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Entrepreneurialism: Taking the Leap

How to build a business with the Lean Startup Method

Today we’re walking about how to build a business, an unusual topic for PVC to be sure. You can also watch my recent webinar about this topic here. For those of you who don’t know me, I am the founder of EditStock.com, a company that sells unedited films to students as editing practice material.

I’m extremely proud of the work EditStock is doing. We have hundreds of prestigious customers like The American Film Institute (AFI), Full Sail, and Carnegie Mellon along with thousands of people looking to progress their editing career goals.

But I’m not rich, at least not yet. And I’m not here to give you a roadmap to getting rich either. I’m here to share with you the modern steps to building a business, which is something called the Lean Startup Method. This article aims to outline where business ideas come from, give you some perspective about what business are really made up of in America, and provide the basic steps to scale your great idea into a sustainable business.

Where Business Ideas Come From?

Most companies start with a person building a product that solves a problem: typically their own problem. It’s as simple as that.

When I was a film student at an editing school in Burbank, California we never had any good footage to practice with. Think about this – I graduated from a school that specialized in training editors and I only had the opportunity to edit one short film (and that film was thirty years old). Many in my cohort finished without editing any films at all.

That was my problem, and it was from there that the idea for EditStock was born. To be accurate, technically this is where the idea for MovieParts was born. I created a mock up website in Photoshop and started telling people about my idea.

“I will do this” I said. “It has to happen.” And then I did nothing about it for the next four years.

Product Market Fit Part 1: MPV to Product

When deciding if your idea is worth the time to build into a business you need to materially investigate two factors:

  • Do I have a product that really solves a problem?
  • Are there enough people who want that solution to make a business out of it?

These two factors together are commonly referred to as product / market fit. Think of a product as a solution to a problem, and the term market as the total amount of money all people who have that problem collectively are willing to spend to solve it.

Product / Market Fit: The Product

There is only one way to know if you have built a product that fits the market, and that is by showing it to customers and asking them if they want to buy it.

The Lean Startup is a book written by American entrepreneur Eric Ries. In it he describes the approach to building your first product, what is more commonly known as the minimum viable product or MVP. Essentially you want to create the cheapest, most stripped down version of your product that you can as fast as possible so that you can get it into the hands of your customers and find out what you should really be building. Your customers will tell you if your idea is valid with their wallets.

Reid Hoffman, founder of LinkedIn said, “If you’re not embarrassed by the first version of your product, you’ve launched too late.”

When EditStock shared its first film, Handicapped John with our first customers we learned a lot about what they valued. Our customers wanted to know how difficult a scene was to cut, so we developed a difficulty meter icon that we added on each product image. Schools wanted to know if the projects had appropriate story lines to teach in their classrooms. That request caused us to add ratings to our EDU collection.

Before getting your product into the hands of your customers and starting to sell you simply do not know what your customers want.

Developing the MVP

A lot of business owners make the mistake of investing their life savings into a secret product development process. They will spend thousands of dollars on patents, trademarks, and feature development all without showing the product to a customer first. This is a financial disaster waiting to happen.

A terrific piece of advice I got early on was to show my product to 100 people. This is a large enough number to force you beyond your comfort zone of family and friends. You need to show people who aren’t going to be shy about telling you what they really think of your product. One hundred people is also enough to notice patterns in their feedback. If you get the same feature request over and over again that is probably the right place to start developing.

Product / Market Fit: The Market

As important as it is to know your product it is equally important to know your market. A market is essentially a gathering of customers and businesses. At a minimum before starting your business you should investigate the following:

  • Who specifically do you want to purchase your product?
  • How big collectively is that group of people?
  • Is there any competition?
  • What kind of business do you want to build?

Let’s start with who your customers are. You might find that you actually have several groups of customers in your market called segments. For example two of EditStock’s customer segments are educational institutions and their students. Each segment has different needs. Schools need multi-user licenses and purchase order billing, students need blog articles about how to get a job after graduation. Which should we develop first?

To answer the question of what to develop first we have to know the size of each market segment. Obviously you want to focus your energy on the place with either the largest or the fastest potential financial return on your time.

Researching the size of a market is something that a lot of first time entrepreneurs (such as my self) wrongheadedly skip out on. New entrepreneurs make vague references to their market size like, “I’m sure tons of people will want to buy this.” But tons is not a number. What new entrepreneurs should be doing is finding data points that can give them a true sense of their market size.

