Around 90% of technology startups will never become successful. Most startup founders do not fail due to a lack of resources or technical acumen; they fail for another reason entirely: they invest time developing software for issues that aren't important enough to warrant a business.
Discipline is an absolute requirement to build a thriving company. Discipline means letting the data drive your decisions, rather than relying on your instinct.
When figuring out how to start a tech startup, it is common for early stage startups to adhere to outdated advice that they must create a flawless solution before ever engaging with clients. This invariably results in high capital outlay and a total loss of ownership in the fruit of their labor.
Smart founders today are able to identify and validate potential markets within days. They develop subpar versions of their products, and monitor how customers use those products before ever thinking of raising capital.
What You Need to Know Before Learning How to Start a Tech Startup
Before you write your first line of code, you must understand the current operational and financial climate in your industry. The landscape has evolved, and the expectations of investors today are far more stringent than in previous decades.
Likewise, the expectations of your customers are for value to be received immediately after purchasing a product. To establish a baseline, here are some statistics you should be aware of and track:
42% of companies that have failed have failed because of poor product-market fit.
The cost of maintaining an existing customer is estimated to be 6–7 times less than the cost of acquiring a new customer.
The costs to initially produce a product typically falls between $10,000 and $100,000, whereas the costs to create the legal structure for a company generally ranges from $500 to $5,000.
Most accelerators will charge 7-10% equity in exchange for up to $125,000 in funding, while some programs, like MassChallenge, provide funding in exchange for no equity.
How to Start a Tech Startup: Key First Steps
This stage of the product development process is what distinguishes between a successful firm and an extravagant hobby. A strategic plan consists of specific constraints, measurable results, and fast testing methods.
Testing Your Idea
You must confirm any potential product you create before hiring any developer or creating artwork for your product; otherwise, the product or service may never generate the income necessary to support it.
There are many good testing tools available including the Mom Test, which allows the prospective client to provide honest feedback based on real-life interviews. This is the best way to obtain accurate customer input when exploring how to start a tech startup. Do not ask friends or family members if they enjoy your concept.
Ask potential customers how they operate currently, how much they are losing due to a specific issue, and what tools they presently pay for. It shouldn't take months to validate demand; it should take days.
Consider your market through pre-selling methods such as surveys and group studies to determine which services they require. You may create a landing page that contains specific information regarding the product, and having a purchase button serves as an indicator of established customer interest. If you cannot get strangers to provide their email addresses (or provide a small amount), you are unlikely to be in business.
Building a Small First Version
The minimum viable product (MVP) should focus solely on the customer's most important need (job to be done). Due to their desire to address multiple customer needs at once, most entrepreneurs build too many additional features that distract from the benefits provided.
With this in mind, the MVP should be developed so that the first benefit is reached within 24 hours or less. If you are a sole owner or do not have technical capabilities, you may want to maximize your utilization of no-code and low-code systems.
You will be able to create and implement an intricate work product without incurring the expense of using traditional software engineers by utilizing applications such as Bubble, Webflow, and Glide. To protect your cash flow and get early feedback from the market, this is the best way to proceed. The custom application will become viable after you have proven that the core logic has a market.
Building Your Company and Team
A well-designed product cannot exist in a disorganized way. The company's structure (equity, roles, etc.) will dictate future funding opportunities and your ability to scale your company.
Setting Up Legal Details and Early Costs
Choosing a legal structure that is appropriate for your business is very important when figuring out how to start a tech startup. An LLC is the easiest and most secure way for a bootstrapped team to operate, but the majority of VCs only invest in C-corporations.
By creating your C-corporation as soon as possible, you will greatly benefit from reduced legal fees in the future. Many services, including Stripe Atlas, can help you create a corporation quickly and cost-effectively. Keep detailed records of your initial expenses.
In addition to product development and legal fees, expect to pay between $500 and $10,000 a year for basic business operations and software subscriptions. Depending on your growth strategy, you may budget anywhere from $1,000 to $50,000 for marketing. Do not invest in promotional items or high-end office space. Keep your budget focused on product development and customer acquisition.
