The 'Rule of One' is the Winning Formula for Startups
There’s a winning formula that’s key to success for early-stage startups. Unfortunately, most founders out there only get half of it right.
We all know that for the early-stage startup, launching in a market dominated by industry dinosaurs is about speed. While a big company’s massive resources and budget come saddled with endless layers of bureaucracy, startups can move quickly. With millions (or billions) on the line, big companies generally avoid risk. Compared to them, startups have nothing to lose.
But there’s more to beating the established companies than speed – and this is something that many of you out there will miss. Those of you early-stage startups that live to fight another day, that become successful, will also distinguish yourselves by your laser-focus.
To put it more concretely, the winning startups are those of you that hone in on one problem, one customer, one product, one killer feature, and one revenue stream. This is a formula I like to call ‘The Rule of One.’
Solve One Problem, For One Customer
The fact of the matter is people don’t buy products; they buy solutions to problems. Startups can’t hope to solve all the problems for the whole market – and they shouldn’t want to. For a startup, the opportunity to narrowly focus on one specific problem, and to build the perfect solution to that problem, is an advantage that must be exploited.
Big corporations don’t have this opportunity. Slaves to their success, they’re forced to serve large audiences with mass-market products that ‘work ok’ for most users (but are perfect for nobody). They must cast a wide net, because that is their only chance to have a meaningful impact on their bottom line.
Startups, on the other hand, have the ability to zero in on one problem for a very specific, small and defined audience. Done this way, a small bite out of the market can prepare a startup to take increasingly larger bites as their fervent community of users grows.
Don’t try to “boil the ocean” right out of the gate with a mass-market product. Unless, of course, you think competing with massive companies on a level playing field is a good strategy.
Facebook started by focusing on one dorm at Harvard.
Mailchimp was created to design emails for the clients of one design consultancy.
Udemy launched by offering startup courses to tech founders in Silicon Valley.
Shopify started as a shopping cart solution for a snowboarding website.
Groupon was created for one office building in Chicago.
Houzz was built to help a small group of friends share ideas about remodeling.
With One Product, Offering One Killer Feature
If you’re wisely aiming small, your laser-focused launch is only going to require one rocket. But that rocket’s got to showcase one really awesome attribute.
Put more plainly, successful founders know that it’s smart to stick to only one product in the beginning. Trying for more than one product will drain important resources and will distract from the necessary process of perfecting your number one offering. It is also a tell-tale sign for investors to know a founder is unfocused.
Perfecting your one killer rocket means ensuring it’s got something that lifts it far above your competition. So, you’ll be smart to focus on giving one product something special – knowing that later you’ll be able to use customer feedback to add new features and broaden your market reach. In the beginning, you are much better off doing one thing really well, rather than trying to do multiple things decently.
Look around and you’ll see that this approach is actually slowly being embraced by even the most established companies. High product complexity, they’ve learned, can become a problem. For this reason, legacy automakers are cutting their number of models and variations, hoping that renewed agility will enable them to better compete.
Case in point: most people think that consumers want choice. However, compare the variations offered by Dell versus Apple. Dell, a business which has struggled, has on offer an unlimited number of computer options at Dell.com. Check out Apple.com to find the opposite. An earlier Chief Financial Officer at Dell.com, which went private in 2013, was quoted as saying, "We were all a bit frustrated with the pace at which this transformation was moving. It's a work in progress." Apple today is the second most valuable company in the world.
The reality is consumers don't want choice; they want freedom from choice. If you can solve one problem really well for a customer with one simple feature, those consumers telling all their friends is the only marketing you’ll need.
And One Revenue Stream
If you’re getting my drift, it’s about focus, focus, focus. And that includes, lastly, aiming for one simple revenue stream.
For revenue streams, “simple” means there are very few steps between when you engage a customer, and when you receive revenue. If someone pays you in exchange for your product, that’s great! If they continue to pay you month after month (a subscription), even better! These are simple revenue models that only require one “step to revenue”. If you are trying to get clever with your revenue model, you are likely increasing the “steps to revenue” and making things harder on yourself.
And, if you do some simple math, you’ll realize that your primary revenue stream should not be advertising.
Why? Well, as of 2020, CPM rates generally put the cost of a marketer reaching one thousand people at, say, $5 - $10 in a given market. That means that a company will need to generate 1 million views to make just $5,000 - $10,000. Keep in mind this is revenue, not profit – and doesn’t include staff, server costs and other expenses your company will incur. In other words, your company is going to lose substantial amounts of money with an advertising revenue model unless you are driving tens of millions of views per month. Are you willing to play that lottery?
A counterexample is from Munjal Shah, founder of Riya. Over a decade ago his team built an image facial recognition tool that, back in 2008, was a pioneer in its space. When the company was considering ways to monetize the technology, its first version was an online photo portal that would rely on advertising, similar to Flickr.
This wasn’t an impossible idea, but in order to receive any revenue they would need to (1) attract tens of millions of users via their novel technology, (2) get those users to upload and organize a lot of public photos to keep them coming back, (3) harvest data from those users, and (4) use that data to sell attractive packages to advertisers. That’s a lot of steps to revenue.
Instead, the company pivoted in order to focus on e-commerce, using its core technology to allow people to search for products via images they find online, and Like.com was born. The company, which generated revenue when customers bought things like handbags they found through their site, raised close to $50 million in funding and reached revenue in the $50 million per year range.
Like.com was acquired by Google in 2010.
In conclusion, no advertising, and one revenue stream. One problem, one customer, one product, one killer feature, and one revenue stream. When just out of the gate, even the fastest horses need blinders. Having recently launched, even the nimblest startups need to keep a sort of tunnel vision to find their way.
The Rule of One formula is about wisely prioritizing tasks and allocating resources. It’s about turning limits of size into a distinct competitive advantage.