Fast boat, fast river

Paul Graham has a simple definition of a startup: an organization designed to grow fast. Steve Blank adheres to a different one: an organization formed to search for a repeatable and scalable business model.

They’re both right, in a way. And that has important implications for entrepreneurs

Many people think a startup is a small business. It’s not. A small business is a small business, and if you want to change that, you’ll have to follow both Paul and Steve’s advice: start searching for a sustainable business model that can grow fast.

Paul’s view

Let’s talk about Paul’s view first. He explains that while tech companies aren’t necessarily startups—Dell and Microsoft aren’t growing rapidly—startups might necessarily be tech companies. That’s because fast growth happens either from a big market shift, or from a dramatic lubrication of a market. Technology causes both huge shifts and copious amounts of lubrication.

  • Tectonic changes in the market: Consider Google or Dropbox. They grew fast because of a huge, irresistible shift—the use of the web, or the willingness of the average person to store data in the cloud. There are plenty of other reasons they grew, but they were part of a rapidly expanding total addressable market. The market they targeted came out of nowhere, and grew very, very fast. If startups are boats on a river, then these ones are going fast because the river’s a rushing torrent.
  • Reduction of friction in the market: Now consider Über or Groupon. There’s nothing necessarily disruptive about taxi services or coupon clipping. Those are slow rivers. But both companies found ways to lubricate the inherent friction in their markets: smartphone-equipped limos; or social sharing with a threshold incentive. These are the fast boats.

Put another way, startups move fast downriver, either because they’re on a really fast river, or because they have a motorboat and everyone else is in a canoe. Graham thinks (and I agree) that to achieve fast growth, most of the time you need a low-cost, short-cycle-time mechanism. And that’s usually software, because humans make bad processes. As Andreesen said, software eats everything. People retire; software gets upgraded.

Steve’s view

Okay, on to the other definition. Startups are searching for a scalable and repeatable business model. To me, that means it’s sustainable without the direct involvement of the people who created it, because founders don’t scale.

A startup is not a lifestyle business. A startup does not mean consulting. It does not mean bespoke.

Etsy is sustainable; one-off quirky knitted sweaters are not. Etsy is software; sweaters are slow, messy, hard-to-scale wool. Sustainable, to me, means that as the business grows, the incremental cost of acquiring additional revenues or customers descends towards zero.

A few months ago, I wrote about a hairstylist who’s setting out on her own. She’s a small business owner. She can learn plenty from Lean methodologies about how to improve her business, just as Fortune 500 companies can improve their competitiveness by using Lean approaches. But she’s not a startup by either Steve or Paul’s definition.

Since Paul mentioned a barber shop as an example of a not-startup, I wondered, “what would a hairstylist need to do to become a startup?” They’d have to be searching for a sustainable business model that could grow fast, probably because of a new market or a lubricant that changes the economics of an existing one in an important way.

Consider some of the ways a hairstylist might try to launch a startup, based on their domain expertise. They could focus on a market that they feel is growing quickly; or on a technology that makes new products possible.

Your source of growth drives your metrics

The source of your growth will influence the kinds of metrics you measure, and which you consider riskiest, and how much of your product or service needs to be built before you can test it. Some of these business models are SaaS; some are e-commerce; some are user-generated content. Each makes money in different ways: subscriptions; transactions; advertising. And all of that drives the One Metric That Matters for these companies.

Growing market (fast river)

If you choose to innovate by focusing on a growing market (fast river), then most of your risk is about whether you can capture that market. You’ll need a really good go-to-market strategy, because you’re not really doing anything new (you’re still cutting hair, just not in the traditional walk-in hair salon way.) You’ll care about exclusivity, partnerships, and existing competitors going after the same blue ocean.

Exclusivity means you’re the only one on the fast river. Partnerships mean that others already on the river help you get there. And competitors reduce your advantage, since they have the same fast waterway as you. The longer you can stay on a fast river, the better—but these days, it’s a fair bet that competitors will quickly copy you. Worse, several Internet giants (Google, Facebook, Twitter, etc.) are really, really good at fast rivers, since they run the underlying infrastructure. They shape the riverbed, and can divert the river’s course or slow the river to their advantage—think Twitter changing its APIs, or Facebook blocking an app’s access to its graph.

