So you have an idea and you want to build a tech startup?
But are you really going to build a tech startup or a regular tech business?
Before you start, you need to get clear on how tech startups are different from regular businesses.
What Makes A Tech Startup Different From A Regular Business?
Tech businesses can be such as:
- Software Development House
- Digital Marketing Agency
- Web Development Agency
- E-commerce Site
But there is one type of tech business that is commonly mistaken for a startup and that is the Software App.
A software App (Mobile or Web) is not necessarily a startup.
Startups have many definitions, but the most common and agreed-upon definition is this one:
“A startup is a business that grows fast”.
What makes a tech business grow fast?
- It needs to be built on a one-to-many premise, this means you need to have some kind of a product (not service) to sell. So any business that relies on selling services as its primary offering cannot qualify for a startup.
- It needs to have built-in capabilities for signing up. This means when someone finds out about the product, they can go to a sign-up form, enter their information, pay (not necessarily right away) and become users.
- It needs to have the ability to be sold without relying on salespeople (direct sales). If you want your app to have millions of users (or tens of thousands) you don’t want to have to hire an army of salespeople to do that. You need to be able to get users by driving online traffic to the app. using online sales funnels which normally consist of digital marketing methods (ads, content marketing, viral loops) that capture leads and move them through the funnel in time until they become customers. This means that if you rely on direct sales to sell your product then you will not be able to reach the sales numbers expected from a startup or it will just take too long. This is why most B2B and enterprise products don’t qualify as startups either.
- The cost of acquiring a customer is low. Think of the cost of hiring a salesperson versus the cost of a Facebook ad.
- Easy to scale by adding more traffic sources. It should be designed in a way that all you need to do is open additional traffic channels that feed into your funnel and make more sales. These channels can be easily opened with $ dollar spent. You can start with Facebook ads and then open up other channels (e.g. LinkedIn ads, Twitter ads, Google ads, even TV ads) and so on.
- Can take advantage of growth hacking methods.
If you look at all these methods then you might think, hey, doesn’t this mean that any Software As A Service (SAAS) product is a startup?
Not necessarily. And this is where the confusion comes from. Now we get to another aspect of startups.
Startup Value Indicators
“A startup has to generate more value than a traditional business and do it so much faster”.
When you talk to investors they will assume all this user acquisition stuff is taken care of already because there is so much material about it out there. For them, it’s a no-brainer that you need all of the above. What they will focus on is the true value of the startup.
Let’s pause here and think about this through an example of, say, a social network. What drives the $ dollar value of a social network up?
I used to think it’s the number of users, but I was wrong, it’s the algorithms.
Algorithms decide what gets displayed on each user’s feed and that in turn decides what ads to serve and this can monetize the traffic. A social network with a large user base and no sophisticated algorithms is worthless from an investor’s point of view. You can build a Pinterest or Twitter-like social network in two weeks, it’s not hard, but other than satisfying your ego, you haven’t built anything of real value.
Those algorithms can tell you who you should connect with, suggest items for you to buy based on your likes and past habits and what you posted and typed online. The sky is the limit and it can get very complicated. Algorithms involve a lot of math and require Ph.D. graduates on your startup team. This is what investors want to see.
What are the value indicators built into the tech stack for a startup?
- Complex algorithms.
- The use of emerging technology like Machine Learning and Artificial Intelligence (AI) or Blockchain.
- A technological barrier to entry. Those algorithms have to be complex enough (with patentable technology) and require sophisticated mathematics beyond the reach of people who want to copy what the startup has built. This will give the startup a headstart for acquiring market share that by the time someone else catches up to them they will struggle to get customers.
It doesn’t stop here.
“A startup has to have a very clear and well-defined business model and an exit plan”.
It doesn’t have to be as complicated as the algorithms. But it needs to be focused and predictable enough to make future value projections. The worst experience in the world is to sit in front of an investor and not have a clear and solid business model (Trust me I’ve been there too).
Now let’s contrast all this with the myriad of software apps out there. Most of them don’t have any of those characteristics and at most, they aspire to have a few thousand or even a few hundred users, which still makes a great business, but this type of tech business can be bootstrapped. It doesn’t require a high venture capital investment to get started. And most likely this type of business (with rare exceptions) cannot be sold for large sums of money either.
I call these tech apps, “The Ultra Light Startups”. Because they embody many of the characteristics of regular tech startups but fall short on the value side.
What type of business are you building? A tech agency? A tech App? Or a tech startup?