Beware the million-dollar cheque!

• November 28, 2011

Associate Peter Hanschke is an Ottawa-based product management specialist. His post is part of our continuing series about the ecosystem necessary to bring technology to market. We welcome your comments.

By Peter Hanschke

Startups begin with little to no money. Much of the early development of their product is funded by the owner, by his or her friends and maybe even by an angel. Every dollar is used wisely and focused at the topmost activity. To build the product from concept through to MVP (Minimum Viable Product) and to the point where a small number of customers can use the product, the company has one, maybe two, full- or part-time developers. In some cases the owner pitches in occasionally to help in development or testing.

Young and lean

In such an environment, drive, enthusiasm and the will to succeed fuels the development process. The product takes shape as the development iterations roll by. Occasionally more money is needed to fuel the development engine, which the owner must somehow secure. Without real customers validating the solution, it’s difficult to get significant funding to speed up the development process or build a more enriched product.

Despite the tough times at this stage of the startup, this is in fact a very desirable situation.

A frugal existence means that every hour the development team works on creating the product is closely inspected. Every element that is added to the product (a line of code or a chip or a circuit) is targeted at reaching the objectives of the product. In other words, every element plays a key role in securing those first few customers. Nothing is added for the sheer joy of building something “neat.” Why? Because the company can’t afford to spend money on adding things that do not contribute to reaching its early goals. Marketing campaigns are focused on awareness for the purposes of attracting customers, while operations are located in the minimal required office space. The startup embraces a frugal mentality and only spends what it absolutely has to.

There is an interesting byproduct of this situation … business frugality leads to the creation of a lean product – a product that only contains what is absolutely necessary in terms of functionality, user interface, documentation and so forth. This does not mean that the product is awful or ugly. It just means that it meets the early objectives and absolutely no more. If the rules in my MVP blog are followed, then in addition to being lean, the product will support the primary use scenarios that are needed by the early customers in the target market. Come to think of it, this is the ideal scenario.

Over indulgence

Products as they age or mature have a tendency to become large and bloated. How does this happen? Some products expand to address additional market problems in the existing market or to address other markets. In many cases, however, the resulting “bloat” is a result of receiving the million-dollar cheque.

When the product is first formulated, the members of the startup have many ideas for it. They create lists of features. They cross-reference the lists with potential competitors, if they exist. Business reality sets in and given their financial situation, business frugality drives what is added to the product. In other words, only those features that will help to achieve the objectives are added. But those lists still exist. They may become a bit stale, but they still exist. Expressions like “when we have the time and money we’ll get to that list” abound.

Early customers react positively to the first version of the product, which leads to more customers, which attracts attention in the investment community. And this is where the problem begins – the startup receives its first large amount of money.

This can come either from an investor or a customer that places a large order. In most cases the reaction is to devote some of the money to marketing and some to development. On the development side, people are hired – maybe that original team of one or two developers expands to five or more. The list is resurrected and the team begins tackling each of the items on it. Additional customers add more requests to the list.

Before you know it, the product is no longer lean and it contains elements that are not necessarily in line with the objectives. Adding features and capabilities is like a marriage contract …until death do us part; once you’ve made the commitment to add them, they are part of the product until its end-of-life.

Avoiding middle age spread

Here are four suggestions to make sure that your product stays lean, even though your development team has expanded.

1. Maintain focus on objectives

Review the business objectives quarterly and adjust the product objectives to match any changes in the business objectives. Companies have a tendency to get caught up in the moment and forget about objectives. This will certainly lead to the adding of features that do not necessarily contribute to achieving business objectives.

2. Evaluate every requested feature against the objectives

Putting a system in place that easily and quickly allows you to evaluate how well each feature meets the business objectives. Take our old list of potential features, along with new features that come from customers or to address changing market conditions, and, as a team, rank them. This list will drive your Agile development process. As objectives change, re-evaluate each feature against the changed objectives.

3. Move focus to the market

Starting out focused on winning early customers is critical at that point in the company’s history. Early customers validate the product and its potential and attract the attention of the investor community. Now is the time to move your focus to the market as a whole instead of individual customers. This will help you build your product to capture the entire market. Individual customers potentially can drive your development in a direction that strays away from the needs of your target market.

4. Remember how to be frugal

Every once in a while take a break from the frenetic pace and reflect back on the good old days …the days when every development dollar was scrutinized to ensure that it was spent wisely. In particular, remember what you did during that early period to decide on what to build.

The intent here is not to reject the million-dollar cheque. In fact, receiving money is a form of validation that others believe in you and what you are doing. The intent, however, is to embrace the money and use it wisely … not waste it on developing features that do not contribute to reaching business objectives. The expression that “money changes people” holds true for companies as well.