Welcome to the Growth Hacking Academy. In this lesson we’ll cover successful startups, a thoroughly current subject that’s often misunderstood.
We’d wager you’ve often heard about startups born in American garages to young people who became millionaires overnight. Good news: it doesn’t only happen in America. By now we can count a considerable number of successful startups in Italy too.
The importance of startups as an economic phenomenon is increasingly recognised by the Italian government itself. The decree implementing tax incentives for investment in startups and innovative small businesses — offering 30% tax relief to anyone investing in an Italian startup — was signed only recently.
So if the idea for a successful business keeps turning in your head and you can already see your brand among the successful Italian startups of the coming years, your instinct has brought you to the right place. Here you’ll find everything you need to understand what it means today to build a successful startup, along with the best strategies to follow and a warning about the missteps you could easily make.
Nearly forgot: if you’re new here, go and discover everything else we’ve covered in the Growth Hacking Academy. We’d particularly recommend growth hacking for startups, growth hacking strategies and the best growth hacking books.
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Startup: what the term actually means
The meaning of startup is contested. Some equate opening a shop or any business venture with a startup; others tie the idea to innovation, technological innovation especially. Being an English word, it can be translated and applied in slightly different ways.
In fact the term arose in services and was later extended to the whole economy. In practice a startup is a company developing something able to meet one or more needs of a potentially large body of users. So the first characteristic: catching a latent need.
Steve Blank, the well-known Silicon Valley entrepreneur who with Eric Ries promoted the Lean Startup method we’ll come to shortly, later set out two characteristics that separate startups from other ventures:
- scalability — the ability to grow customers, and therefore turnover, progressively without a proportional increase in resources;
- repeatability — the ability to repeat the same model in different places and conditions with only small adjustments.
The Italian legal framework
Italian law, and specifically Decree Law 179 of 18 October 2012 (the principal measure on the subject), names only innovative startups, as though no other kind existed.
We’ll leave it at that brief mention, because the innovative side of startups is the subject of the next lesson here on the Growth Hacking Academy (not to be missed).
The three types of Italian startup, according to Mind the Bridge
Mind the Bridge is a California-based foundation acting as accelerator and investment fund. In an analysis of the Italian situation carried out in 2012, it identified three types of startup:
- Techno startups, or first-generation startups. Around 20% of the total. The founders are generally young graduates or even still students, with good technical and IT ability but zero entrepreneurial background. Creating a startup therefore marks a new entrepreneurial generation’s entry into working life — perhaps still green, but certainly enthusiastic. Will our heroes realise their dream? It’ll be hard, but why not?
- Startups born of the downturn. A solid 50% of the total, whose founders are often former employees who decided to put themselves back in the game. They generally have good professional experience, though not matched by equivalent entrepreneurial experience. The push comes more from necessity than from passion and skill, so the chances of failure are high. If you recognise yourself here, don’t be discouraged — start thinking about your strengths and weaknesses.
- Scalable startups founded by experienced entrepreneurs. The remaining 30%. Entrepreneurial experience makes raising funds easier, and there’s a general tendency to team up with several co-founders, each with a specific background complementing the others, so that managerial and technical experience are both covered. The foundation behind the study identifies this type as the one most likely to succeed.
None of the three categories carries a guarantee of success or failure, but it seemed worth putting these considerations in front of you to show that a good idea and motivation aren’t enough; other skills are needed too — which in turn probably aren’t sufficient without a good idea and a healthy dose of motivation.
Do you have all the ingredients, or is something missing? Don’t worry. Once you know what’s needed, you can always find it.
Building a successful startup
The introduction you’ve just read was, I think, necessary.
The word startup is overused these days and often tied to a romantic idea of passion and genius. If you want to build a successful startup, know from the outset that the road climbs: you’ll need good legs, trusted travelling companions, antiseptic and plasters for every time you fall (and you will fall), confidence, optimism, feet on the ground and motivation.
Plus a great deal of humility and flexibility. Let’s warm up muscles and brain together and — without expecting magic formulas — think it through before you set off on your climb.
How to know whether your idea can win
You have an idea in your head, we’re sure. It’s the idea of the century: you can feel it in your bones. Perhaps it is, perhaps not. And who, you’ll ask, can confirm it?
Given that fundamentally, as Raffaele Gaito puts it, nobody cares about your idea, don’t start asking friends, relatives, gurus, accountants or experts in this field or that.
There’s only one category of people you have to talk to: your possible customers.
You have to have identified and studied them, described them in the finest detail, and calibrated your idea to them.
But then — or rather, before then — you have to put it in front of them.
