246. [Out] The Best Framework For Building A Startup (Full Walkthrough)

0:00You need to stop wasting your time writing business plans if you're serious about being a startup founder. Business plans work for traditional companies because they're following the path which has been well-travelled. The assumptions they make can be reasonable to banks and traditional lenders, but it's not true for you. If you're building an innovative business, your assumptions at the beginning are likely to be completely wrong. Slack was a gaming company. YouTube was a dating site. Instagram was just a check-in app. Everything will change as you learn more about your customers and the market.

0:30As the old saying goes, everyone has a plan until they get punched in the face. What you need is an agile framework that enables you to get down your ideas without taking too long so you can get going. And that's what I'm going to teach you today. Moving fast has become even more important in the world of AI. There's something called the time to duplication. And in the past, you could have an idea, you could test it, and it'd be a while before I could copy it. Now the world of AI has gone so much quicker. So if you're spending time writing business plans while others are out there doing, you're going to fall behind.

1:04The best framework I've come across for startups is the Lean Canvas by Ash Moria, and it's based on the lead startup methodology by Eric Ries. It's a one-page startup planning tool specifically designed for high-growth businesses. It lets you capture the most important and critical parts of your idea in a concise and compact format. Here are the nine key components for the Lean Canvas. One, problem. What are the top problems you are solving for your customers? 2. Customer segments. Who are your target customers? 3. Unique value proposition. Why should customers choose you over anyone else? Solution.

1:45What is your proposed product or service? Channels. How will you reach the customers? Revenue streams. How will you make money? Cost structure. What are your key costs? Key metrics. What numbers will tell you if you're succeeding? and finally but not least importantly unfair advantage what can you do that others can't easily copy the goal of the canvas is to see everything laid out at once that you can quickly scan and be able to explain easily to others you can keep iterating on top of it as you learn more information and it doesn't take you too long you should be able to go through the whole thing in under an hour well under an hour ash has refined the model over time and i'm going to use order that he suggests.

2:27First let's look at customer segments. Who exactly are you going to serve? Part of me dies inside every time someone says they're trying to serve everybody. You need to be as narrow and specific as possible while not making the market too small. There's a few different ways you need to differentiate. One is between users and customers. Let's take Calendly. Users are people aren't necessarily paying but using the app. So this could be the people who booking time in the person's app. Whereas a customer is the person that's allowing other people to book their time through currently. So one person is paying but lots of people are using it and you need to make sure you're accounting for both groups and you can have both primary and secondary customer segments in this way.

3:10As you're thinking about these customer segments you also need to think about both demographic and psychographic details. Demographic is age, location, job, those kinds of elements. Where cyber graphic is more about how do they feel, what's the emotions. You need to understand how your potential customers are feeling in order to serve them well. If you're building a marketplace or another type of company which targets multiple customer segments, you need to do a lean canvas for each of them. Let's take one of my portfolio companies, White Hangry. So White Hangry is a marketplace for private chefs and dinner hosts who want to hire those private chefs.

3:48Now, what they need to do is make sure that they're a strong product and service for both groups. Are they the best place for private chefs to list? And are they the best place for dinner hosts to find private chefs? As well as your ideal customers, you also need to be realistic. You need to think about your early customer profile or ECP for short. These are the people who are more likely to take a risk on you right at the start before you get to maybe your bigger customer segment where more of the money is. And this is very classic in the situation when people are targeting enterprises, it's very unlikely as you have a huge amount of credibility that your first customers are going to be enterprise-grade customers because that could take six to nine months of a sales cycle.

4:25But you might be able to first test out with startups with smaller companies who maybe don't bring as much revenue, but easier to get the validation going and to see if you're onto something or not. The products you now think are used by everybody didn't start that way. So Amazon, right at the start, was just for book lovers, right? It only sold books. But at the same time, it was only book lovers who were also early adopted on the internet. So it's the only people who both had this Venn diagram overlap of one, love books, but two, trust the internet and trust e-commerce enough to buy from there.