Here’s an example of how to determine market size. No surprise here, EditStock is interested in the size of the “film student” market. By Googling “number of film students” we found an article claiming that there are at least 608 film schools around the world, 48% of which are in the US. The article doesn’t tell us the number of students enrolled, but at least this is a data point that we might be able to use later.

We kept looking. Further research found an organization called CILECT, an international body of 180 film schools who write that their estimated 9,000 teachers train more than 55,000 film students a year. This means that the average CILECT film school is graduating 306 students per year, at least according to them. Now let’s multiply 306 by the total number of film schools which is 608. That gives us a total of 186,048 film students graduating each year. Now we’re getting somewhere!

Of course, not all those film students will want to be editors, and not all those schools teach editing. We picked up the phone and called a random sample of 50 film schools in the US and found that about two-thirds of them teach editing classes. Now we can approximate that 123,000 students graduate haven taken some kind of editing class each year. If each student represents the potential to spend $50 on footage that means EditStock’s potential editing student market segment size is $6.15 million.

I know that number feels big, but it is actually quite small compared to other markets. For example Americans spent more than $570 Billion on new cars each year.

Can EditStock become a billion dollar company selling only footage to college students? No. But can we be a multi-million dollar company? Yes, we can. Determining if a market is “big enough” for you to enter depends on your personal goals for your business. The big take-away is to look for concrete numbers and decide what you are going after.

Finally, any new company needs to investigate what competition is out there. Most people who start a business think of competition only as a bad thing, but let me tell you it isn’t. You can learn a lot from your competition. You can gage the size of your market, learn from their sales process, and gain insight into what your customers will expect. Perhaps most importantly you can figure out how your company can add value to what’s already out there.

When to start selling

Once you’ve built your MVP you should start selling immediately, meaning from day one. In fact, a lot of entrepreneurs start selling even before they’ve built their MVP. Crowd sourcing companies like KickStarter offer a great way to get your product in front of customers to test the demand for your product even before you’ve finalized your MVP, and certainly before you’ve ordered any costly inventory.

The Lean Start Up

The rest of the Lean Startup process is described as a wheel with three pillars: build, measure, learn. Let’s run through the build, measure, learn Lean Startup Method with a new feature that EditStock is working on now, the ability to re-download previously purchased products.

Re-download requests are the number one tech support issue we get. Our customers have problems beyond our control: their hard drives die, laptops fall off the bed, and media becomes corrupted if it’s looked at the wrong way. Customers understandably want to be able to re-download their previous orders and we should offer them a way of doing that.

When we are in the build step we are essentially creating a hypothesis for testing in the real world. EditStock is saying that by adding this new re-downloading feature we will improve “x” about our company. X must be a measurable statistic or else the hypothesis isn’t thought out well enough to be worth pursuing. In this case we want to measure the number of support tickets coming in with this request.

After the build step we measure the results. If the number of support tickets we receive related to this issue goes down then we succeeded. If it stays the same then we have to think of another idea to fix this problem for our customers. Either way, it’ll be the measurement that determines if the re-download feature was a successful experiment.

Finally, we need to learn. If the solution we built did not effect the number of support tickets that is ok, but it’s important to think about why and not just move on. We can learn lessons from our experiments even when they “fail.” From EditStock’s experiment trying to solve the re-downloadable order problem we learned that our new file delivery system had faster download times, and allowed us to hold zip files larger than 5GB per portion in the cloud, something we could not do before.

The goal of the Lean Startup is to create a process ensuring that a company is spending time and resources efficiently. In fact, resource and time management are at the very core of what it means to be an entrepreneur. Anyone can have a great idea for a product, but running a business is really about creating a process that is constantly improving products, and recruiting new customers. Build, measure, learn.

The Truth About The Size Of Business In America

Pop-culture’s narrative of growing a business sounds like this: you come up with a brilliant idea, an investor comes along with bags of money, then there’s a montage and the next thing you know your company is worth millions.

Being a business owner for four years now I’m all too familiar with pop culture’s view on the entrepreneur as well. When I tell people that I run a company their reaction is usually either reverence, or a little patronizing. They either think I’m Tony Stark, or a starving artist.

The truth is of course somewhere in the middle. Only 4% of business in the US have an annual revenue of $1 million or more. According to the US Census there are more than 27 million companies in the US, but only 650,000 of them have 20 or more employees. Nearly 21 million companies have just one full-time employee, and that’s the owner. Few entrepreneurs end up like Tony Stark. Most are freelancers, designers, repairmen, plumbers – in other words hard working, blue collar people who like being in charge of their own destiny.

