The Fundamentals of Scaling: A Simple Startup Machine as the Path to Revenue.

When we sold our first deal, we were over the moon. The Head of IT at a large enterprise signed a multi-year contract exceeding our wildest dreams. Yet, it took us years to sign a deal of a similar size again.

We experienced what many startups see in their early stages. Our co-founder was a brilliant evangelist, our demo was kick-ass, and people loved our story. We pitched anybody and everybody, spending our life on the road or in front of Zoom.

Our issue wasn’t to win fans and friends - everybody loved us. Our challenge was that our positioning was only apparent in our heads, and we had no idea how to generate leads, develop opportunities, and close deals consistently.

Your Business as a Simple Machine

Building a startup is a messy, complex project, and you can easily get lost in the details. As a founder, your job is to provide focus and simplify processes so your teammates don’t have to keep all those balls in the air.

That’s what is so intriguing about the idea of your business as a simple machine because it gives you many opportunities to replicate successful processes. In the book Levers, the authors nicely summarized this practice as the revenue formula. With the formula, you define the path to revenues with a small number of crucial inputs.

Let’s take a look at Tesla to illustrate the method. Think of the company in its early days, when you could only buy a car in its online store. Building a car based on new technology and getting people to trust you to deliver it while it is widely questioned by “experts” is a very complex challenge.

Yet, when you break it down into the core elements, it becomes manageable. The path to revenue was:

The number of visitors on the website x percentage of visitors buying a car x price of the purchase x percentage of orders delivered in a given period.

Scalable Faktors: What Drives the Simple Machine?

Once you have a good draft of your simple business machine, you want to improve it. In order to do that, you want to drive each of the factors up. In the example with Tesla, that would be: Increase web traffic, conversion, the price per purchase (or customer lifetime), and the percentage of orders you can deliver in a given time.

Web traffic might benefit from influencers talking about the latest Tesla feature, and Tweets by Elon Musk are clearly raising attention. The conversion rate depends on the customer experience when interacting with the website and service of the company. The main drivers for the price are the model and the engine used in Tesla cars. And finally, the delivery is driven by the manufacturing process.

Benefit of the revenue formula: Alignment Across the Team

Make sure to include your team in this effort. Your people know best what drives your startup machine. While it looks like a sales and marketing exercise, it leads to alignment across the organization. By working together, you are not just improving your business model; you unite the team to work together.

We have introduced the book Levers to almost all founders in the Moinland community. It has not only been a great success with them individually; it also allows for a common language with other founders. Just like the 3Ws help you define your core business, the simple machine - or revenue formula - defines your path to scalable revenues.

The Fundamentals of Positioning. Understand Who Buys, What They Buy, and Why They Buy?

Imagine you are selling an app that allows an employer to reach all their employees. Who is buying this? About a decade ago, three founders each started a company, and they came to three fundamentally different answers.

Markus founded Sitrion, focussing on HR, Martin started Staffbase, concentrating on Internal Communications, and Cristian started BeeKeeper, focussing on the frontline workforce. Who was right?

Fast forward, Sitrion merged with another company and did an IPO. Staffbase became a Unicorn worth more than €1.1 billion, and BeeKeeper is in the Swiss Soonicorn Club, indicating that a billion $ valuation is just a matter of time. Three founders, three different but successful paths.

As early founders, we often believe that everyone needs our product or service. That is rarely the case. Success comes with a clear understanding of who is buying, what they are buying, and why.

Who, What, and Why? Defining Your Positioning

Not everyone can and will be your customer. And that is a good thing - because it gives you the possibility to be the best in your specific market. And you need to be the best to survive long enough to scale your business.

As we learned from Amos Schwartzfarb’s book Levers, the answers to those three simple questions are the essence of your business, the driver behind your startup. Before you design your logo or even think about your pitch deck, you should answer them:

• Who is your customer?

• What are they buying?

• Why are they buying it?

Almost every founder we talk to can articulate the 3W in the abstract, but once we dig deeper, you’ll be surprised how many founders don't have a clear answer - even at a larger scale. Try it yourself; take a minute and write down your answers in a table like the one below.

Source: Moinland illustration based on the book Levers.

Who Is Buying Your Product?

The Who seems the easiest. Yet, three smart founders came to different conclusions. The key to a great Who is to narrow it down as much as possible. All three founders sell to companies with many employees. But so does almost any B2B Software vendor. When you’re digging deeper you'll find the important nuances:

• Markus and Sitrion focused on the HR buyer in large organizations.

• Martin and Staffbase aim for Internal Communications in large companies.

• Cristian and BeeKeeper on companies with many non-desk workers.

Each of these buyers are fundamentally different people. Yes, when you sell B2B you still sell to a person with their needs, feelings, biases, and challenges. To define your Who, you need both the ICP (ideal customer profile) and the buyer persona. In essence, the ideal company and the ideal person within the company.

