When operating a startup your top priority is finding a repeatable and scalable business model. This means, the more hypotheses about your customers, pricing, distribution, market, etc you can test and validate, the more likely it is that you will find a correct model for your startup. Effectively, the life of your startup can be measured in terms of how many attempts at finding that model, or iterations, you have before you run out of money. This understanding leads to a simple equation from Eric Ries' blog:
Looking more closely we see that there are three variables we can optimize for to increase the number of iterations.
1. Increase cash
Find revenues. Acquire customers. Raise capital. These are a few of ways startups can increase cash on hand. The first two often come with the added benefit of increased learning about the market or customer. Bootstrapped companies are usually very adept at doing this because their survival is strongly dependent on being able to make money. Raising capital, though not necessarily recurring, is sometimes the best way for a company to get a large injection of cash. Typically startups will raise money from one or many of the following: friends and family, angel investors (wealthy individuals investing their own money), and venture capitalists or super angels (institutions or individuals investing money from a larger fund). These are the most common sources of cash in an early stage startup, though resourceful entrepreneurs find all kinds of other ways to increase cash.
2. Decrease burn rate
Spend less. Be frugal. Eliminate everything that does not contribute to iterations and validated customer learning. At BackType we operate a large cluster of machines to collect, process and serve data and insights. The majority of this infrastructure is profitable to operate (i.e. it supports customers), but we still constantly look to eliminate anything that is not directly related to our focused iterations. Another way startups can reduce burn when cash is scarce is by putting equity to work. Balancing cash and stock compensation heavily towards stock not only aligns incentives, but it also decreases burn.
3. Decrease time of each iteration
Build MVPs or tent-pole features. Create process to build more quickly. We focus manically on speed. One-button deploys, unit testing, customer development, and customer surveys are just a few ways we try to move faster and minimize time spent creating waste. We also have a process called "BackSweep" where we keep a page on our wiki with all the things that slow us down. On the last Friday of every month we go through this list as a team and knock out the biggest obstacles. A great way to focus the entire team on creating iterations as fast as possible is by creating an operating dashboard (aka a single place for your entire team to see where you suck the most).
Generally, you're trying to optimize all three variables at the same time. Optimizing one variable can often negatively affect another. For example you could decrease burn rate by firing half your team, but you will almost certainly increase the time of each iteration. Some activities can have a negative affect on iterations in the short term, but can be extremely benefitial in the long term. Fundraising and recruiting are two great examples. When you're out raising money for your startup, you're not working on an iteration. When your team invests heavily in recruiting top talent they are spending time that could otherwise be used building stuff. However, both of these activities will likely improve your number of iterations in the long run.
There's no science to knowing what to focus on; you have to find the right balance of maximizing iterations in both the short and long term.
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