Introduction
The approach, tactics, practical advice Forward Partners have captured in The Path Forward and supporting ‘Paths’ have been a massive help to me over the last year as we’ve grown Lexoo from a raw idea to a fast growing business connecting hundreds of companies and lawyers each week.
– Daniel van Binsbergen, founder, Lexoo
The Path Forward describes the journey of ecommerce and and marketplace startups in their first year from raw idea to valuable business in the space of 12 months. It’s a practical guide for entrepreneurs that stresses the importance of acquiring a deep understanding of customers’ real needs, building emotional resonance into products from the start, quickly getting to revenues, growth and scaleable economics. Our thinking has roots in the Lean Startup methodology and in Design Thinking but first and foremost it’s a distillation of what we’ve observed and learned working side-by-side with nine startups in our offices over the last two years.
We’ve seen that it works best when during the first year entrepreneurs split their work into three steps, only moving on when each phase is complete. The Path Forward therefore has three Steps, each of which has three Waypoints. Founders should begin by validating their idea, then focus on building a product that’s valued by customers before going on to build a valuable business. Underpinning this approach is a belief that the best startups today focus from day one on building great products which resonate emotionally with their customers.
The starting point for The Path Forward is when an entrepreneur has identified the key assumptions in their business plan and done the desk research to develop an idea that on paper looks like it has the basis to be a big business, as determined by the following criteria:
- Exciting product idea
- Deep understanding of the product space
- Benign competitive environment
- Basis for long term competitive advantage
- Potential for future profitability
Step 1: Valid Idea
Focusing in the first couple of months on building a deep understanding of our customers felt counter-intuitive, especially given the sector experience I had, but turned out to be one of the best things we’ve done. On first release our messaging hit home and our product resonated deeply.
– Matt Fox, founder, Snaptrip
Once the desk research is done it is time to start company building properly, and that begins with getting out of the office to do customer research. The aim for this Step is to prove the idea is valid by proving finding a point of emotional connection with customers and selling them a basic version of the service which taps into that emotion.
Valid Idea Waypoint 1: Proven Need
The need is proven when customers validate the problem space by describing their frustrations and actions they’ve taken to find solutions and there’s clarity the market size is big enough to support the company’s vision. The descriptions should be elicited through questions about past behaviour and observations in real life settings.
Valid Idea Waypoint 2: Resonant Prototype
The prototype shows that the product concept taps into the customers’ emotions. Development should be limited to the minimum feature set required to deliver the central customer benefit.
Valid Idea Waypoint 3: Right Skills
Companies should have the product skills to write and wireframe a compelling value proposition, the development skills to instantiate it in a prototype and the hustle to find a few customers. There should also be someone to challenge and support the founder (often a co-founder). Typical team size: 1-3 people.
Once the prototype is resonating with users and a few of them have become customers, ideally paying customers, the idea is “valid” and it’s time to focus on the product. If the prototype isn’t resonating then the customer research should be revisited and the product tweaked until it taps into customers’ emotions.
Step 2: Valued Product
“Creating characters that our fans love and connect with emotionally is a key part of the success of Moshi Monsters”
– Michael Acton-Smith, founder, MindCandy
The aim of the Valued Product Step is to prove that the product has real value to a significant number of customers. Once this is achieved the number of customers who love the business will be large enough that some of them become evangelists.
Valued Product Waypoint 1: Passionate Advocates
Passionate customer advocates show the company understands how to connect emotionally with customers and has captured that in the product and messaging well enough to inspire spontaneous statements of support in public forum and private emails to founders.
Valued Product Waypoint 2: Growing Product
Growing product is achieved when the company has laid the foundations for scalability from a technology and marketing perspective and built a habit of strong month-on-month growth, albeit from a small base.
Valued Product Waypoint 3: Emerging Team
An emerging team should have two or more senior people who act as partners (usually co-founders) and have secured core capabilities on long term arrangements. Typical team size: 2-4 people.
Once the product is resonating with a significant number of customers, has strong month on month growth and a handful of passionate advocates it’s time to focus on scaling the business. Transaction values per month of £10k+ for ecommerce, 30% month-on-month growth and a Net Promoter Score of 30+ are good metrics to aim for. If the growth or passion aren’t present then the activities from this Step should be revisited or the underlying idea re-examined until they are.
Step 3: Valuable Business
Whatever your market and product, focusing on building a strong team, driving rapid growth, and developing healthy unit economics will maximise your outcome when it comes to fundraising.
– William Reeve, co-CEO Hubbub, founder Lovefilm
The aim of the Valuable Business Step is to prove that the business is more than just a product by developing scalable economics and building an empowered team.
Valuable Business Waypoint 1: Scalable Economics
The economics are scalable when the gross profit over the life of the customer is greater than the cost of customer acquisition (CAC) averaged across all channels AND one or more of the channels has the potential to scale 10x without significantly increasing the average CAC.
Valuable Business Waypoint 2: Rapid Growth
Rapid growth is achieved when the habit of fast growth is deeply ingrained at a company. The annualised gross-transaction value run rate should be £1-2m growing at 20-30%+ per month.
Valuable Business Waypoint 3: Empowered Team
An empowered team should have expertise across all the key functions, include at least one person who is a true partner to the CEO (usually a co-founder), and have the genesis of a strong culture. Some structure will be emerging and the CEO will increasingly be freed from day to day tasks and focusing on the business. Typical team size: 5-10 people.
Businesses that complete the activities and achieve all the metrics and outcomes listed above have navigated the path from raw idea to valuable business and should be in a strong position to raise next-round funding. Those that achieve most of them will still have a good chance. (Caveat – investors look at the whole picture when assessing companies and businesses that use this article as a simple checklist may well fail to raise money).
Context
The Path Forward is a great guide for us at Forward Partners and the companies we back. We are sharing it now in the hope that the startup community will find it helpful and that others will contribute and make it richer. We have been writing a host of detailed practical guides to each of the Steps on The Path Forward.
Disclaimer
In the words of Ash Maurya “Practice trumps theory.” Every time. At the heart of every great business there’s a great entrepreneur exercising great judgement and leading his or her business. The Path Forward is more a set of practical tips than a theory and can be a big help to great entrepreneurs, but it is not a substitute for entrepreneurial flair and grit.