Finding the Right Co-founder
While solo founders can achieve success, investors prefer a team that is equally skilled in all aspects of the business. Typically, this team will consist of a technical co-founder who writes the code, and a non-technical co-founder who handles sales, marketing, and day-to-day operations.
If you are going to work with a technical co-founder, do not give away equal ownership to the first developer you encounter before discussing the details of their experience and qualifications.
Hire a contractor or leverage no-code software tools to make your first $10,000 in monthly recurring revenue (MRR). Once you find product-market fit, it becomes significantly easier to hire a great technical co-founder.
Numbers, Growth, and Getting Money
Traction is the most important metric. If you want to survive and thrive in your first year, you need a detailed plan on how to track user behavior and sustain your business operations through appropriate funding sources.
Tracking the Right Information Early
Don’t wait for 1,000 users before you install analytics. Have Google Analytics, Amplitude, or Mixpanel live on day 1. Understanding exactly where users drop out of the onboarding flow is critical.
For product-led growth models, the goal is to achieve a retention rate that is at least 40 percent at day 30. Track your customer acquisition cost (CAC) and compare it to your customer lifetime value (CLV).
If you are building a SaaS for SMBs, your payback period should be less than 12 months. Consistently measure customer sentiment with NPS tools, like Delighted or Wootric, to identify churn before it happens.
Getting Money from Investors and Programs
In most cases, companies should bootstrap their business as long as possible. Bootstrapping forces you to focus on building a product that produces revenue. However, when your company is heavily dependent on upfront engineering or requires rapid market capture, it becomes necessary to seek outside funding.
This is a common hurdle for anyone learning how to start a tech startup. Typically, angel investors will write checks for ~$150,000 at a $3,000,000 valuation for early stage teams. The advantages of accelerators such as Y Combinator and MassChallenge include access to funding and a network.
Equity should be carefully guarded as accepting money too soon can pressure a founder into creating hyper-growth before product-market fit has been achieved.
Final Thoughts on Building a Business
In conclusion, starting a technology company is the process of elimination. The founders will survive through a continuous process of elimination of bad ideas, the process of keeping their burn low, and the sole focus on producing revenue from customers.
Founders should not allow themselves to be distracted by vanity metrics within the industry. Receiving a large round of funding does not equate to a successful business. Receiving that funding is similar to receiving a loan that the founder must pay back with significant growth.
The primary focus of a founder during their first year should be achieving $10,000 of monthly revenue. The best way to achieve this is to launch quickly, speak with customers at all times, and learn exactly where they abandon the product.
The companies that have captured the largest share of their markets, including Stripe, Notion and Linear, did not launch with ideal product designs. They launched with feedback loops tightly and aggressively committed to providing customers with the best solutions to their problems.
Frequently Asked Questions
The following are answers to some frequently asked questions for technical founders who want to learn how to start a tech startup.
Why do most early stage user onboarding flows ultimately result in the loss of users?
Most early-stage products fail to maintain the customer due to the excessive time required to see the first value of the service. If the customer is required to click through 7 screens, set up numerous complicated settings, and wait for an email confirmation prior to obtaining the service they purchased, the user will most likely leave the product. In order to be successful in onboarding users, it is essential for the founder to eliminate all barriers of entry to allow for customers to experience the benefits of the product immediately after signing up.
When should a solo developer start to seek commercial co-founders?
If the developer can create new features within one week, but cannot get ten individuals to try out the new feature, the developer should consider seeking a business partner. Before seeking a business partner, the developer must have a working prototype or initial vetting of the product in order to be able to attract a co-founder with a high level of experience and not have to relinquish excessive amounts of equity during the early stages.
What type of data infrastructure is needed before reaching 1,000 users?
In order to effectively scale, there must be an event-based tracking system which tracks individual user interaction, including button clicks and completion of core processes. Without this event tracking information, it is not possible for the developer to truly know why users leave the system, nor can they identify which features of the system aid in retaining users long-term.
It is important to set up basic structures for growth early on; using hard data on user interaction to drive growth will allow the founder to make better decisions about how to grow the business based on actual revenue-generating user interactions instead of assumptions.