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The Four Rules for successful startups

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Is all small business marketing tips equal?  Are there secretive rules for successful startups that constitute a formula that always work?  Startup business comes in different shapes and sizes: bootstrap, franchise, mom and pop, technology etc. and they compete in many different industries.

Is there a set of guide an entrepreneur can use to guide himself on his journey that is always true regardless of the situation surrounding it?

We are here to answer precisely this question and you will get the answer you desire in this article.  Our experience with hundreds of successful startups led us to an overall interesting conclusion:  there are a few rules that work in some situations and only four of them work all the time.

Our approach to business is simple.  Simply watch and learn what many successful startups did, that most unsuccessful ones did not do.  What were the few successful startups willing to do that the many unsuccessful ones did not do?

To our greatest dismay, much of the startup advice typically given turned out to be totally dependent on conditions.  That is, it may work 100% for a particular type of fresh startup in a specific kind of industry, but it was not true for all startups.

Additionally, if a startup followed all the correct conditional rules, and did not follow the “four rules of small business marketing,” their probability of failure will significantly increase.

Now:

What are the four rules for startup success?

  • Rules #1: Seek out top quality, not the cheapest
  • Rule #2: Income generated by the business is your first priority
  • Rule #3: Learn how to make effective joint decisions
  • Rule #4: Everything else is subordinate

It is important to note that every of these rules are entirely within the power of a startup’s control.  They are choices you and other business people make.  They are beliefs you often hold true.  Take a quick look at rule one for example, which turned out to be the most violated rule in our research.

Most Unsuccessful startups believed that they could not afford to pay the best, and thus eliminated any possibility of affording the best.  On the other hand, successful startups believed that they must afford the best, and were willing to do what was necessary(regardless of the sacrifices made) to obtain the very best.  Note that it was a decision completely under the control of each startup (successful ones and unsuccessful ones).

This “fully under your control” observation is quite important because focusing on your mind on things that cannot be controlled is a waste of your precious mind power.  Research has shown that we cannot control other people; we can only convince them.

We cannot control luck (there is no such thing as luck- there is only reward as we sow what we reap 10x over).  But we can control our worries and actions and worrying about events, things or factors we cannot control distracts us from focusing on the things we can control.

Our study revealed that most entrepreneurs focus on the uncontrollable, the result is usually failure.  Although we are not psychologists, it is not really hard to understand the reasons why: it is easier to blame everything or everyone else for errors, mistakes and failures than to create an action for change within oneself.

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This is idea is such a powerful one, that we at makemoney2k considered making it the “One Simple Rule for Startup Success”, but concluded that this idea has already been written about for many centuries.  Although super important, it is really not a new idea.

Let’s take a look at the four important rules in more detail:

Rules #1: Seek out top quality, not the cheapest:

A general routine strategy for most startup goes thus:  I am a new startup.  I have little to no money.  I need to either do the work all by myself or find resources that are cheap or close to “free” as possible.

This way of reasoning sometimes comes from an often misapplied belief about the value of an entrepreneurial idea and the entrepreneur’s ability to execute the idea.

If one believes the idea brings about 90% of the value and that executing it is just some series of task that must be done, then finding the least expensive way to do these tasks is the rational thing to do.

Our study has shown that the reality of a startup is a bit more complicated than this normal model of idea and execution as separate independent entities.

Most times, the two are usually inseparable.  Execution complements the idea, or at the very least adds essential details to the idea.  For example, the story of the growth of the iPod.

There existed a lot of “digital music players” on the market long before Apple emerged to develop their very own.  None of these digital music players were particularly successful, and it remained a niche market product for at least 10 years.

Apple was able to successfully convert this idea of a digital music player from a niche market to a popular market by filling in the details of the idea: marketing, iTunes, app, the infamous radius on the corners, etc.

These details came into existence as a result of conscious efforts of executing the idea over many months and years by a team of incredibly smart and strategic people.

Here is the interesting part:

This team of great minds were not the low-cost option; they were the most brilliant, and the best Steve Job’s could afford. The shocking thing is that this was all being done while Apple was on the brink of bankruptcy.

Cash (capital) is not the problematic element in a startup; intellectual capital is.  That is, it is more difficult to find the best and sharpest of minds to hire, then figure out how to find the cash to support them.  We live in a period where there is superabundance of money and this is likely to continue to exist for quite some time.

 

Capital is on the lookout for teams that execute projects well and the best. The high-cost (smartest) perform well, while the cheapest (low-cost option) often cost more than the value it adds.  Choosing the “cheapest” creates a retroactive progress – poor execution of the plan makes it increasingly difficult to attract additional capital (either intellectual or physical), and this difficulty makes it less likely it’s execution will improve.

