Startup Investing: How to build a snowball
Alice Schroeder named her Buffett biography "Snowball". What a wonderful analogy for compounding! In this article I describe how I build my snowballs aka. startups.
|A wonderful snowball (flickr)|
The maths of rolling a snowballImagine a snowball on top of a hill. The ball is sunk into the snow coverage. Without a force pushing the ball to one side, it will not move. As we push the ball to one side, the ball moves and collects snow. As more and more snow is collected the ball grows bigger. This growing process absorbs some if not all of the pushing force.
So, if the ball is too small, too slow or the hill not steep, the ball has not enough energy to support the growing process. Than the ball will just stop rolling. If the ball has more energy than the growth process requires, the ball will further accelerate thereby increasing its kinetic energy. As the ball has more kinetic energy it can accelerate the growth process.
The growth process creates friction consuming energy. Similar to growing company using capex and other expenses capital is costumed.
Building a snowball
The first step is to build a snowball / startup. As I am young I have not much capital to build a startup (using much snow) but I have some time, much creativity and being a digital native. This leads to the problem that my snowballs are small. I have to push them around in smart ways to add snow.
I have already build one startup which is currently incubating into a self sustaining business. As I love the process of getting deep insights into the problem's of my customers. I want to describe my process here.
The first step is to walk around in life with wide open eyes looking for other businesses and pains customer have. As I am a digital native I have good insights what technology can and cannot do.
The second step is to filter out business ideas fast. The earlier an idea is out the more time and money you save. Ideal I cannot come up with a technology solution for a pain in a fast way it's filtered out. I do not try to jump over 6 foot hurdles, I jump over 1 footer. The next thing is to understand what players (customer, supplier, regulator) are involved. A good solution is not complex and fits on a napkin. In my case only one idea in 2 years is good enough to go to the third step.
One thought on technology. In most cases technology does not do something new but better or at less cost. For example Uber is not new in the sense that you can call cabs since 1906 by phone. As Rory Sutherland pointed out, it just makes the waiting experience much better. Another widely known ability of tech is to cut out intermediary from the supply chain and saving expensive manual labor.
Step three is to do small customer tests. Build your idea in power point and let customers click / play through it. Keep time and money investment's low. Normally customers come up with good ideas how to improve the process. Key here is to find out if they would pay for it. If they do not, filter the idea out.
Step four is to build the real thing as well as a marketing and sales. Here investment's are high but you could decrease the risks by rigorous filtering.
After step four there should be some revenues. If revenues are high enough to cover your expenses you have a rolling snowball. If not which is common the ability to find investors is much easier than with just the idea.