So you want to be a startup founder: step one, start building a product, or figure out how to pay BlueChilli to build it for you. Right?
Wrong. What you should be doing is trying to sell something to people.
We think we should be building products because our industry started in Silicon Valley. Inventing new products is what Silicon Valley does better than any other 1,500 square miles in the world. But this is not Silicon Valley, and most of us are not rock-star developers, so building a product is not free.
Sometimes we think we should be building innovative new products because the siren song of new technology lures us in. New tech is more exciting than just tech, right? How can we resist those open APIs, those smartphone ecosystems, those beacons and payment systems and dashboards?
Sorry. If you ship a product without really knowing who to sell it to, how they’ll pay for it, and how much, the cart is before the horse.
I had a coffee with a great founder recently. Smart guy, years of experience in a senior role at a tech company. Knows how to manage a team. Can’t code but can relate to developers.
He’s spent six months and enough money to put his kid through private school with a digital agency who’ve built him an iOS app that does offers for merchants. His mockups of the app’s user experience looked great. But it was time to go there…
“So,” I said. “How much are merchants prepared to pay for this? Do they pay a monthly subscription, or per coupon they offer, or a once-off license fee, or a share of sales generated by coupons, or what?”
The worst possible answer: “I spoke to 25, pitched to them in person, offered it to them for free for the first three months, and 23 said yes”.
“What price do they revert to after the intro period? And do they go onto a monthly plan or annual plan? Or are you doing a revenue share? Or offering them in-app advertising model with click through-based pricing?”
“I said we’d figure that out later. I thought the most important thing was to get them onto the platform. Traction’s important, right?”
Again, that’s the worst possible answer.
This business now had a big problem that no experienced investor would be able to get past: there’s a product here, but no validated revenue model.
Without a revenue model, the primary purpose of any new investment in the business (when push comes to shove) would be to repay the debt incurred building a product. A product with no revenue, no customers, no business model, and no validated plan for how to get one. Why would an investor be interested in taking on that debt?
With the tools we now have available as startup founders, there’s no need to build a product to test whether it has a viable revenue model.
Develop a series of hypotheses in a lean canvas tool. Get a logo and an app screen mockup from a crowdsourced design community. Create a series of landing pages with a split testing tool to create multiple hypotheses of brand/feature/benefit/pricing model/price. Create a series of cost-per-click advertisements on Facebook and AdWords to direct business owners and consumers to those landing pages. Tell them the product’s in development, and you’ll let them know when it’s ready for private beta if they’ll give you their email address. Take an email address as a qualified lead and assume for the moment five percent of those email addresses might pay you on the feature/benefit/pricing model/price you served them on the landing page they saw.
There’s your validated revenue model. It has a good approximation of the cost of acquiring a customer, of the likely revenue per customer per month. Sure, it’s missing a lifetime customer value (how many months they might keep paying to use your product) and also whether a happy customer might refer another customer at zero cost for you. But it’s a great start.
This is called ‘growth hacking’. It’s way easier to learn than coding your own smartphone app and, when you have learned how to do it, this is wayyy more likely to help close you a seed investment round. An app in the iTunes Store with no traction (paying customers, users, business model) has never been attractive to investors, and less so now your competitors are all growth hacking.
Stop worrying about the features or the quality of your startup’s product. The features only matter if they’re features that add to the revenue and profit of the revenue model. Quality only matters when you and a competitor begin competing to acquire the same customer. You can’t compete to acquire a customer if you have nothing they want to buy.
Tech startups is a little about the product, but it’s much more about selling something to people. Please print that out and stick it on the back of the iPhone 6 you and I are both going to buy the second it ships.
This week we launched a self-paced startup education program for people who want to consider becoming a startup founder. It includes a bunch of great stuff (and a lot more detail) on what I’ve skimmed through here. It will not teach you how to build a product. For the next few weeks you can subscribe for an introductory price of only $200, after which it does up to $290. Signup now for 99toLaunch.
Photo credit: Retronaut