And you have to do it now. Only they can tell you whether the product or service you intend to offer actually catches a need of theirs, whether it meets that need the way they expect, whether it carries added value against what’s already on the market, and whether its innovative character is genuinely perceived as useful.
The customer doesn’t lie, because they have no interest in lying, for good or ill.
How’s your timing?
It may surprise you that timing is considered the single most important factor in a startup’s success.
So the first judgement you have to make is whether the market you intend to address is ready — technologically, humanly, in every respect — for the product or service you plan to offer.
You also have to judge whether you’re able to deliver and adapt your offer extremely quickly in response to user feedback.
What you need, then, isn’t opinions but feedback: clear, measurable, unambiguous.
The reality is that feedback won’t necessarily be positive, so you have to be sufficiently detached from your idea, emotionally and otherwise, to accept reality — and ready to abandon the road you wanted to take for another you may not have considered at all and wouldn’t have chosen.
Which brings another important quality you have to be sure you possess: flexibility.
The right team
Putting together the right team for a startup is a delicate and important matter.
Abandon, if you have it, the attitude that the idea is mine and I’ll do everything myself. That isn’t a winning attitude. The day has 24 hours for everyone, and you can’t work 36 of them. You’ll rarely have all the skills required and, above all — at the start especially — you’ll face moments that are difficult emotionally, motivationally and financially.
Debate and sharing are two hugely important weapons that can’t be missing from your arsenal.
You should also know that one of the main things prospective investors judge is precisely a startup’s team. Investors generally look for these roles:
- CEO (chief executive officer);
- CMO (chief marketing officer), although the role of growth hacking officer is spreading today;
- CTO (chief technology officer).
For each of them, both experience and past failures are weighed — and the failures, perhaps surprisingly, count in your favour here.
Dividing responsibilities is important and productive, even though everyone has to share some minimum common skills and, above all, believe strongly in the project; in testing moments that will be what keeps you from giving up. We’d suggest surrounding yourself with people you’re already in tune with personally or professionally and have travelled some road with. You need to know how well they hold up under tension, whether they’re positive and constructive — and in the end you have to enjoy their company.
A startup’s early days are long, hard and rarely paid. The hours are intense and the project has to be everyone’s central objective. Nobody works part time in a startup, at the beginning especially.
Later you can bring in collaborators whose role may be more peripheral, but it still matters that they believe strongly in the project. They certainly have to be paid — and there are tax reliefs for that — but they can’t be simple employees doing a job to take money home. They have to feel part of the whole, and making them feel important is the founding team’s job.
The Lean Startup method
As trailed in the introduction, we want to tell you about the Lean Startup method which, in its apparent simplicity, is an excellent script — mental as much as practical — to follow.
Not everyone agrees, but we consider it very sound and we’d recommend it, not only for your startup but for running any process, entrepreneurial or otherwise.
Here’s the plan: we’ll explain it, and then you can make your own judgement and decide whether to go deeper into its foundations. Two classic texts to start from, if you want to: “The Lean Startup” by Eric Ries and “The Startup Owner’s Manual” by Steve Blank and Bob Dorf.
For now let’s step back and pick up the two ideas from the previous sections. We said only customers can tell you whether your idea is sound, right now, for that particular market.
The non-lean approach
Suppose you’re a perfectionist and want to do things properly. The more you think about it, the more you realise your name and your face are tied to your product; you’ve no intention of embarrassing yourself. So you devote all your time, your money and your ability, and where you fall short you pay someone to fill the gap. In the end you’ve built the perfect product (I say product to keep it simple, but it could be something less tangible).
Now comes the moment of truth: the test with the customer. A real customer — imperfect, perhaps, but real.
Guess what? The customer expected something different. They like what you’re offering but it doesn’t fully meet their needs. It’s extremely strong in other respects, but it doesn’t quite hit their real expectations — or misses them entirely.
Think how many resources you’ve wasted: time, money, effort, emotion. All to look good and protect your name. We don’t think it’s worth it, and neither does Eric Ries, the man behind the Lean Startup method.
The Minimum Viable Product
Going back to our example, it would have been far more productive — if less elegant — to build a minimal prototype, the so-called minimum viable product or MVP, carrying the primary function, so that customers could test it quickly and give immediate feedback.
Positive? Good — carry on, add something and repeat the tests.
Negative? No great harm: there’s still plenty of time to change something that hasn’t taken too many resources and isn’t yet highly complex.
Today, with digital everywhere, the idea has evolved further into the pre-prototype and so-called smoke tests — building a shop-window page, say, that lets you measure prospective customers’ engagement with it.
