On a recent trip to Silicon Valley, I was talking to a very successful venture capitalist. He said, “the problem with most entrepreneurs is that they don’t know the recipe of entrepreneurship.” I was fascinated, especially because teaching entrepreneurship is so difficult. Some think it’s teaching people business skills, others think it’s subject matter skills, still others think it’s finance and risk evaluation skills that matter. The truth is that it’s all of these things and more. But most people think teaching entrepreneurship is about the content knowledge and some experiential component. But actually, and according to this VC, it’s about the process, or recipe, and then the experience of cooking the recipe.
Not all recipes produce delicious outcomes. In fact, many recipes, even when followed precisely, don’t turn out. So the first question is what is the recipe? While there are many sub-steps in each of these main steps, the following four, sequential steps form the foundation of the recipe.
First, there is an innovation and discovery stage. This stage can be spawned by many different stimuli. For example, someone might recognize a need or pain point that needs to be solved. Or someone might ask another to think about how something might be done better. Many think of this innovation phase as entrepreneurship. Nothing could be further from the truth. In fact, ideas are a dime-a-dozen. It’s the next steps that add value to the idea.
The second step of the recipe is to derisk the idea. Applying derisking processes like Lean Business Model Canvas is a great way to do this derisking. Perhaps the most important part of this step is to identify strong product-market fit. That is, can you find a solution that the market desires that can be “productized” (understood broadly as also including services). The most challenging part of this process is to not assume you know what a customer will want. In its most successful form it’s getting a purchase order from a potential customer that verifies they will actually part with their cash for your product.
Once someone has identified strong product-market fit, it is important to determine what the unit economics look like for the new product. This includes manufacturing costs, delivery costs, sales prices, etc. What are the economics of the product? How many do you have to sell at what price? What are your margins? Can you make money? Or if it’s a social entrepreneurship venture, can the provider successfully deliver the product to the recipient?
Finally, if unit economics work, the next question is whether the production of the product can be scaled. Can it be manufactured, delivered, serviced, upgraded, replaced, and transformed in an economical or scalable manner? Ironically, many new companies fail at this stage. They provide a useful, money-making solution only to find that it can only be done at a small or isolated scale.
I am increasingly convinced that following these four steps, if done correctly, will result in a successful startup. Does that mean that knowledge of business, technology, relationships, funding, or leadership are unimportant? Absolutely not. They may be critically important, but primarily as they influence the ability of the entrepreneur to implement the recipe at the highest levels.
Now, in conclusion, I KNOW there will be many entrepreneurs who say “I’ve done all of these things and have not been successful.” I’m amazed how many times I’ve worked with founders and small company CEO’s who think they’ve achieved, for example, strong product-market fit. But in reality, they’ve achieved product-solution fit. There’s a tremendous difference. Simply identifying a problem your product might solve is not the same as solving all of the barriers that might keep someone with that problem from buying your product. Think of all the potential market barriers: price, channel, competition, relationships, barriers to adoption, barriers to payment, and so forth. A good product-market fit solves all of these issues, not just whether the product works.
To summarize, creating the perfect entrepreneurial soufflé requires that you make sure the technology works, that the customer wants it, that it works economically, and finally, scale it! Like any soufflé, it will take practice to get perfect. But without a great recipe, failure will be common and any success is likely just luck.