Scaling Your Business: Building funnels and audiences

Once you have researched your market and developed a product that customers love, its time to scale your company. Scaling a company involves building two things: a funnel and an audience.

A funnel is the process your customer walks through from finding your store to buying your product. A funnel should contain at least 4 major steps: building awareness of the product, building interest, generating leads, and converting leads into sales. Every step of a funnel needs to be constantly fine tuned as your process and customers evolve.

EditStock’s funnel starts with our landing page, which offers information on what the product is. We generate interest by offering a free sample scene. We collect email address in exchange for that free scene, which are our leads. We then use a series of automated drip emails to entice our leads into buying our products.

The measure of a funnel’s effectiveness is called the conversion rate. The conversion rate is the percentage of people who purchase vs the number who entered the funnel. If you have a conversion rate of 1% that means out of every 100 people who visited your store one of them bought something. There is no “good” conversion rate. It varies greatly from industry to industry.

Throwing money at advertising is a common mistake new companies make. Not getting enough sales? Throw money at Facebook ads. Not “enough” web traffic? Spend the company’s hard earned money on Google ads. If you’re buying ads and your conversion rate is getting worse it means that either your ads are ineffective or your funnel is leaking.

Building Your Audience

With your funnel defined it is time to focus on building your audience. This process takes time. Part of the EditStock funnel is to collect email addresses in exchange for a free sample scene, but only so many people per day will sign up.

The backbone of building an audience is a base of subscribers; be it an email list, or social following. EditStock uses an email list as its main audience information platform. Just think, when EditStock publishes a new project we can tell all of our leads about it at once.

Members of your audience are significantly more likely to place an order than anyone you pull in through advertising. Plus if your funnels are working well, about 1/3 of your customers will become repeat customers.

When you spend money on advertising you are pouring people into the top of your sales funnel. It’s up to the funnel to make the sale. If your funnel is leaking then you are wasting money advertising. It’s like pouring water into a bucket with a hole in it.

The last part of building an audience that we’ll talk about today is the idea of push vs pull marketing. Push marketing is when you lure customers with sales, and ads. Pull marketing is when you generate content that your audience wants like tutorials, podcasts, and blog articles. Companies are investing more and more into their blogs because pull marketing is an effective tool for building an audience, creating brand loyalty, and displaying your brand as an expert in your field.

In my opinion you should be using both push and pull marketing techniques. Provide your audience with tons of interesting content, and once in a while have a great sale.

When to start and when to jump off

Perhaps the two most daunting questions a first time entrepreneur ask themselves before starting is: When do I start? And when do I take on my business full-time?

I had the idea for EditStock four years before I finally started. I wish I had started on day one. I can honestly say that the assumption of failure is what prevented me from getting going.

Just two days after my thirtieth birthday I received a newsletter email from a company called iFilmDailies. The newsletter read, “So how does iFilm Dailies work? We package your movie, along with its assets (dailies, script, etc) and offer it to film students & aspiring filmmakers, teachers and schools.” I was destroyed. How could I compete with a company that had already started? I was behind and I was inexperienced.

That’s when I stopped feeling sorry for myself and took action. It became more painful to not start then to fail. Ironically iFilmDailies closed not even a month after launching. I doubt they sold a single thing.

Starting and diving in full-time are two completely different things. It would take two more years before I could make EditStock my full time job. I recommend starting full time on your company either when your company is large enough to sustain your life, or when you have a significant amount of money saved up from your current job. It is better to be safe here than sorry here. Try not to fuel your startup with debt!

Conclusion

Business ideas are everywhere, and discoverable by anyone. But as much as we’d like to think our ideas are worth millions, they are worth nothing if we don’t take action.

When you start your business make sure you get it into the hands of real customers as fast as possible, and start selling from day one. Don’t waste time on “secret development” projects.

Define what you consider business success to be. Are you trying to build a million dollar company or a life style business?

Finally, this is going to take time. Give your self permission to walk down the road without the pressure of achieving immediate success.

I want to leave you with a thought from Bill Gates, “People overestimate what they can do with one year, and underestimate what they can do with ten.”

If you have an idea for a new business why not start today?


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Misha Tenenbaum is a film and television editor, a certified Advanced Final Cut Pro Instructor, an Avid Certified User (ACU) and founder of EditStock. His editing includes "Immigration Tango", winner of Best Picture at the…

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Eric Francis Harnden
Eric Francis Harnden

Great article Misha!