Monday 19 August 2019

Startup diary: Don't fall victim to the myth of an 80/20 shortcut

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Richard Rodger, Voxgig founder

The startup world is littered with clichés and just-so catchphrases. Many of these are uttered by the denizens of the startup world without irony and with a full sense of earnestness. But like all things trite, they hide a kernel of truth. The trick is to do the hard thinking that applies the cliché to your company. Previously, we covered 'eat your own dog food' and 'you need lead bullets'. This week, let's talk about '80/20 solutions'.

There is quite a bit of crossover between corporate-speak and startup-speak. Both are languages of political obfuscation in the best Orwellian sense. The advice to use an 80/20 solution is one of these phrases.

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It comes up frequently in the startup world simply because your limited resources mean you don't have much choice about it.

The key idea is that 20pc of the effort generates 80pc of the value. It is implicitly assumed that this is the first 20pc of said effort. This is often used as a justification for building a minimum viable product (MVP); it's the first 20pc of the product, after all.

But since your MVP will barely begin to move your company forward, you can already see the cracks in this idea. Life, and business, is not so simple. The problem with adopting the 80/20 mind-set is that it inverts cause and effect.

It is a commonly observed pattern in many business contexts, but only after that fact. The top 20pc of your products generate 80pc of your margins. The top 20pc of your people generate 80pc of the productivity. The most demanding 20pc of your customers generate 80pc of support tickets. This is a natural statistical phenomenon.

Among economists, it is also known as the Pareto Principle, named after the Italian economist Vilfredo Pareto, who noted in 1896 that 80pc of the land in Italy was owned by 20pc of the population. Note again that in this case, it was an observation after that fact.

What is so tempting is to believe that you can build just 20pc of your product to get 80pc of the benefit. The problem is that you can't tell which 20pc to build in advance. By the law of averages, some startups will get this right, survive to spectacular lengths, and lead everyone else astray as they try to copy them. A great many more startups spend a decade or more in the wilderness filling in the missing pieces before they finally get the business to work. Nobody wants that, so everybody looks for the shortcuts.

The 80/20 idea is one of those shortcuts, and you should be very wary of it. It will be true once you are successful, but almost certainly not before.

Our own history of product development at Voxgig is a good example. In 2018, we tried to launch a series of speaker training programmes to support early marketing for our yet-to-be-released product. These felt like they could be a quick win: an 80/20. It doesn't take too much to organise a training course, and we already had the speaker contacts to get good trainers.

But the courses did not sell, and we had to cancel them. Why? Because at that early stage, we had not yet built enough of an audience to sell to.

Even now, we do not estimate that we would generate sufficient demand. The speaker training courses do not form part of the magical 20pc.

Luckily, we learned this lesson quickly and shut them down before expending too much energy on them.

The lesson here is that you can't base your strategy on picking the key products or features, winning with those, and then filling out your product later. What actually happens to most startups is that they have a good idea of the basics, but it's not nearly enough to deliver 80pc of the market. You only discover what the market needs once you go out there and talk to people, and get trial customers.

A case in point: it turns out that many technical speakers also write books and record training videos, and that this is an important source of extra earnings for them. Adding support for these materials to our speaker profiles is something we are doing right now, but not something we thought was in the 20pc originally. Down the road, we may still find that it is not - only measurement will tell.

There is no shortcut to finding that 20pc, and no real way to avoid building the other 80pc of your product.

Getting taken in by an after-the-fact statistical observation is a dangerous mistake for a startup, so beware.

This week, we have 79 open issues and 172 closed issues. This is a metric that only gets worse the more users and more engagement we have, which is somewhat ironic.

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