At the different phases of a startup’s lifetime, an entrepreneur’s focus shifts. It can vary from product development and market fit, to market acquisition and international expansion. Throughout each stage, however, the entrepreneur is often faced with three important decisions: at what speed she should develop her product, how much she is willing to spend on it, and at what quality she is willing to put it on the market.
The answers to these questions vary based on the startup’s goal and stage. While there is no single answer, veteran entrepreneurs often recommend the tried and true lean startup method. The lean theory advocates that startups use as few resources as possible to develop a minimum viable product – a sensible philosophy for a company in its early stages for two principle reasons. Firstly, when developing an MVP, the entrepreneur cannot afford to spend a large amount of resources, making it particularly expensive to create a high quality product from the get go. Secondly, in its early stages, the start-up still hasn’t assessed its market fit. It could destroy a company to spend a large amount of time and resources to develop a perfect product, only to learn that this is not what the market wants or needs. Over time, as the company validates its market fit and scales, it invests more of its resources into high-quality production. This will serve to overcome churn and increase its lifetime value.
Understanding where and when entrepreneurs should place their focus in the triumvirate of cost, speed, and quality is delicate balance. Below, we lay out the lean startup stage-by-stage:
Until a company’s growth stage, it is imperative for entrepreneurs to produce rapidly and penetrate the market swiftly. This allows the startup not only to begin acquiring market share as quickly as possible, but also to obtain consumer feedback early on. When entrepreneurs fail fast, they have the time and resources to pivot, adapt quickly to market needs, and ultimately go-to-market with a product consumers want. The focus at this stage should be on cheap, low-quality production at high speed.
Once the company has validated its market fit, it enters the go-to market phase. At this stage, entrepreneurs should develop a product that is “good enough” to put on the market and that can be developed fast. The startup has not yet generated revenue, so it is strained on resources. Consequently, this quick, cheap development will inevitably come at the expense of quality.
The company reduces its need to be cheap when it begins generating revenue. Similarly, once it has penetrated the market and acquired market share, the startup cannot afford to bring forth a low-quality product, as its reputation and success rely heavily on its quality. At this expansion phase, entrepreneurs should invest its resources on high-quality development to avoid churn.
To better illustrate this model, consider a SaaS startup in its early stages. The entrepreneur anticipates building a fully modular platform with a host of features and an excellent user experience. She could spend years developing the perfect product with every available feature, spend all of her resources, and risk not finding a market fit. On the other hand, she could develop the software’s core with no added features within a few months (cheap, fast, and low quality) just to bring it to the market as quickly as possible. At this stage, if the entrepreneur finds a need to pivot, she has the time and resources to do so. Once her platform addresses the market’s needs, she can begin acquiring market share and, concurrently, build the additional features to enhance the user experience as the company scales.
The significance of speed, quality, and cost not only varies according to the company’s stage, but also on the company’s funding. Entrepreneurs that bootstrap – or fundraise minimally – must constantly be wary of cost. They lack the capital to spend freely and are bound to cheap production and development. This is particularly true before the company generates noteworthy revenue.
While the overarching trends are similar, external financing, whether in the form of VC money or loans, can alleviate a lot of the pressure for startups to be cheap in its early stages. This can allow the startup to focus all of its efforts on speed while gradually improving its quality.
Clearly, external financing allows a company to grow much more quickly than traditional bootstrapping. In fact, this is why startups often race to raise larger VC rounds as a competitive weapon. The more an entrepreneur fundraises, the better equipped she is to scale at an exponential rate, and after all, she who gets there faster, wins.