(It should be noted that neither home visits nor AirBnB haircuts are growing fast enough to qualify for Paul’s “designed for rapid growth.” That kind of growth takes something truly new, and often exploding because of network effects: the phone system, the Internet, credit cards, television, the printing press.)

Disruptive technology (fast boat)

If you choose to innovate by focusing on a disruptive technology (the fast boat in this analogy), you’re going to care more about whether you can build and run it; whether it will work and easily replace existing solutions; and whether it will really go as fast as you think it will.

The “can you build it?” question is true only of genuinely innovative technology, and often your adoption will come from patents or the barriers to entry that you create because of your invention.  Your risk is that your Arduino/Dyson/Kinect Frankenscissors might not work.

Invention is a special segment of the startup world, and its value comes from an ability to demand high margins because of the advantage the product conveys to those who use you. For example, a chip manufacturer that increases network performance tenfold charges far more than the cost of making a chip, because of the value it conveys to network infrastructure that uses it.

The “will it work?” question is about substitution. If people won’t consider your offering a viable substitute, it’s no good. If Über cars weren’t widely available at launch, they wouldn’t be a viable alternative to taxis—which is why Über paid drivers $30 an hour to sit idle when they first launched. They basically rented a city’s population of limos until their demand took off. A good rule of thumb is that something must be ten times better than the alternative. Humans have intertia, and incumbents have inertia, and you need to overcome both.

The “speed” question is about being able to achieve the volume and cycle time you expect. Let’s say you think you can do a perfect haircut in 30 seconds because of your new hair-cutting invention, which will give you a 60-fold increase in productivity. You’re still running a salon. Your business hasn’t changed (much.) But there’s real risk that some other element of your business model (say, reservation management) becomes a bottleneck that prevents growth.

Both at once

If you’re doing both (new idea in a new market—fast boat on a fast river) you’ve got even more risk, because you have to focus on market fit and product fit. The best companies do this:

  • Microsoft’s Windows was a motorboat, and the home PC was a fast river.
  • Credit cards were a motorboat, and the rise of consumer banking was a fast river.
  • Google’s Pagerank was a motorboat, and the rise of the consumer web was a fast river.

But it’s taken an amazing amount of dexterity for these companies to stay around, and they’ve had to adjust constantly. Microsoft nearly steered their motorboat into the shore when the Web happened, and it took a draconian intervention by Bill Gates to get them back on course. David Allen explains this history in his consequences of state interference and non-interference.

Coming upon this scene about two years ago, in late 1995, Bill Gates found that his Microsoft was caught flat-footed. The company’s cash flows were tied to desktop computing, but there was a fundamental shift underway, toward networked computing. Remarkably, among many such performances by the man, he turned his leviathan virtually “on a dime” and steamed it off in relentless and vigorous pursuit of the Internet.

In other words: Beware the founder claiming to have a fast boat on a fast river.

Startups aren’t easy

It should be obvious that I’m not suggesting anyone go launch Airbnb for haircuts and the other business models I’ve mentioned here. These are bad examples. That was precisely the point of Paul’s post:

…if you want to start a startup, you’re probably going to have to think of something fairly novel. A startup has to make something it can deliver to a large market, and ideas of that type are so valuable that all the obvious ones are already taken.

That space of ideas has been so thoroughly picked over that a startup generally has to work on something everyone else has overlooked.

The issue here isn’t that a hairstylist couldn’t launch a startup. It’s that the realm of hairstylist-related innovations is relatively small, and unlikely to yield something fast-growing in a big market. That’s why good ideas are scarce, and investors snap them up for what seem like unreasonable valuations. A speedboat on a fast river is a rare thing indeed, and they all want to get on board.

So consider this corollary: Invest in the founder who’s found a fast boat on a fast river, and whose idea seems daft at first and obvious in hindsight.

A conscious decision

Many entrepreneurs delude themselves into thinking they’re building startups, when in fact they’re building businesses. There’s nothing wrong with building businesses. In fact, it’s amazing. The hairstylist isn’t a startup founder, she’s a small business owner, and that’s fine. She has many of the same problems, but she isn’t girding herself for fast growth or searching for a sustainable, repeatable model.

