It’s been several years since I co-founded my previous startup but I still remember our last board meeting where we were going to decide the fate of our company.
My team and I had built a fashion e-commerce site targeting the Indian market. We worked with one of the best creative agencies in New York; set up a state-of-the-art fashion studio and built a large delivery team in multiple cities to deliver a premium delivery and returns experience. However, after four years of strong growth, we made the difficult decision to close the startup. I remember thinking, how did it happen? What went wrong?
Although there were several factors, the most important factor was that there was not strong enough differentiation from the big players who had access to hundreds of millions of capital. Even though the startup was not a success, I learned several important lessons from this journey that any entrepreneur can benefit from.
Don’t be everything to everyone.
As founders, we aspire to be the best in all aspects of our business. There is nothing wrong with this mindset. However, life (especially startup life) is all about compromise. If we try to be the best in everything, we will probably end up being “good” in most aspects, but not the “best” in all aspects.
Choose one dimension of your business that really matters and truly excel in it. Whether it’s creating a highly efficient delivery experience or offering the most curated assortment of products, decide what would set you apart from the rest and innovate to your heart’s content.
As an example, my current startup, Squadhelp, focuses on a very specific niche: we leverage crowdsourcing and artificial intelligence to help companies name and promote their brand image. With a crowdsourced community of over 300,000, we could easily expand our services beyond naming into other startup services such as copywriting or marketing. However, we have made the strategic choice to continue to innovate more and more around naming-related services. This strategy has paid off and allowed us to achieve significant scale and create a highly differentiated offering.
Don’t optimize for profitability too soon.
This lesson may be counter-intuitive since entrepreneurs learn how to build profitable businesses. However, if you try to optimize profitability too soon, you are likely to stifle business growth.
If you are holding back product investment or cutting costs for your customers (e.g. high shipping costs), this can lead to a vicious cycle in which you will not be able to acquire enough new customers to create a significant scale.
I’m not saying you shouldn’t worry about costs and cash flow. Quite the contrary. Managing a Lean startup is extremely important, especially in the early years. It’s also important to have a clear path to profitability. However, instead of taking profits from your business at an early stage, you might be able to achieve much greater scale by operating the business near break-even and continuing to reinvest your earnings into product, marketing and business growth.
Marketing is not a substitute for creating value.
Don’t start spending big bucks on marketing until you’ve created something that provides clear value to your customers.
An important goal for any startup is to create shareholder value. However, this can only happen after you have created significant value for your customers. Investing too much money in marketing can sometimes give you a false sense of achievement and mask some fundamental flaws in your business model. If you invest $1 million in marketing to reach $1 million or even $2 million in gross revenue, is that really a result worth celebrating? Ineffective marketing investments are usually a symptom of something deeper.
Keep in mind that as you increase your marketing spend to expand your network, marketing effectiveness may deteriorate further. For example, if you run an online business that sells organic pet food, running Google search ads on high-intent keywords (e.g., “buy organic pet food online”) will usually provide the best results. After all, these customers are looking for exactly the products or services offered by your business and are therefore much more likely to convert. As you begin to increase your marketing investment, you will likely need to expand reach to a much wider set of customers by targeting higher funnel keywords or display marketing, which is typically less. effective.
Therefore, if you see a high cost of customer acquisition even early in your business when you are hyper-targeted, it may signal a disconnect between your product offering and your target customers. Maybe your competitors have a much better assortment of organic pet food or are more affordable in price. You may be targeting the wrong buyers. Whatever the case, it’s important to pause and address that disconnect before increasing the marketing investment.
Don’t wait too long to pivot.
With my previous startup, we made the fatal mistake of waiting too long to pivot our business. There were warning signs that our customer acquisition cost was too high and we weren’t seeing a strong cohort of repeat buyers unless we offered a discount or coupon. This meant that our loyal customers were primarily loyal to price, not to our company’s core value proposition of a high-quality shopping and discovery experience. We have continued to stay invested in our business model hoping that increased marketing investment will help us overcome this issue.
It’s important to stay true to your instincts but don’t lose sight of the real data. If the data shows clear warning signs about the viability of your business model, don’t wait too long to pivot. There are many stories of iconic companies that found great success after turning away from their original business model. For example, Instagram started out as a Foursquare-like app before switching to its current business model; Twitter started out as a podcasting company. Pivoting is a humbling process. While some entrepreneurs may view the pivot as a sign of accepting failure, it actually demonstrates the courage and foresight to steer your business toward success.
Fail early and celebrate failures.
Employees must be empowered to step out of their comfort zone and take risks. As a startup founder, you can’t afford to play it safe if your goal is to build something of significant value. While it’s important to take risks, it’s also important to be ruthless in killing projects or ideas if they don’t work out the way you expected. Remember that there is an opportunity cost to dragging things out, especially if they don’t generate the right results.
Take the time to objectively acknowledge failures and encourage the team to take even more risks. Small failures can lead to greater success as long as you apply your learnings in your future endeavors.
Although entrepreneurship is never easy, it can be a rewarding and fulfilling experience. Even though your first attempt at entrepreneurship may fail, the lessons learned from this experience are still valuable and can lead to much greater success in the future.