the stream of farmers market visitors walking by and hand out samples from a tray? What happens if they have a big banner saying “Free coffee samples”?
After running several weeks of experiments, I’d expect their Customer Machine to look more like: “1000 people walked by, 350 tried a sample, and we signed up 40 new subscription customers. Here’s how we do that.”
It may be hard to believe, but I would rather a founder tell me they can prove and describe how they will repeatably get one new customer after 1000 people walk by their booth than for a founder to tell me they signed up 10 new customers using 10 different tactics and have no idea how they’ll get their eleventh.
The old maxim is so very true: What gets measured gets managed.
By defining, measuring, and improving the conversion of a person into a customer, founders can tell the story of how their startup has become a business, ready to scale — not through brute force but with a proven, repeatable process.
Why does this matter?
Startups aren’t businesses. They’re protean organisms designed to quickly identify a path to evolving into a business. So many founders lose sight of this in the quest to grow quickly and show traction at any cost. No wonder they constantly think they need to raise money — they’re running on fumes, throwing spaghetti at the wall and hoping it sticks, leaning into the maxim to “do things that don’t scale”.
With a Customer Machine in place and a story to tell about how their Machine turns $1 into $4 every time, founders can raise capital and build a business that scales beyond their ability to work 40 hours a day.
They move beyond hoping and wishing their business succeeds. They move beyond luck and magic.
Every city with economic development policy focusing on entrepreneurship needs a way to measure and demonstrate return on investment. Every dollar spent on supporting startups needs to be justified to the civic organizations, grant-makers, private economic development corporation boards, and the citizens in that community.
The two most commonly-used metrics are Jobs Created and Funding.
These are good metrics, but they are part of the long game.
Lots of communities have read and subscribe to Brad Feld’s Boulder Thesis, which hypothesizes that it’s going to take our communities 20+ years to develop a vibrant and self-sustaining startup ecosystem. Measuring job creation and funding rounds is part of this long term strategy.
But if your ecosystem is less than 10 years old, your startup landscape probably consists of a lot of very, very, very early stage companies (compared to the ones that are just normal early stage companies – the ones with employees and funding). These companies are too early to have employees. They’re legitimately too early for funding.
So how do we define and measure their progress?
Currently, many startup ecosystems measure the vitality of their community by the number of startups in existence. Some of the more sophisticated communities are probably also tracking which of those startups have increased employee count and/or raised funding.
This is a crude but useful baseline understanding of what is happening in the community. If an ecosystem goes from five startups to 10 startups, they’re making progress!
However, this is not nearly enough information to understand if the economic development efforts being poured into the ecosystem is effective.
What if in the course of one year, three of those five startups from the previous year raised funding and moved to San Francisco while eight new founders launched their startups and are in the process of trying to land their first customers? This gives a much more nuanced view of what is happening in the community – both in terms of “progress” and – more importantly- in how and where the ecosystem should double down on resources.
What we need is a way to assess and diagnose the health of our startup ecosystems.
We need a more fine-tuned metric of startup progress.
At Fluent, I talk non-stop about the usefulness of the Founder Roadmap as a tool for founders to focus and work on the right thing at the right time. It can also be used by economic development professionals to assess the stage of progress for each startup in their ecosystem.
Take a minute and think about your ecosystem:
• How many of your founders attend startup events because they want to start a company, but haven’t done it yet? They are in Stage 1: Get inspiration to start working on a startup.
• . How many of your founders have just started out and are either doing customer discovery or need help thinking through idea/market validation? They are in Stage 2: Validate the idea and market opportunity.
• . How many of your founders are in the earliest stages of building a product or are stuck, unable to build product because they have fallen into the “need funding to build product, can’t build product without funding” trap? They are in Stage 3: Develop and test solution with early customers.
• . How many of your founders are trying to solve the scale problem or are running zombie startups – have a few customers and seem like they should be growing faster than they are, but seem to be stalled out (and again, are probably complaining they need funding but keep getting told they are “too early”)? They are in Stage 4: Accelerate growth by developing predictable, repeatable processes
• . How many of your founders have raised money and have hired a handful of employees? They are in Stage 5: Scale business beyond early adopters
Once you have a baseline of raw numbers organized by stage, you can watch and measure progress as they move from stage to stage.
This mirrors the work founders do to measure progress within their company. Once founders have some baseline numbers for how many people learn about their product/service and then convert to customers, they can begin tracking and testing ways to optimize their pipeline for greater efficiency (greater % conversion) and velocity (faster conversion).
Economic development leaders that are committed to helping founders can apply this same methodology to ensure the money and resources invested into the startup community are doing the good work everyone wants them to do.