4:56And this enabled them to target that narrow reach of people and do exceptionally well there. And obviously, we all know what's happened with Amazon since. Our second section is to really narrow down the problem. What exactly are these people struggling with from the customer segments in the problem area that you're looking to solve, right? So interview them, do the customer discovery. I've got another video on that that you can check out. But what you want to get to is what the top three problems they're currently experiencing in the area you're looking to work in and make sure that you truly understand, are these hair on fire problems?

5:30Are these things which are, there's real urgency from the customer to solve? And if you're not getting that sense from them, then maybe it's not a good area to build a startup in. Learn the difference between what people want and what they demand. And it's economics 101, but in the startup world it can be so easy to just get drawn into what people want. But the truth is people want everything now, they want it for free, and what are convenient to them. That doesn't make for a very good business. What people demand on the other hand is where they're both willing and able to pay for a solution. And that's what you need to focus on, right?

6:03So try not to get lost in their kind of tar pit ideas where people really want something, but they're never going to pay for it. And if they're never going to pay for it. How are you going to make money? How are you going to feed yourself, right? Our third section is existing alternatives. And the existing alternatives is a really good way to understand if the problem you're solving for the customer you're trying to solve it for is truly an issue worth pursuing. So if people aren't currently looking for a solution to that problem, or they're not paying for a solution to that problem, then again, maybe that's not the best route.

6:34It could be that existing solution is to have something very manual, very time consuming, and it's really inconvenient to them but they just can't think of a better way to do it. They've tried searching online, they can't find anything. It could be they're using another product already but it could be they have a huge amount of pain problems with that solution and a good way to find this out for example if you go to customer reviews you might consistently see in customer reviews for other products that people are complaining about certain things then maybe it's not very easy for that product to solve themselves.

7:04One important point here too is you can't just be slightly better than what's out there because remember as humans we're fundamentally lazy right we don't want to keep switching software for something for a one percent gain it takes time and effort from us and the huge companies like salesforce rely on this it's very difficult when somebody's using a software like that to have to switch away from it so what you need to think about if you're going to get somebody to switch away from something like salesforce you need to be 10 times better we call it 10x better right so when you're looking at a solution and looking at the existing alternatives you've got to try to work out how can be 10x better for those customers to solve that problem than the existing alternatives our fourth section is solution and this is where you need to design as simple as you can something which 10x better at solving a specific problem but don't lose your head think about every little feature what you really want to focus on here is what is the main cause of the pain and how do you solve that and in our little plan here again you're not taking very long over this you need to just understand what the top three features that need to be in your MVP or minimum viable product so that smallest earliest version of your product that you're going to then use to test and now with AI you can build MVPs in record time your first solution is probably going to be wrong and that's okay I think it was Reid Hoffman who said if you're not embarrassed by the first version of your product you've released it too late so the first version the solution you're coming out with it's just a hypothesis this, you're just testing it.

8:32If it's wrong, it doesn't hurt your ego, it doesn't hurt your status, it just means you've got more lessons to make the next time better. Testing with customers will mean that you keep iterating and keep getting better and keep getting closer to that true solution. One little hack here is if you go to your competitors or other companies' LinkedIn pages or social media pages and scroll right to the very back to when they started, you can see like what they used to do at the beginning and it's really interesting to look at if you're a nerd like me because you can see what did they used to say and how they made that better over time and you'll realize that many of the companies you think are so amazing now actually started off much more humble and much less polished than they are.

9:12The fifth section is unique value proposition and most startup founders really suck at explaining this right they need to show me why should I care they need to show you why should you care but most importantly they need to show potential customers why should they care? What makes their product, their idea stand out? My inbox is full of people who list a load of features that I don't care about and unprovable adjectives where say we're the fastest or we're fast or we're quick or we're better or it's just adjectives like they don't mean anything, they're not trying to, they can't prove it. You want to have a clear differentiated strategy where only you can truthfully write that sentence.

