Management for Startups: How to Get Customers & Funding

This article is an excerpt from the Shortform book guide to "The Essential Drucker" by Peter Drucker. Shortform has the world's best summaries and analyses of books you should be reading.

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How should you manage a startup company? Where do you find funding for a new company?

Whereas large organizations may struggle to innovate, small businesses just starting out often suffer from a lack of managerial expertise. In The Essential Drucker, Peter Drucker explains that people starting new ventures must pay attention to the markets, manage their finances, and install a leadership team.

Read more about what’s required of management for startups.

Management for Startups

Especially for a new business based on an innovative product or service, market research must take a different tack than that employed by established industries. Drucker writes that most of the time, a new business doesn’t know who its customers are yet, nor how they’ll actually use what it has to offer. Therefore, management for startups requires assuming the their original business model will have to be adjusted as the market demands. For example, someone opening a vegan grocery in an underserved area may discover that their customers are more interested in pre-made dishes than buying separate ingredients. In the end, the market defines the nature of a business, despite the intentions of the owner.

Cultivating Customers

Regardless of who your customers turn out to be, one thing that’s common to every startup is providing the best possible customer experience. In Superfans, Pat Flynn explains that building a loyal, devoted base of customers is essential to the long-term survival of a business. By providing regular, positive associations between fledgling customers and your business, you can build an emotional connection between your customers and your brand, eventually turning them into ambassadors who bring even more customers to your business.

Of course, just as Drucker points out, part of creating a good customer experience is providing the right product or service. In The Lean Startup, Eric Ries provides specific tips for how to pivot from your original business strategy to providing what your customers actually need. One way is to focus on a specific feature of a product or service that customers value most. Another is to identify a specific customer need that you’re not filling yet. Lastly, you might consider whether there’s a more efficient technological solution to whatever customer need your business exists to satisfy.

Funding and Organizing

While identifying customers and its true market, a new business must also take great care with its money. Drucker argues that a new enterprise should absolutely not set its sights on profits. Instead, a growing business always needs more money, and draining its revenues during its early days to enrich its owners and investors is the surest way to starve it of resources. Money management for new businesses should focus on finding new sources of capital as the organization outgrows its original funding method. This may entail bringing in new partners, private investors, or even incorporating and taking the company public.

Funding Startups in the Internet Age

Two modern methods for financing startups that didn’t exist at the time of Drucker’s writing are crowdfunding and crowdsourcing, both of which rely on using online networks to funnel money and resources. In The Success Principles, Jack Canfield explains that crowdfunding is a strategy in which you reach out to customers and donors through websites such as Patreon and Kickstarter to acquire your business’s funding in exchange for early access to products and exclusive rewards.

Crowdsourcing, on the other hand, uses digital networks to directly connect customers and resources, as in rideshare companies like Uber and Lyft or freelance platforms such as Fiverr and Upwork. These internet tools for finding money and resources have created business opportunities far different from the traditional approaches familiar to Drucker.

Drucker writes that most businesses start as small operations with only one person or a handful in charge. If successful, a business will eventually outgrow its original management structure, and when that happens, it’s crucial that a management team is already in place. If it appears that your business will grow significantly over the next few years, you and your team should plan how management tasks will one day be divided so that everyone can start learning their future jobs and how they’ll interact. Another key decision to make at this point is what role the business’s founder will play. It may be that they don’t want to run a big business, but would rather contribute in some other fashion, such as being the company’s public face.

(Shortform note: While organizational change is a concern for startups growing beyond their founders’ control, as Drucker describes in this section, it’s also an issue for large corporations competing in a global marketplace. In Leading Change, John P. Kotter writes that managing organizational transitions relies heavily on coordination and motivation from upper management. Business leaders must cultivate a sense of urgency for a needed change, build a coalition of like-minded stakeholders both inside and outside the company, and express a coherent vision for how the business will operate in the future. While aimed at big company executives, Kotter’s advice is also applicable to the startup founders that Drucker addresses.)

Management for Startups: How to Get Customers & Funding