Sunday, July 5th, 2009

How Startups can Evolve, and the E.V.O rule: Establish, Verify and Optimize

There are rarely successful businesses that followed through what they had wanted to do originally. See Facebook - if you have seen the original interface at thefacebook.com (its original name), you will know Facebook was meant for college students in the early days, particularly for Harvard students. Apple changed its name from Apple Computers because they realised they have evolved from just selling computers. Yahoo was supposed to be a directory service, and Google’s page rank algorithm was pretty much the only USP. Dell remains pretty much a JIT operation but they are now better known to produce cheap business desktops. Saying all startups should be adaptable, agile enough to adjust to the business climate and needs of the market is akin to saying the Moon is round. The room to evolve is critical for a startup because great ideas do not happen overnight, and instead many times  through much trials, pain and even dark moments to finally get the right mix. Other times, its purely luck that the right person comes along to join your team or to refer you a great deal.

In itself, evolving a product is an art. There are many evolution outcome of a kickass idea:

1) Vertical Evolution - Your idea evolves in a manner where you start earning bucks off the guy up/down-stream of your supply chain. For e.g. if you originally planned to sell cupcakes, you need flour and sugar. If your business begins selling flour and sugar as well, that is vertical integration, and if you decided that flour and sugar are much more profitable, that is when your business will evolve vertically.

2) Horizontal Evolution - This is a much more common form of evolution; using the cupcake example, you may decide to sell brownies, pizzas or even coffee instead. Your business model may change a little, but you are still generally making money from almost the same group of consumers, or similar consumers.

3) Business Model Evolution - Instead of making money from the consumer that stops by your shop, your sales may from from mainly corporate customers. Your cupcakes may instead become complementary products for other cafes. You may even give cupcakes for free to the public and instead ask people to donate to your piggy bank, or even request them to do a survey, and get paid for the surveys from a research company.

4) Radical Evolution - Now, your cupcake business is not really selling cupcakes anymore. Instead, you have decided to become a school teaching how to make cupcakes. Your business model has changed, your staffing needs are adjusted, and even your supplier is no longer the flour man, but an Internet marketeer.

5) Bad Evolution - To be honest, this really isn’t a brand new category of evolution; it really is a bad evolution that can happen from any of the above strategic decisions. Bad evolution happens in many cases, such as when your competitor squeezes you out of the original domain forcing you to adopt poorly thought business models or diluting your brand by doing selling desperate products you have poor knowledge in. In a nutshell, bad evolution is an evolution of an idea which is not properly controlled and ill-managed.

I come up with the EVO rule which I hope some can find useful for managing this process - namely Establish, Verify and Optimize.

ESTABLISH your needs, your weaknesses, your strengths and the market conditions. Establishing the status quo in a wholesome manner is beneficial to seeing the whole picture. There are many ways you can do these: Porter’s 5 Forces model, or a simple SWOT analysis. Is there an opportunity you should exploit, or is there some fundamental weakness in your startup which no VC can agree with? With the cupcake example, you may want to establish firstly that your sales are bad not because you suck in baking, but that the recession is looming around. Back such statements up with good data, such as focus groups and conversations with peers in the industry.

VERIFY comes in after you decided to evolve. Verify that you have not steered off into a road where you have no competence in. If you have been baking cupcakes your whole life and that is the only thing you know, do not sell brownies just because it is the trend for the year. If you indeed possess the expertise to make brownies, verify that this is the new startup life you want to lead; pretty much selling anything that is in trend, and getting ready for more evolutions. Ensure also that the evolutions you have executed do not confuse your current customers, and articulate the new offerings clearly. Be sure that your passion has not been led astray, because without passion your startup life is going to be very very miserable! Lastly, verify that your evolutions are meaningful, financially of course. Run them through your potential customers, in networking sessions and your board of advisors. After implementing them, monitor them closely and note the progress.

OPTIMIZE your knowledge/intelligence in the new inroads you have carved. Bearing in mind you are almost starting all over again, you are slightly disadvantaged compared to your peers. You can expand such business intelligence through more reading of books, blogs (of course!), or get a team member/intern/consultant to run through such research in a dedicated manner, and impart to the team afterwards. Employ someone who is already experienced if you have the money is definitely the optimal solution.

I know I am being generic here about the EVO rule, but someone has to start somewhere (; Please feel free to drop me some comments.