The build-measure-learn cycle
Lean means slim, and before the method was defined, so-called lean thinking — spare, essential thinking — and agile methods were spreading.
The goal was to find a route to a sustainable business while cutting time and cost drastically, and with them the odds of failure.
That’s achieved by repeating the cycle build, measure (analyse the results), learn (learn and adjust). That way changes and mistakes don’t land heavily.
Split tests and actionable metrics
Another foundation of the lean method is split testing, or A/B testing, which means producing slightly different versions of the same prototype to test which proves most effective and best liked. All of it, again, based on real, concrete feedback.
Hence the importance of defining which metrics you judge the results by — metrics that have to be meaningful (actionable metrics) rather than flattering (vanity metrics).
Criticisms of the lean method
Some don’t agree with this method, at least not fully. The main faults identified are that the cycle moves too fast for accurate judgement and causes important aspects of the customer’s response to be missed, that it creates false negatives or positives, and that it produces a flood of feedback capable of confusing the entrepreneur’s judgement.
Another criticism, aimed particularly at putting the prototype on the market quickly, comes from the fear that the idea may be copied. To my mind an idea can be copied at any point in the process, and above all, if the strategy behind the idea isn’t copied too, the copy will be of little use.
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How to raise funding
Here we come to a rather thorny subject.
First, it’s worth saying that the first funders are the founders themselves, particularly while you’re still at the idea stage. That phase is called bootstrapping. The hope is to be able to self-finance, or at least to cover the initial investment with the proceeds of the first sales.
If that doesn’t happen, the founders will have to find investors or new partners willing to share in the profits — and in the risk.
The first step is drafting a business plan describing the startup’s intentions, strategies and prospects precisely, but also carrying plenty of solid numbers, starting with the results of the first customer tests and the corrections made. As we said, the composition of the core team matters a great deal too.
If the most logical idea seems to be asking a bank for a loan, we’ll say straight away that it isn’t a viable route, because banks invest only in businesses already trading.
The first step can be turning to friends and family, who out of affection and trust might decide to give you and your co-founders a push.
Once that affectionate capital is exhausted, let’s look at the options open to you.
Work for equity
Italian law provides for the work for equity formula, which lets the incubator hosting the startup, or the consultants working with it, be paid in shares. They can therefore become a first source of funding.
Equity crowdfunding
Equity crowdfunding is a fairly new way of raising money, and Italy was the first European country to legislate for it, in 2012. Initially very restrictive, the rules have been revised repeatedly, giving investment ever more room.
The “crowd” of investors can put money into innovative startups and small and medium-sized businesses in exchange for shares in those companies (hence equity), through authorised online portals.
This form of funding keeps gaining ground. Consider that it went from €11.7 million invested across 50 funded startups in 2017 to €36 million across 114 in 2018. The number of investors tripled over the same period, from 3,300 to 9,500.
The main portals worth pointing you at are Mamacrowd, CrowdFundMe, Opstart, 200Crowd, BacktoWork24, WeAreStarting and Walliance.
Business angels
The typical funder in the startup world is the business angel, an informal investor, generally an individual, who puts capital, knowledge, experience and contacts into the startups they consider promising.
Funding from a business angel involves handing over shares in the startup, on terms agreed between the parties.
Venture capital funds
Venture capital funds are made up of investors who in turn have to raise capital, mainly from institutional funds.
Generally the three things that lead venture capital to invest are: a solid, highly capable team; a very large addressable market; and a product or service that already has a competitive advantage.
Venture capital can come in at the seed stage, when the startup is getting going, generally also bringing as much expertise and help as it can to get it off the ground — or it can come in at a later stage, when the odds of a good outcome are easier to predict.
Venture capital usually requires a seat on the company’s board until exit.
Some of the most significant Italian venture capital funds: Five Seasons Ventures, Programma 102, LVenture Group and Innogest SGR — though there are plenty more you’ll find easily online.
Conclusion
To close: through this lesson you’ve learned mainly what a startup is, how to build a successful one, which judgements you have to make before setting out, how much timing matters — more even than the idea — and what characteristics an idea needs in order to win.
You’ve also grasped how important it is to put together a good team, both for raising funding and, more still, for the emotional, practical and motivational support it gives. You’ve met the principles of the Lean Startup method and the various funding routes open to you.
As we said, a lesson on innovative startups and the Italian legal framework around them will follow — but the main purpose of this introductory lesson was to make you aware of how complex the subject is and of the thinking that has to sit behind your decision.
We sincerely hope you realise your dream, as long as you set out knowing what you’re walking into, however high your motivation.
If you enjoyed this lesson on successful startups, stay tuned to your favourite Growth Hacking Academy.
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