A Blog by Jonathan Low

 

Mar 26, 2018

How Does An Idea Become a Startup?

The days of raising millions and then figuring out if you have a viable business strategy have been supplanted by a lean startup approach. It emphasizes flexibility, prototyping, iteration and fast failure - or success - in order to identify a workable approach before seeking and committing significant capital. JL


Jennifer McFadden and Brad Hargreaves report in Yale Insights:

“We’re in an environment, now, where there’s no better time to try something new."  Lean Startup Methodology is a way to explore opportunities with less risk. Your prototype may not serve the same purpose or target the same audience, but it’s a useful product in its own right. “You don’t have to go all in. You can try something on the side. You can get a small project up and out. Sixty percent is the new eighty percent.”
How do you go from, “We knew there was a big opportunity in education, but we didn’t necessarily know what that was,” to a tech skills school with 20 campuses on four continents in seven years?
The answer is iteration, according to Brad Hargreaves YC ’08—the founder of the school in question, General Assembly, as well as three other companies, including the co-housing company Common. He talked lean startups with Jennifer McFadden ’08, Yale SOM’s associate director of entrepreneurship and co-founder of Skillcrush, in a February 7, 2018, webinar.
Hargreaves discovered entrepreneurship as a student at Yale. Trying to furnish their common space on the cheap, he and a roommate bought two card catalogs from a library the university was renovating. They hoped selling one on eBay would pay for the other. It ended up making a profit and led to a business helping Yale and other institutions liquidate similar items.
In 2011, he and three co-founders launched General Assembly. With little more than a hunch that they would do something in education, they created a set of single-session online classes that offered students a “cocktail-party-level” understanding of tech concepts. “It wasn’t a bad product at all,” Hargreaves said. “It let us build an audience. It let us develop our pool of instructors. It let us to get our operations going.”
A few months later they started offering 8- to 12-week classes in web development, data science, and UX design. They taught enough to add a skill on a resume but not enough to get a job. “Six months after that we launched our three-month full-time program in web development that actually got people jobs.” Today, its many full-time programs are the core of the business.
The evolution is a perfect example of lean startup methodology. “Your prototype may not serve the same purpose or target the same audience, but it’s a useful product in its own right,” Hargreaves said.
McFadden contrasted today’s approach with the late 1990s, when a company like Webvan would raise hundreds of millions of dollars in venture funding before talking with any customers. “We’re in an environment, now, where there’s no better time to try something new,” she said.  Lean Startup Methodology, she added, is a way to explore opportunities with less risk. “You don’t have to go all in. You can try something on the side. You can get a small project up and out.”
Quickly putting out an early iteration or minimum viable product (MVP in lean startup parlance) is a hallmark of the approach. How do you balance the efficiency of putting a prototype in front of consumers against ensuring a positive long-term reputation of the company? “Balancing brand and lean, sometimes you have to make hard tradeoffs,” Hargreaves said. “Even if you don’t invest in a brand, you still have a reputation. Customers are still going to talk about you, so thinking about it and building brand in from day one is critical.”
One way to build a buffer between early experiments and a full brand launch is using a pop-up company. When Hargreaves was exploring a real estate venture, he used a “working title” of Porchlight. It was little more than a website and a name to put on early tests aimed at gauging interest. When he and his team were clearer about the final product, they launched Common, a company that offers co-living apartments in four cities.
McFadden, who teaches the course Startup Founders Practicum at Yale SOM, noted that the Lean Startup Methodology is applicable to a range of organizations—for profit, nonprofit, or social enterprise, tech or consumer product. Regardless of the eventual sector, she said, “I encourage students to build a model, even if it’s rudimentary, early on.” She added, “If you put numbers down on paper, it forces you to think through issues you wouldn’t otherwise.”
While risk may be lower in starting a venture today than in the past, most entrepreneurs will eventually need to take a deep breath and decide to move ahead despite uncertainty. Google or Facebook may have the huge data flows to make choices with high confidence, but few others get that luxury. “Sixty percent is the new eighty percent,” McFadden quipped.
Hargreaves responded, “If you’re at 60% in the early days, you’re doing great.”
To reach any level of certainty requires figuring out some source of quick and inexpensive data to base decisions on. McFadden described Rent the Runway, an online dress rental company, which created a popup store to test whether women would be willing to rent dresses at all. When the company got a positive response, it followed up with an email-only offering to see whether customers would rent dresses without trying them on. Again, there was a positive response, providing proof points for moving ahead with the expensive steps of building a robust back end for the company.
“Email is still a great way to reach people,” Hargreaves said. “You can have an email list with 1,000 high-engaged subscribers and you’re 10 times more fundable, 10 times more interesting to a software engineer who’s thinking of joining your team.”
When developing teams, Hargreaves looks for complementarity. “The way I like to think about it is, ‘Where am I weak as an entrepreneur, given the idea I’m going after.” Whether it’s sectoral expertise, technical skillset, personality, or leadership gaps, awareness of individual and collective gaps is critical to building a startup team. As he launched Common, Hargreaves said, “I’d done product. I’d done technology. I’d done operations. I’d never done real estate.” His first two hires were a real estate finance expert and someone with real estate project development experience. While those were clear gaps, personality or leadership qualities can be harder to spot. “It’s so situational,” he said. “It’s a lot easier if you know yourself.”
Even with a great team, great idea, and great execution, “it’s going to get hard. It’s going to take longer than you think,” Hargreaves said. “There will be a slog even in a successful scenario.”
McFadden agreed, noting that to be sustainable, any venture has to fit into a entrepreneur’s life and rouse his or her passions. “Starting a venture is incredibly hard. Your probability of success is pretty small.”
Indeed, Hargreaves pointed out, while his biography lists four ventures—three of which he counts as successes—many ideas that didn’t get far enough to be counted. “A lot of things I tried didn’t work at all,” he said. “If you have 20 ideas and 3 work, that’s pretty good.”
His experience with both failed ideas and successful ventures has given him an appreciation of keeping an even keel, he said. “It’s never as good as it seems, nor as bad.” Today, he explained, he is better able to ride the ups and downs with some equanimity.
One tool for managing uncertainty is understanding the full spectrums of options across every axis of the business. Funding offers an example. The general rule of bootstrapping as long as possible before seeking investors isn’t inviolable. “Bootstrapping versus venture capital is a false dichotomy,” Hargreaves said. He encouraged entrepreneurs to be imaginative about funding, considering a full spectrum of options, including seeking early angel support, a small business loan, private-sector sponsors, pubic-sector grants, or a first customer who is willing to pay up front for a discount or for warrants in the company. Creativity and flexibility can expand opportunities.
Both General Assembly and Common are closely linked to the communities that that have grown up around them. “Community is the thing on top that takes it from a transactional experience to something magical, but you have to have a great product,” Hargreaves said. “The product has to come first. People don’t buy into a community in the abstract.”

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