“Real knowledge is to know the extent of one’s ignorance.” Confucius
So, you have a great idea and are ready to borrow money from savings, friends/family or maybe even considering a second mortgage or cashing out that 401k.
Hold up a sec.
Are you passionate about the problem, or solution?
Imagine the Wright brothers really liked building winged contraptions, but were scared of heights and flying?
It is easy to become enamored when you put a lot of time and effort into something. This is especially true for software products. The beautiful design, the elegant code, the blazing performance… is worthless if it doesn’t solve a problem.
- immerse yourself into the customer’s pain (hopefully it is yours)
- love this pain
- love solving it
- love the type of customers who have it (don’t underestimate this)
Building a startup and taking a product to market is brutal. Without passion for the problem, chances are you won’t make it. So if you don’t love the problem, save the time and move on to something else.
“Leap, and the net will appear.” John Burroughs
No, it won’t.
As creative entrepreneurs it’s tempting to skip validating an idea and start building the product. I get it. Talking to potential customers and figuring out what they really want is hard, and scary, but building is easy. There are countless stories of companies spending years/millions developing just to find out nobody wants their product.
- Talk to at least 10 customers, if they’ll give you money then you’re on to something (even $20).
- Create clickable prototypes to demo your product
- Take that Google/Twitter credit sitting in your inbox, create some ads that redirect to a launch or coming soon page. See what the click through rate is.
- A/B test some landing pages to determine what messaging resonates, gather emails.
- Conduct surveys or expert roundups in the problem domain
Learning about IP law can be a drag, especially when you just want to get cracking on your idea. Unfortunately not understanding the basics can put a startup at huge risk, right from the start. By default the copyright for every line of code (i.e. Creative Work) is owned by the developer who authored it, just like an artist’s painting or a musician’s song.
If the IP is not clean, your startup will be severely undervalued, if investable at all.
Protect IP by forming a business entity and executing IP assignment agreements between the people working on the product and the entity. By far the best money I have ever spent on professional services is with my attorney, Brad Frazer. You can watch one of his many community video sessions here.
Understanding the market : Strategy
If you are “Dollar Shave Club” your message is not “We build the best razor on the planet”, it’s “Those other guys are charging you a boatload of dollars for tech you don’t need”.
Using Steven Blanks “Four Steps to the Epiphany” market types, you can form a rough understanding of the potential market you’re entering.
Understanding the market : Competitors
Any decent idea has competition. Edison’s DC vs Tesla’s AC, MySpace vs Facebook, Uber vs Lyft. Given how easy it is today to build a software company, 5+ are likely working on your same idea, right now. By using Google, SEM tools, directories, press, trade events, etc, you can find your competition, learn from them, and get a pretty good idea of what it will take to beat them and be “first” to the next customer.
- What is the differentiator?
- How are they marketing?
- How much are they charging?
- Who are the founders and investors?
- How do they position the brand?
- Who are their customers?
Scaling, selling and making money
At the end of the day you have to make money. By figuring out some basic models before spending a bunch of time and money (reoccurring theme here) you can determine how much to charge for the product to be successful, and how much it will cost to acquire a customer.
Wouldn’t it suck to build a product and have to shelve it because it costs too much to sell?
Here is a good baseline SaaS success model:
Success = CAC < (LTV*.2)
(I am not sure where I got this?)
Customer Acquisition Cost (CAC) : The cost to acquire a customer (sales, marketing, etc.)
Let’s say Johnny is selling his 12 month video subscription, “How to become a better quarterback”. The subscription is $20 a month, so the LTV = $240.
The cost to acquire a customer must be less than 20% of LTV, or $48, for the model to float (in most cases).
$240*.2 = $48
Let’s contrive an example campaign using an inbound marketing strategy. Email drip/PPC -> Landing page -> Sale (Acquisition)
- $100 email list of 18,000 high school coaches
- $500 email templates
- $250 email drip campaign software
- $5000 PPC ads (2500 clicks)
- $500 landing pages
Total campaign spend: $6350
Total leads: 20500
Using this chart you can see the model is in good shape above a .075 conversion rate. 1% would be very good, but if you only get a half percent then you’ll want to optimize. You would also review the two sources, email and PPC to determine which one creates the lower CAC.
This idea will scale infinitely, until the market saturates, for little to no additional cost.
This is an attractive investment if the product is good, the market is big enough, and the customer is validated.
Iterate and Learn
“Develop a passion for learning. If you do, you will never cease to grow.” Anthony J. D’Angelo
Just because you have validated the idea, doesn’t mean you should hunker down and build the dream. Build a Minimum Viable Product, get it back in front of the validated customers, and listen. This is straight from Eric Ries The Lean Startup.
Build. Measure. Learn.
This is one of my favorite graphics:
Source: Author unknown
Team & Process
“You think good software is expensive? You should see the price of bad software” – Unknown
Having a great team cannot be understated. Though a great idea has value, it will never come to life without a talented team. Many times teams pivot if the idea isn’t working, or completely switch markets and strategies. Repeatedly, the #1 thing investors weigh is the team. A good team can do anything.
A “Team” means everyone has to pull weight, there is no room for an “Idea guy”. Even investors must bring more than checks. Hacking, selling, growing, coding, engaging, designing, supporting, picking each other up, introducing, attending… everyone in the boat.
If you are non-technical, pick up a book. Learn to design or code. If you don’t know what good a good product looks like, you will never have one.
At Royal Jay we apply these lessons to all of our client engagements. Drop us a line at email@example.com and see how we can help.