What a Startup Is: A Search for a Business Model
A startup is not merely a smaller version of a large corporation. While established companies execute known business models, a startup is a temporary organization designed to search for a repeatable, scalable, and profitable one. At its inception, a startup is essentially a collection of untested guesses written on a canvas. The traditional approach of using rigid product management processes—common in large companies—leads to failure for nine out of ten new products because founders treat their vision as fact rather than a series of hypotheses. To succeed, entrepreneurs must shift from execution to a process of discovery, focusing on turning unknowns into knowns before resources are exhausted.
Entrepreneurial ventures face two primary types of risk: invention risk and market risk. Invention risk occurs when the main challenge is whether the technology can be built, such as a new cure for cancer. In these cases, demand is often guaranteed if the product works. Conversely, market risk involves products where the technology is manageable, but it is uncertain if customers will want or adopt the solution. Most modern startups, particularly in the web and mobile space, deal primarily with market risk. Success requires a dedicated process of customer development, not just engineering, to determine if a customer even exists for the product as specified.
The history of entrepreneurship is littered with well-funded failures that followed a seemingly logical path. Companies often collapse not because they failed to execute their plans, but because they executed the wrong ones. A prime example is Webvan, which raised hundreds of millions of dollars to revolutionize the grocery industry. They built massive automated warehouses and hired experienced executives but went bankrupt within two years. Their downfall stemmed from treating a startup like a large corporation, using a product-centric model to launch on a fixed schedule. This works when customers and their needs are known, but for a startup, almost everything is a guess. When founders treat these guesses as facts, they set themselves on a "marketing death march," spending enormous amounts of money to scale a business before they even know if anyone wants what they are selling.
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