9:56You should be focusing on the hair and fire problem, how you solve it, how you make their lives better and how you do it that nobody else does it. So if you use a template here, right, we help and then insert your customer segment, do whatever the solution is or whatever they want from their problem to be over, buy and then the unique way they do it. It's their unique solution. Let's take an example of a recent podcast guest. So B. Bakshi is the founder of See the Science. They help clinicians to detect the early signs of cancer in their patients by using a unique AI-driven algorithm that collates all of the data together.

10:40And they're better at it than anybody else. So they've got 50 ,000 people where they've detected cancer early. And think about how many lives it's potentially saved. but in that one sense of explaining what they've done in a way that you can understand and in a way that's very easy for potential customers investors and stakeholders to get on board another little hack you can do here is use a high concept pitch which is where you compare yourself to something else so you say we are the airbnb of xyz or we're the youtube of xyz or whatever it is use a reference point that people already understand and then use that to help people to get your idea quickly.

11:18It has limitations though so don't rely on it and often it can feel a bit cliche when people keep overusing these different methods. Our sixth box is revenue. How are you actually going to make money? And you'd be surprised about how many startup founders, especially those who are too focused on the product, forget this really important part right. If you're not making money then you're not really a business. You can use what your customers are paying for their existing alternatives as a baseline to try to understand how much they're willing to pay in this area. Then think about your positioning.

11:51Are you going to go cheaper than that? Are you going to get more premium? Do you think there's willingness to pay a more premium price? Then you have founders that go the other direction where they overcomplicate their business model too much and they have a million different revenue streams. This is complicated and at the beginning startups are hard enough as it is, let alone if you've got like 10 different sub-businesses under your existing business. Bain HQ is 100 % guilty of this. And I'm very much guilty of this, where we overcomplicate things, have too many different things going on, and then we don't get the actual maximum revenue we could do if we just focus on doing one thing really well.

12:26So when you can get revenue streams, don't think, oh, and we could do this, and we could do that, and we could do this. No. What's the 80-20 rule, right? What's the way you're going to make most of your money and focus on that? If that's not working, you can try other things too. but have your hypothesis that this is the majority of the money and where it's going to come from. Our seventh box is channels and Justin Catton who's the founder of Twitch said the famous phrase of first-time founders focus on product whereas second-time founders focus on distribution. Your channels are all about how are you going to get people to actually use your product, to actually pay for your product.

13:02If they don't know it exists and you know the best product in the world you're not going to make any money. At the beginning you can do things which don't scale, you can be personally reaching out to people you can be cold messaging people you can be going to every single event but that's not going to work in the long term right the long term is that there's a there's a limit on how many events you can go to personally as a founder to get through so what you need to look at is what the most effective channels where both your customers are hanging out and if you're targeting people who are on linkedin but you're doing most of your marketing on TikTok, that doesn't really make sense, right?

13:39So make sure you understand your customers, where they are, where they're looking for solutions and where they have the trust, and then looking at what's your skill set and what do your team have the abilities in. And the overlap is that sweet spot, right? Where you're good at marketing in this particular area and you've got a good distribution in that area and then you get people across. One big mistake people make is focusing on overly complicated, overly difficult distribution channels. Say for example a podcast right? As you can see I'm sitting in a podcast studio, I've done over 400 episodes now and because I've done over 400 episodes that gives me a massive unfair advantage is that I can do this easily.

14:16I'm recording this video and I don't need to do that many retakes. If somebody else was to record this it would take them way longer. That means I have an edge. It means I can do this and others can't. Others can try to copy me but you're going to spend way more work than I do. So I welcome them to do that. When you're at the beginning, try to look at what are the most effective uses of your time. And often there isn't a podcast or a long-form content that can come later on. And it also can depend on where your skills are. If you are somebody who's done loads of TV, then of course use those distribution channels.