Here is a very small example of how this can look.
As you can see from these slides, this entrepreneurial program invested economic development funds to help five startups make progress in a short amount of time. Four of the five companies started the program in the Validate stage. One started at the Test stage. By the end of the three month program, 3 of 4 Validate stage companies progressed to the Scale stage (moving through three stages). The other two companies progressed from where they started to the next stage. All five companies are super early, but measurable, quantifiable, reportable progress has been made.
More importantly, it can be optimized. Once we know what results to expect from the community’s current programs and resources, we can evaluate and experiment with these inputs to improve outcomes. We can look for ways to increase efficiency (increase in startups going from idea to growth stage) and velocity (increase in startup moving through these stages faster).
Why does all of this matter?
It matters because our startups need thriving ecosystems that support them through the messy and chaotic process of creating value out of thin air. Lots of people will say startup success is largely driven by luck.
Luck is what it looks like when you don’t know how to measure, experiment, and optimize to get the results you want.
In 2018, I am testing the applications of the Founder Roadmap with 100+ startups in accelerators and startup ecosystems all over the world, starting with Velocity Accelerator and Engler Agribusiness Program. If you’d like to chat about integrating the Founder Roadmap into your program, shoot me an email at firstname.lastname@example.org.
Today, I indulged in one of my guilty pleasures, the TV show “Gold Rush: Alaska”. Despite my aversion to the devastation to the land their mining creates, I just can’t help falling a little bit in love with these scrappy amateur miners. They signed up for insanely hard physical labor in wild, dangerous Alaskan territory to take a chance at riches. They endure setbacks, injuries, and disappointments with sheer optimism that they can “get the gold.”
This is a show about modern-day speculators, gambling their time and physical well-being to make it rich.
Startup founders are speculators too, but I don’t think we talk about it enough, early enough, or provide founders with enough tools to be great gamblers.
Think about it for a second. Once a founder is out on the road pitching their business to investors, they often face the harsh reality that the investors are “grading” them based on a set of metrics, milestones, and indicators that help the investor determine if the startup is investable.
They’re doing mental calculations to see if the business is a good bet.
Meanwhile, most founders I’ve coached have already gone all in — investing all of their time, energy, creativity, and money into their dream.
The problem is that while most people in the startup world understand that startup-building is different from business-building, we haven’t totally defined what that difference is.
My favorite definition of a startup comes from Dave McClure:
A “startup” is a company that is confused about 1) what its product is, 2) who its customers are, and 3) how to make money.
As soon as it figures out all 3 things, it ceases to be a startup and then becomes a real business.
This definition firmly reminds us that startups aren’t even actually businesses. They are just a set of unknowns!
Most activities in startup communities revolve around some form of pitching — 1 Million Cups, networking events, pitch competitions, business plan competitions. These kinds of events pre-suppose that the founder already knows the answers to these questions. What would happen if a founder presented their business at one of these events and only exposed all of the things they didn’t know?
But they don’t do that, because there is a pervasive culture of having to appear to be killing it, growing fast, gaining traction, scaling.
None of these expectations embrace the fact that founders are speculators and need to prioritize learning and de-risking their startup fast and as soon as possible. As Ash Maurya says, they don’t need to scale. They need to learn.
So why don’t founders do this naturally?
Well, it’s just not human nature to come up with a business solution that seems like it could disrupt an industry or change the world and then sit back and try to think of all of the risks and untested assumptions that could kill the business. Just like those miners on “Gold Rush”, founders are hustlers and hard workers. They want to dive in and start building.
But what if we could set up systems and structures in our startup communities to help founders prioritize de-risking their opportunity before they go all in?
I think we can.
I developed the Founder Roadmap as a tool to help founders think through their riskiest assumptions and find focus as they test and validate these assumptions with their potential customers.
Serial entrepreneurs do this, often because they got burned on their first company or two. Investors think this way.
We can help first-time founders develop this skillset and mentality as well.
Now in Season 8 of Gold Rush: Alaska, those amateur miners have gotten a lot “smarter”. They have better equipment, invest time and money into testing the mining site before setting up camp, and don’t make as many preventable mistakes. They’re not rookies anymore.
I don’t know if they could have been coached through their first season to avoid a lot of those costly and dangerous mistakes. It certainly would have made for less entertaining television.
But I do know that the founders I coach feel a huge sense of relief when I coach them through a systematic process to de-risk their startup and prioritize what they need to learn from their customers in order to build a healthy, viable, and investable business.
We’re not on TV. We don’t need high drama. We don’t need first-time founders to “learn the hard way” by going all in with their lives and their money.
We need to help them be savvy startup speculators. Let’s help give them the tools they need to do that.