Raw thoughts from Alex Dong

A humble guide to build a startup

So you’ve decided to start your own business. If you are like many other first-time entrepreneurs, you want to build the next Google.  Or the next Apple.  You want to walk into a coffee shop and see everyone is using your product.  You might even want to “make a dent in the universe”.  There is nothing wrong about this.  This is usually the most long-lasting motivation for entrepreneurs when things go bad and one has to continue fighting.  However, if you start out wanting to do nothing less than taking on the whole world, chances are you will be disappointed.  There is no direct path to “change the world”. 

In this article, you will find a 3-step approach to build a startup. It might be quite different from the “go big or go home” stories you’ve heard or read. It might seem too humble and not exciting enough, but it’s much easier for start a company this way.

Step 1: reach “Ramen Profitable”.  Paul Graham defines it as:

Ramen profitable means a startup makes just enough to pay the founders’ living expenses. This is a different form of profitability than startups have traditionally aimed for. Traditional profitability means a big bet is finally paying off, whereas the main importance of ramen profitability is that it buys you time.”

It basically means your company is producing something people want and you are paid enough to make a living off that. It’s not the final destination yet but this is a crucial step.  Once you reach this milestone, you suddenly become indestructible.  It doesn’t mean you have a perfect product yet. But at least you have an infinite run way to fine tune your offering or try a different plan.

If you get to Ramen profitable, you should celebrate this by adding an extra egg to your Ramen! This might be a tiny step if you compare yourself to a company like IBM or Microsoft.  You may be surprised that you’re already better than 90% of all startups,  which close shops in the first year of operation. You have chosen a market, manage to get enough funding to build the idea into a real product and have people found it useful enough to pay for it. (If the people who is paying doesn’t even know you, go get another egg for your Ramen please. )

Achieving Ramen profitable does not mean you should stick with the same idea.  Many companies pivoted into a new direction which eventually make their name there.  Take Microsoft as an example. It was founded in 1975 to sell a special version of Basic interpreter called Altair Basic.  But Bill Gates didn’t stop there. 5 years later, Microsoft moved into the operation system market and released DOS and then Windows, two core products that helped to grow itself into a billion dollar company.  The essence here is as you reached this stage, you will have a better understanding of the market. You will be in a much better position to take on new opportunities when it emerges.

Step 2: own a niche.  Become the number one in a market.  It’s more important to be the number one in a small market than a number two in a bigger one.  We are living in a “big is better” world so this might sound crazy.  Who haven’t read about Facebook’s IPO and secretly wish he could be one of those 1,000 fresh minted millionaires. However, it may surprise you that usually a smaller market is actually a lot easier to conquer.  Dave McClure has an excellent short article talks about “niche to win” strategy:

Most startups think they have to be AWESOME to succeed.  Actually, this is quite far from the truth – in fact, you can be incredibly mediocre and still be quite successful. The secret is to find your Niche – that is, the initial customer segmentation / product differentiation combo that enables you to beat your more established, mature competition with a much crappier product.

Besides the segmentation and differentiation, you need to own a niche market to get the time and resources to build a team, to hone your marketing messages, to establish your distribution channels and turn your technology into a product. Your technology might work for a small group of early adopters who are willing to play with latest tech, but the main stream market requires much refined off-the-shelf product.

There is a gap between the early adopters and the rest of the market. A premature expansion usually sinks the company by burning too fast too early.  When it really should carefully fine tune its offering and use its resources frugally. This idea is best explained by “Crossing the Chasm”,  one of the best book on marketing and selling high tech product to mainstream market.

Step 3: bowling into adjacent markets.  Geoffrey A. Moore, the author who wrote the Chasm book, explains the next step in his other book called “Inside Tornado”. The basic idea is once you dominate one niche, the next thing is to expand into adjacent markets. Just like playing bowling, you don’t try to knock down all the pins at once. Instead, you hit the first one at the right angel, then let the ball as well as the first pin to take down the 2nd and the 3rd; then all these pins will help to spread the force and take the rests.