Startups are not simply small businesses. As Steve Blank famously stated, a startup is a “temporary organization designed to search for a repeatable and scalable business model.”
There’s a lot of jargon in that. Let’s unpack it.
What is a Business Model?
Simply put, a business model is a description of how your business runs and makes money. (For an overwrought history of the term and some additional takes on it, see HBR’s “What is a Business Model?”)
As a simple example: We make and sell cookies direct-to-consumer.
Repeatable and Scaleable
Ensuring that you’re able to repeat and scale the way that you make money is crucial. Selling 10 cookies won’t a business make. How do you go from selling 10 cookies to 100 to 10,000 to 10M? By successfully repeating and scaling your model, you’ll (presumably) have built a real company.
What is a Company?
Steve Blank’s corollary for a business enterprise is: “a permanent organization designed to execute a repeatable and scaleable business model.”
The Temporary Nature of Startups
Steve Blank says that startups are temporary organizations designed to search for business models. Why is that?
Searching for a business model often requires the formulation and testing of multiple hypotheses. The temporary startup organization needs to be structured in order to enable the efficient and affordable testing of multiple hypotheses in order to discover a profitable model.
I used the example of direct-to-consumer cookies earlier. (Several companies actually play in this space.) I’ll share a real example from one of my own startups in order to best illustrate this point.
How Norm’s Farms Tested the Market Before Fully Launching
When we first launched in 2011, we did small runs of several different types of products, including ready-to-drink juices, jams and jellies, and extracts. (In terms of retail categories, we launched beverages, grocery items, and supplements.)
People liked our ready-to-drink beverages, especially a tart lemonade blend we made. But the drinks had very low margins, and most of our blends were just okay. We decided to ditch them.
The jams and jellies also had low margins, but they served as an entry point to elderberry for those who hadn’t heard of the ingredient before. And we were able to make them from the mash leftover from producing our supplements, lowering our COGS on these items. We cautiously decided to keep them.
Our supplements (elderberry extract in particular) had the best margins of all — and we got rave reviews from our growing customer base.
We’d found product-market fit.
What is Product-Market Fit?
According to Marc Andreessen, “product/market fit means being in a good market with a product that can satisfy that market.” You’re producing a product or service that people actually want and are willing to pay for. (For more on this, see Andreessen’s post titled 12 Things About Product-Market Fit here.)
What’s That About Temporary Again?
Once a startup has found product-market fit and a repeatable, scaleable business model, it needs to change from being structured to efficiently and affordably testing hypotheses to executing on the business model that works.
For anyone who’s worked at both a startup and a large organization, the tone, pace, and level of bureaucracy are strikingly different — and for very good reasons.
What’s the Stage of Your Organization?
If you’re an entrepreneur reading this, check-in with yourself. Where are you in the spectrum of startup to company? Have you found a repeatable, scaleable business model? Do you truly have product-market fit? If so, how can you better execute? If not, how do you better innovate and test hypotheses?