14:50But if you don't, then trying to struggle really hard to break into TV when you could just use paid ads or you could use other methods doesn't necessarily make sense. Another key thing is to focus on one or two distributions at a time until you get the systems which make them work and then move on because if you're spraying and praying you could actually be really mediocre at loads of different channels rather than really really good at a couple. Number eight is key metrics. How are you going to measure success? How do you know if you're on the right track? It's very easy to fall into the trap of vanity metrics and I see this all the time where startup founders who say they're trying to build a billion dollar business are focused on how can I get 10k Instagram followers and you need to be very careful about falling down this trap of looking successful as opposed to being successful and you can use a metric say one which is about the value right you can see is what you're building being used well and do people love it right and this can be like metrics such as NPS scores where you do surveys it could be like what's the referral rate up is everybody who uses your app then telling their friends about it it could be things like how long are people spending on if you've got an app how long are they spending on it every day these kind of things can tell you like how much is your app being used because if you have the example of where people might be paying for your app but not really using it very much then it's probably like that churn is going to increase over time then you have the more hardcore revenue-based metric which is really the most important and that could be monthly recurring revenue for subscription-based models so how much are you actually making a month and you can set yourself targets on this if you've got a business model which is more advertising based you can look at monthly active users because that's going to be the main metric that you're going to use to then sell to advertisers then you can look at ARPU so ARPU I love that word ARPU is average revenue per customer so let's say you've got a model where people can buy add-ons let's say a game for example right in a game it could be that it's free to play but then people buy add-ons so they buy extra like weapons they buy extra accessories those kinds of things if you can increase the ARPU that can increase your revenue significantly right over time so if you can see okay the ARPU is 10 pounds per user and you've increased it's 15 pounds per user then it makes more sense to do more advertising because your return is going to be better and with these metrics as well try to use both a primary metric and a secondary metric and the secondary metric is all about stopping the primary one from being gamed.

17:25So let's say you would try to increase lifetime customer value. So lifetime customer value is once somebody becomes a customer how much they spend with you over the course of their lifetime. Fairly self-explanatory right? Let's say a lifetime customer value is one million pounds. Great, sounds amazing but if you're a customer acquisition cost is 10 million pounds then you've got a terrible ratio right so what you can then use instead is you can look at the primary metric is let's say monthly recurring revenue but then you can use the LTV to CAC ratio which is lifetime value divided by the customer acquisition cost and set a minimum for that right so let's say you want at least to be three or four or whatever it is for your industry that way you can focus on okay we're going to increase revenue as much as we can while at the same time making sure that we're not spending money in a headless way.

18:20Ninth is our cost structure and this is a bit that's a bit less fun but unfortunately to make a good business you can't just be focused on revenue and growth you also need to make sure that you're not spending money in a bad way as you mentioned about the LTV to cap ratio and we need to look at here is what are your overheads what your fixed costs do you need an office space do you need a warehouse do you need salaries for employees then you can look at the variable costs so this is like how much does it cost you to deliver per user or per customer and then you have the other overheads as well so say for example marketing and things like that which maybe aren't as attributable but you should map this out right how much you think things are going to cost and try to pay attention to other things too like tax for example they'd be surprised how many people make their business models and forget they need to pay tax so that obviously cuts into your margins and cuts into everything else you're doing too but you're not going to be very precise here because you're trying to do this business plan quickly you're just standing to assessing because if your costs are extortionate it's better to work out at the beginning rather than later down the line you've got more and more excited about the idea and then you realize it's not a feasible business model the tech cost is another one too where you can sometimes catch people out is that if you need a million different pieces of AI to get your company to work, that's all going to cost money.

19:39And especially too, with Amazon credits and different cloud products, they add up all of these different bits of things you're paying. And the final box is unfair advantage. What can you and your team do that nobody else can to keep your unique value proposition unique? Avoid generic adjectives here. We're the best or we're the fastest or we're whatever it is that you think you are more than everybody else or with the hardest working. That's a classic one, hardest working. Every single founder is going to say they're hard working. So if your competition can say the same thing as you, it's not an unfair advantage.