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Finding the best and brightest can go from “simple to hard”.  It is quite easy and simple, to find average people – or even ordinary.  Finding the extraordinary and the brightest before figuring out how to get them on your team will take a lot of hard work.  We know the majority of entrepreneurs will opt for the easy option, and this is the number one reason many startups fail – they are not willing to do what the successful are willing to do; that is, do what is necessary to get the best and avoid the cheap.

Rule #2: Income generated by the business is your first priority:

The Four Rules for successful startups

In this context, revenue is defined as any form of income on the cash flow statement: in-kind services, investment, loans, sales, etc.  But revenue is more than just the “normal money in the bank”.

It is proof that you are towards the right direction.  In order to receive revenue, you must convince someone (bank, strategic partner, investor, and customer) to write you a check.  They are voting for your team with their dollars.

This idea of voting with dollars is in contrast with the idea that the team will first develop the perfect product, and then everyone will buy it because it is the perfect product.

Free markets work because they utilize the power of numbers – I would argue capitalism was the first version of crowd funding and still remains the most powerful in the world.

Each time you ask someone to “vote” for your team, there exists an opportunity to learn and modify the idea based on this learning.  Even a “no” can lead to positive learning – often times, getting a “no” is more instructive than a “yes” reply.

For instance, Apple first learned why the then existing digital music player sellers did not do well – why they got “no” from many potential consumers. Learning what the market values are a vital function of most startups.

The best confirmation method to determine if your value proposition works is to ask the market to pay for it.

There is absolutely nothing wrong with generating theories about what the market values; in fact, it is a compulsory task, but not a efficient task.

However, without proper testing, it is just like any other theory, and theories need to be tested before they are developed into a perfect product or service.

The most valuable learning from the Lean Startup movement has been the idea that we move from an entrepreneur that knows what the market value, to an entrepreneur that knows how to determine what the market values.

Startups should focus externally on the market by running series of tests, not internally.  A startup’s first priority should be to test their theories (external focus), not perfect their theories (internal focus).

Your first and top priority should be to prove a working repeatable business model, and only then perfect this model, or scale the business.

Revenue is top priority because it is the best way to prove your theory right about your value proposition – so-called “market validation.”

Trying to make sales before market validation is relying on pure luck and intuition, and like it has already been stated, relying on luck is not something we can afford. It is a poor and business ruining strategy.

Rule #3: Learn how to make effective joint decisions:

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Research has shown that generally, people often believe they made effective decisions and during these times, they are usually wrong.  Over the cause of many years, Humans have made decisions based on emotions and then proceed to rationalize them with logic.

We fall into all kinds of decisive lies that may “feel and look” right but are flawed nonetheless.

Furthermore, research has shown that progressive collective decision making is more efficient than a single decision made by a single body.  Teams that understand how to work together share ideas and come to a decision that everyone on the team can support, even if it was not originally their idea, always out-perform teams with a single team member who decides for the group.

The key to these positive collaborative decisions lies in the “functional” part.  No doubt, many teams are retroactive in their decision making.  Just because the meeting is being held does not make a functional collaborative team.  To become a functional team, you all need to know and respect one other.

You and every other person need to understand the point of view of each team member.  A simple way to do this is by having clear roles and responsibilities.  You all need to put the success of the team above your egos and aspirations.

Anyone who has ever participated sometime in sports, or followed sports, will understand this difference.  Many organizations that had great players failed to produce excellent results because of team separation.

To continue with the sports analysis, the difference is the coach.  Check the records of every great team, they had a great coach.  They had a great leader who understood how to get the best out of each player.

This great leader had the ability keep egos in check. He recognized the importance of values and culture.  He knew what functional collaboration looked like, and he knew how to get everyone to row the boat in this direction.

Don’t underestimate this ability.  Every successful startup had at least one or more great coach.  To be honest, it is not easy to be a functional team, but it is one of the many things  successful teams do that unsuccessful teams are not willing to do.

Rule #4: Everything else is dependent

Why make a rule that there are no other rules?  Because it is crucial to understand that everything else depends.  Bootstraps or raise money– depends.  Hire or Outsource employees – depends.  PPC or SEO– depends.

Much of the advice that startups get are general strategies(not targeted) that worked for some other startup at some point– usually a different kind of startup in a different industry – investor are notorious at providing this type of advice, but they are not the only ones.

It is not that this advice is really wrong, it just that it is dependent on each startups situation.

Different strategies work for different startups, but all strategy, accepting these four rules, do not work for all startups; and assurance that your startup follows these four rules will increase the probability that the right strategic choices are being made.

It is helpful to note that, the best strategy in the world is likely to fail if these four rules are not followed. So follow these four golden rules for successful startups and avoid failure!!

 

Martins

Europedefences is a top personal finance blog based in UK. At “Europe finance blog”, our goal is to help you create wealth

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4 Comments

  1. I once knew a great leader who had the ability to keep egos in check. He recognized the importance of values and culture, how to get everyone to row the boat in this direction and this helped build up his startup succesfully

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