Finnish start-ups are being celebrated on their ability to raise money, but few have yet built successful growth company and long lasting businesses. Number of the start-ups have burnt through the capital they have received and are in continuous demand for new capital either from investors or from the Finnish state organizations.
Only few have questioned the common approach being applied: are the Finnish start-ups really built smartly, using their capital effectively and are they creating growth companies with sustainable businesses ?
Method 1. Identify the problem
The common opinion is that you have to get together a great team, identify a problem and get financing to build a solution to the problem.
You could describe the process in three steps (after getting together the team)
- Building the product (solution)
- Getting ready to scale
- Sell, sell, sell
Step 1. requires a lot of money and founders are typically spending substantial efforts in finding financing very early in the process Speaking with financiers and government people requires a lot of time and presentations with bold promises. The longer you keep repeating the story, the more you begin to believe in it yourself. As a result founders get fixated on the solution before they even start building the product, let alone have validated there is demand for such.
As the cash is burning, founders are rushing to develop the product and directly jump in scaling the business- and once again raising more capital. At this stage many founders are raising capital full time.
Large number of people seem to think that selling is just about having and applying the muscle – the more effort, the more results. If the results are not satisfactory, just do more of the same, hire more sales people etc to “educate” the customers to understand the greatness of your offeringBut a sale cannot be forced, it only happens if the customer wants to. Understanding their want is about discovery, planning, analysis (multiple times again), building structure, validating, identifying, reading other parties weak signals etc etc. A sales process can last multiple months, sometimes even years.And it only happens when your offering is a must have for the customer.
I call this model PSC (Problem => Solution => Customer)
Method 2. I have a great idea !
This is the “mad scientist” scenario. Which in 98 % cases is a guarantee of the failure.
One comes up with a great product idea (solution). Then rush in to build it, believing “when they see it they will want it”. The Finnish system offers numerous ways to find financing for this approach in form of loans, grants or other similar financial aids aimed at building the product. Unfortunately this money will not create customer needs and in most cases the solutions produced are not solving any real problems for real customers – they are nice to have but not must have.
This approach is surprisingly common among Finnish start-ups and often get substantial amounts of government grants – but rarely any paying customers.
I would describe this SPC method (Solution => Problem => Customer) and would call it also “Solution looking for a problem” approach.
Method 3. Discover your customer first
Both Steve Blank and Eric Reis (Lean Start-up) state that the difference betweensuccess and failure comes from understanding customer’s needs. Indentifying and solving a problem has to be done from customer perspective and it has to be a problem the customers recognize they have
This means that building a start-up has to pay attention to real life customers from the start – a start-up should be built in three steps (borrowed from Eric Reis):
- Customer discovery
- Building pivots and validating
- Implementing and scaling
Working this way, start-up’s financial needs are modest on steps 1. and 2. Founders can focus on developing and validating their ideas until they find the one that works. This means lots of footwork and being able to adapt (remember Darwin). This is the learning phase which every start-up must go through to become a great company. If one does not add-value to partners, there can not be sustainable business .
Step 3. requires substantial capital , as it is about implementing the business model learned from the experimental lessons in steps 1 and 2and scaling the company fast to world scale.
Looking back on my own entrepreneurial history, using this model I was able to take a mature 700K€ p.a. business to 9M€ p.a. in less than 12 months. And keep it growing for next five years.
I would describe this being CPS method (Customer => Problem => Solution).
During last twelve months I have reviewed over 200 business plans in different stages. The most common approach of the Finnish business plans has been SPC. Interestingly, if you compare that to the some 20 Swedish business plans I have examined, 80 % of Swedish plans are using CPS approach. I do not know if this has any correlation to the number of world class high growth companies these countries have produced ?