20:13Likewise, if you say that we've experienced the problem ourselves, so it's everybody else who's your potential customer. That's not an unfair advantage. It can be a combination though, right? If of all of the people who experience the problem, you're the only one who's got X skill, then it can work out. So think about it as combinations, it's an unfair advantage, not necessarily just a single reference point. There's a great book by Hassan Kuba and Ash Ali which is actually on the shelf behind me which goes into unfair advantages in depth and these are Miles' framework. The M is for money. If you come from a crazy rich family and you can pump more money in than all your competitors then you've got an advantage right?

20:52You can do things that other people can't, you can buy the best equipment for everybody else can, you can spend more money upfront than others can before needing to make money back. That's one advantage. I is for intelligence and insights and this is for example sheer, let's say you are one of the world's best AI researchers, then you have an advantage right? But it comes from that intelligence insight and insights too can be from having from different experiences than everybody else has right? So let's say you've got a unique insight because you're the only person that's done a particular thing or cross over two different areas that you can then apply to a new area.

21:28L is for location and luck. So every amazing startup founder in the world has some element of luck. It could also be in the right place at the right time too. So these are things you can't necessarily plan for but you can be honest with yourself. It could be you're lucky that you're in a certain position that means that you can be better at delivering unique value proposition than others can. Say for example my story is the first article I ever wrote went viral. Because it went viral then I suddenly had an audience which then tickled along and enabled me to grow to where I am today. It's not necessarily I was so amazing, it's that piece of luck and that I've been able to seize that luck to get to where I am.

22:07The E is for education experience. So similar to intelligent insight but more focused on the background you have where if you've spent longer on a certain problem than everybody else has or you've worked in an area which nobody else has that means that you have an advantage over everybody else so let's say again you're you did a phd in a particular topic that phd can then be used to build something which nobody else can build and you have got an advantage because it takes a bit of time for people to catch up with that and finally is status so one of my friends recently raised a pre-seed round very quickly because he has a huge audience so aiden outside dad.

22:50So obviously he's got many other unfair advantages. He's intelligent, he's got a good education, he's got money. But the fact that he has such a great network means that people want to work with him. It draws people in. And this is a personal brand authority really comes into play. If you build a strong personal brand, then people want to work with you. You get doors open for you that others don't have. And that can keep an unfair advantage that others can't easily catch up on. Now, reality check. You might not have an unfair advantage. You might be really struggling to put something in this box and that's an amber flag not a red flag and i'll tell you why because a lot of the times people start building a company where they have real no reason to build it they have no expertise they have nothing which makes them stand out but the act of building and the act of putting in that work and struggling and talking to loads of customers means that eventually they get one of these advantages that if they've interviewed more potential customers than everybody else has, all of a sudden they've now built an unfair advantage.

23:49So as you're going through this, you can think about this too of where do you think you can build an unfair advantage and keep it in mind. If you don't have it at the start, it doesn't mean that you can't build it if you put in the work in an intelligent way. But to survive long term, you will eventually need an unfair advantage. What you need to do now. So you can go to Lean Canvas website to download the template and fill it out. I recommend his book too. You're going to fill it out as quickly as you can. Let's say 20 minutes to half an hour, even quicker if you can. You're going to find out what's the bit that is the biggest assumption that you really need to test and find out more about.

24:26Usually it's to do with the problem, so get out there and talk to customers. Next, build an MVP. Give it to real customers. See what happens. Are you getting good feedback or not? Finally, you're going to take that information, look at the data, iterate and do the business plan all over again, which you can do because it only takes you a very short amount of time. So using this model, rather than writing a six page business plan, you can spend 15 to 20 minutes writing something down, which you can then test and then redo, redo, redo, redo until you get something which is worth building and can potentially change the world.

25:01I hope you've enjoyed this session today and And follow me for more episodes like this, which is coming every week. And you can also check out our podcast too, where I'm interviewing people who are generally serious A &B on or people who are investors to get their insights just for you.