Before you get your PhD in persona-building I’d recommend reading the book and taking a lesson from Rand at Sparktoro. Both are great investments of your time.

What Are Your Customers Buying?

Now you might think: “That’s an easy one - they buy my product!” Let’s think back to the example of the three founders. They all offer the same general product, an app that reaches all employees. The What is not what you sell, but what they buy. It helps to ask, how would your customers express that?

• Sitrion: We provide our HR Self-services to all our employees.

• Staffbase: We reach all our employees with our communication.

• BeeKeeper: We connect with our unconnected field workers.

All customers purchased the same type of product but all of them had a different way to express this. Only if you immerse yourself in the language of your customers, you’ll be able to articulate the What.

This change of perspective is key to understanding what your customers are actually buying. Stop thinking from the inside out and communicating why your product is so great. Instead, we're looking from the outside in: What do they need your product to do for them, how does it fit into their lives, and what problem does it solve?

Why Are Your Customers Buying Your Product?

The last question is all about Why your customers are buying something. This is probably the most difficult question to answer, but the most important one that can convince your target audience.

As we can see in the examples above, purchase decisions depend on who you are and what you are trying to achieve - and are often not rational but emotional. Let’s go back to our three founders and see how their customers expressed their Why:

• Sitrion: We made a big investment in HR Self-services but many of our employees don’t use them. We need to increase the adoption to justify the investment and reduce expenses in HR administration.

• Staffbase: Our company goes through a lot of change and we need to be able to support the change across the organization. We need to take control of the employee communication or they’ll find external sources.

• BeeKeeper: Most of our value is generated by employees in the field but they are disconnected from the company. They are the core of our business and we need to take care of them.

Want to Know More About Positioning Your Startup?

Hopefully, this gives you a good 101 of finding your Who, What, and Why. In our founder coachings we deal with many strategic and emotional challenges of scale. Having your 3W in order clears the path and provides a good framework to set goals, empower your people and make sure you always have enough cash in the bank.

Want to learn more about our coaching? Get in touch with us!

Growth 🚀 Can Wait; Survival ☠️ Cannot!

We’re in a significant market adjustment with massive implications on startup funding. It feels a little like the Dot.com crash in 2000/01. I was still in investment banking, and we were working on mergers & acquisitions and tech startup IPOs, when the world around me changed dramatically within just a few weeks. But what exactly is happening right now?

What is happening? Venture Capital Hits the Brakes on Startup Funding!

While the number of Venture Capital (VC) deals remained high in Q1 2022, the deal value is down $20bn or 26% from Q4. This data is for the US, but the European market should follow in Q2. At the same time, IPOs of VC-backed companies came to a complete halt after we enjoyed a phenomenal stretch of mega exits. With the path to short-term exits closed, especially late-stage investors will be very careful, and we can assume that this is going to continue for a while.

Source: Q1/2022 PitchBook Venture Monitor

Why is it Happening? Inflation, Interest Rates, Recession.

The inflation rate is rising, causing interest rates to increase, which will slow down growth or even lead to a recession. It is essential to realize that we have experienced an unusually long period of very low interest rates (price for money) which made huge funds available, incl. venture capital. Think of it as an open bar: Free drinks lead to more drinking.

Well, the bar just raised the prices.

David Sacks has posted a nice summary video that puts it all in context. Here is the accompanying deck he shares in the video.

Source: Craft Ventures | Operating in a Downturn

What does that mean for founders? Focus on Cash!

The funding environment will be more demanding. Great companies will always get funding, but good companies might struggle. While there's plenty of cash in the market, investors are careful.

What can you do as a founder expect?

• Valuations will drop: Be realistic and optimize for cash, not valuation.

• Deals will close slower: Build relationships early and allow for more time.

• Risk appetite will slow: Show why your idea matters in times like these.

• Time is not your friend: Stretch the runway to survive.

As the economy slows, your customers are likely to review their spending. The sales cycle will get longer, and you need to demonstrate why your product is a must-have. Costs are examined more closely, and renewals or repeat purchases are not a given.

Go back to the fundamentals: Who is buying, what do they buy, and why are they buying.

Dan Rose sums it up quite well.

Startup Funding in Decline: End of the World? Opportunities ahead.

A downturn is also an opportunity for change. For example, Mailchimp started in 2001 in the middle of the dot.com crash. The AirBnB founders got accepted to YCombinators in 2009, and Uber launched the same year.

Following the COVID disruption, many are looking for permanent change, and nothing fosters change better than a good crisis.

• Aim your message at a problem relevant in a recession.

• Focus your value prop on costs, efficiency, and profitability.

• Adjust your tone to the changed situation of your target audience.

• Focus on being a business, not being a startup.

If you’re not sure how to address the current climate, ping me or reach out (see below). The Moinland community includes many founders that experienced a crisis or two. They'd love to share their experiences with you!