In a lean startup world of intense focus on Product-Market fit and Minimum Viable Product (MVP), many entrepreneurs are not asking a broader question about their work. What am I building?
The process of creation must always be mission oriented. The mission may not be specific but at least should be directionally correct. Capital light and quick coding have created a myopic view of creation. This has also created a bit of a gluttony of “walking dead” in markets like Atlanta where the follow on capital can be sparse for first time entrepreneurs. Seed investments of $250,000 allow a company to build some software quick and test the market. However, the larger roadmap isn’t always clear. If these capital light investments are merely experiments that lead to a conclusions that de-risk the opportunity in order to raise more capital for the next experiment then these conclusions should lead to proving a larger hypothesis.
Many of these “companies” without capital acceleration have a potential to turning into a product, tool or worse a feature. The highest value multiple companies typically solve real problems for a customer that creates highest value to the customer. This value is generally apparent on their financial projections both in revenue growth and margin elasticity. …Enter AWS (Amazon Web Services) or any other cloud provider. Their model is to scale quickly with your startup with a very low barrier to purchase. However, what happens when you do scale? You pay them more. This means that they have revenue growth and elastic gross margin, while the startup has revenue growth with fixed gross margin. It would then seem that the startup is really just a feature on AWS. Outsourcing your systems engineering to another company has a cost, and Amazon is very happy about it.
So, what are you building?
If the answer is a Company, then consider the above. Building a technology company requires a plan beyond MVP and quick coding. While it may make sense to start with AWS, having a plan for migration is key. Technology companies should be inventive and lazy at the same time. Effortless selling more with an ongoing reduction of cost is inventive and lazy. There is an inflection in valuation when a startup can prove revenue growth through declining CAC (Customer Acquisition Cost). This valuation multiple further increases when the startup can show gross margin increase. Building a technology company requires Research and Development. This means Engineers…Engineers are not Computer Scientists (you need them as well). Bandwidth and rack space are a commodity, Systems Engineering is not. Have a plan to bring Engineering in-house once you outgrow AWS, then you may actually be building a company.
