If you’re a student of lean startup methodologies, then you understand the concept of a Minimum Viable Product: just enough of an offering to demonstrate the core of your idea, allowing you to get the concept out there and solicit feedback from your target market.
In this week’s partner meeting, as we discussed some of the companies and founders we’ve met in the past week’s Office Hours, Ray coined another term: Minimum Viable Vision. If you’re trying to build a great company and get others involved, it’s not enough to find an MVP: you need an MVV, too.
If you’re trying to create a lifestyle business — one that brings in revenues and lets you lead an interesting life — then breadth of vision isn’t as important. You can be the best practitioner in your city, or differentiate yourself through personal relationships. These are fine, noble, time-honored ways to build a company. But they’re not companies that need acceleration.
A minimum viable vision is one that captivates. It scales. It has potential. It’s audacious, compelling. As a founder, you have to hold that huge, hairy, world-changing vision in one hand, and the practical, pragmatic, seat-of-the-pants reality in the other. The MVV you need in order to get funding demands a convincing explanation of how you can become a dominant, disruptive player in your market.
Here are some of the signs we look for that suggest you’ve got the makings of an MVV:
- You’re building a platform. If you’re creating an environment in which other things can be created, this is a good sign. Google Maps was just one of the many mapping tools available, alongside Mapquest and others. But Google made it easy to embed and annotate those maps, leading to thousands of mashups and clever uses. They quickly became the de facto platform for entry-level GIS, and all those annotations made their maps even more useful.
- You have recurring ways to make money. It’s one thing to take money from someone once. But if you can convince them to pay every month, as well, you’re on to something. Just look at Blizzard’s revenues from World of Warcraft: a new software release is a drop in the revenue bucket compared to their monthly subscriber fees.
- You’ve got tiered pricing. If you can find ways for customers to self-upsell, as companies like 37Signals, Wufoo, and Freshbooks have done, then you can hook your users on basic features and tempt them with an upgrade path that adds functionality as they need it. This means you’ll not only add revenues from new users, but from existing ones, too.
- You’re tied to a disruptive change. If you’re part of a growing trend — people sharing information, mobile devices, cloud computing — then you’ve got a better chance of growth. A rising tide floats all boats, and a rising tech sector floats all valuations and exits.
- Adopters automatically become advocates. Just look at the classic example of online marketing — Hotmail. A simple message appended to every email invited the recipient to switch to Hotmail. The result? A literally exponential growth rate and a huge exit for the founders.
- You can create a bidding war. If you’ve got a solution that several industry giants will want, you’re in a great place. While big companies can build anything given enough time, they’ll buy you if you’re stealing their sales or if your product helps them (and their competitors) sell dramatically more easily. Beverage giants like Pepsico and Coca-Cola regularly buy out promising incumbents, knowing they can make back their investment easily through their existing supply chains.
- You’re riding an environmental change. We don’t mean the Green Movement here. In marketing strategy, environmental forces include things like legislation — for example, government-mandated privacy laws. If you do something that everyone will be forced to adopt, you’ve got a promising exit and a chance at taking over the sector.
- You’ve got a sustainable unfair advantage. There’s nothing investors like more than unfairness. If you can maintain an unfair advantage — lower costs, better market attention, partners, proprietary formulae, and so on — then you can scale your business to a degree where it’s interesting to investors. But be careful: outside of government-mandated monopolies, few advantages are truly sustainable.
- Your marginal costs tend to zero. If as you add users your costs go down — so that the nth customer costs nothing to add — then let’s talk. Businesses that can grow revenues while costs stay still or decline have the potential to grow massively overnight.
- There are inherent network effects in the model. The phone system is the classic example of a business with a network effect: the more people that use it, the more useful it becomes. Network-effect businesses are wonderful, but they often have a two-edged sword: it’s great when you have a million users, but you may be deluding yourself about how easily they’ll adopt the product or service. Do you also have a plan for getting to the point where the network effects are obvious?
- You have several ways you can monetize it. It’s unlikely that any one payment model will work. But if you can find several ways to make money from a business — one obvious one, and several incidental ones — then you can diversify your revenue streams and iterate more easily, improving your chances of success. Quick note: Adwords and selling your analytical data don’t count.
- You make money when your customers make money. Humans are, at their most basic, motivated by two things: fear and greed. Fear means things like costs and risks, and if you reduce risks or cut costs, that’s nice — but it’s not compelling. Customers will often rationalize away the risk and pocket the savings. But if you make money from revenues, then the customer will likely split the winnings with you. Products that boost revenues are easier for people to believe in — just look at lotteries and get-rich-quick schemes versus savings plans and life insurance.
- An ecosystem will form around you. This is similar to the platform model we discussed earlier. Salesforce.com and Photoshop are good examples of this: Salesforce’s App Exchange has thousands of third-party applications that make the CRM provider more useful and customizable; and Photoshop’s plug-in model added features to the application far more quickly than if Adobe had coded them all itself.
In the end, you have to be audacious. You need to understand how your company can become a Big Idea, something that’s truly new, and either widely appealing to a broad market or a must-have for a well-heeled niche. And then you have to convince investors and partners of this, without sounding like you’re deluding yourself.
We never said that was easy.