What a lot of entrepreneurs who run lifestyle businesses don’t get is this: if they become a startup they’re quitting their job. They’re shutting down the current business (or finding someone to run it for them as a cash cow) and launching an entirely new one. None of the companies in my nonsense example above are a hairstylist—they’re a reservation platform, or a haircutting machine, or an iPhone app.

Until they mentally “quit” their lifestyle-oriented, slow-growth, unsustainable, unrepeatable jobs, they’ll never turn their businesses into startups. And that’s one reason why it’s so hard for small business owners to become startup founders.

They need to change jobs.

The Lean Hair Salon

Yesterday, I had an interesting conversation with, of all people, my hairdresser. Those who know me realize there isn’t much hair to dress, so it was an unusual event to begin with. As it turns out, she’s just bought a one-person barbershop and this was her last week at her current employer’s shop.

In hushed tones, under the sound of scissors, she told me about her marketing plans: “I just got my business cards printed and I’m making a Facebook page. I don’t get Twitter.”

I gave her a few ideas:

  • Encourage people to post pictures of the cuts they liked to her page, where others can Like them, and each month give one person who does so a cut for free
  • Go see all the concierges of hotels in the area and ask them to come for a free cut, so they recommend it to visitors
  • Canvas movers on July 1 with a campaign since they just moved to the area (July 1 is moving day in Quebec.*)
  • Set up a Twitter search for “haircut” with a region of “Montreal” and respond to people when they mention it, and offer them a code by DM

She asked me how I was coming up with all these ideas. And I tried to explain to her (in halting French), “well, I’m thinking about what makes someone change salons. Their friend gets a good cut; they’re visiting from out of town; they just moved. And that’s the moment when you can change their minds.”

She replied, “these are great! I’m going to do them!”

I asked her, “all of them? but why?”

“Because they’re free!” she answered. “Even printing my business cards cost more than some of these.”

I agreed with her: “This is the change that businesses have undergone in the past decade. The price of marketing has gone down to almost zero, if you can just find a way to be in the right place at the right time with the right message. But most small businesses still think about marketing as fliers, a Yellow Pages ad, and some business cards.”

“So I should do all of them, right?” she asked excitedly.

And I shot her down. “No,” I said, “you’re going to try them. You need to measure whether they work. Better yet, go home, grab a few beers and a pad and paper, and figure out all the ways that someone finds out about you and decides to try you. Then, for each of those, figure out ways that you might join that conversation in a way that doesn’t suck.”

She paused for a while, forgetting to cut what’s left of my hair, and I could almost see the wheels turning.

Once she came out of her daze I said, “and then figure out how to measure it. You have a barber shop to staff—you’re the only employee. You need to kill the bad ideas fast, and find someone else—preferably a piece of software or a friend—to do the good ideas repeatedly. You’re not a hairstylist any more, you’re an entrepreneur, because you bought your own business.”

She was clearly starting to get it—although she was probably also reconsidering her decision to strike out on her own.

So I said, “this is the difference between an employee and an entrepreneur. You’re not in search of the perfect haircut, you’re in search of a sustainable way to grow your business and bring in revenue.”

It occurred to me at this point that most small business owners define themselves by the work they do within the business (cutting hair, mowing a lawn, driving a truck, running a lemonade stand) and not by the customer need they’re addressing (a neat appearance that gets them promoted, a lawn that complies with town by-laws, relocation, learning about business.)

A worker becomes an entrepreneur when they re-frame themselves. They’re no longer the cog in the machine—they’re the architect of the machine. The watchmaker, not the watch. And that means they start asking what the machine is for, how it can be improved, what else it can do, and which other machines satisfy the need.

“In the end, it may even be that your customers don’t want haircuts, they want something else—fashion consulting, pedicures, personal training, someone to talk to. Or maybe you should be a travelling stylist who does work on demand for hotels. How would you find out about that and figure out what other needs customers have that you can help with? And how could you use those to become unique, or more efficient, or more profitable?”

The conversation reminded me that lean principles apply to everything, and are increasingly relevant to small businesses. Today’s one-person company has tools at its disposal that the Fortune 500 only dreamed of a decade ago. Entrepreneurs can make data-driven decisions, run experiments, segment customers, and iterate.

They just need to stop thinking of themselves as part of the machine, and start seeing themselves as its designer.


* 4% of the population moves on that day. No, there aren’t any trucks available. Go ahead, mock us.