Letter to a startup wannabe (part 3)

I receive weekly 3-4 emails or presentations (pitch decks) from founders with untested ideas. They are looking for an investor who’s willing to pay their salaries and the necessary costs to create and launch a product to materialise that idea. They are full of confidence, which is good, but, unfortunately, most of them are under the impression that entrepreneurship is something simple and easy, which does not require any previous study. Just a brilliant idea, a lot of ambition and a visionary investor with bottomless pockets. And this is how 92% of startups go bankrupt in their first 3 years. So I came up with this automatic answer for all these dreamers:

  1. The idea is interesting, you have the necessary skills to develop a software solution, but my first concern would be to check if it’s a real problem of the targeted niche market and how much of a necessity it is (must-have vs nice-to-have). That is why I would recommend that you start with 10-20 interviews with potential ideal clients (see ICP) until you manage to formulate the problem correctly (see problem statement canvas and this article). I call this stage „Customer-Problem Fit”. It is the most neglected stage, yet it’s the one that determines, with the highest percentage, the success or failure of a startup.
  2. Only after you clarified and validated the problem, I would recommend you do a „pre-product MVP” type of test (smoke test, concierge, wizard of oz, etc.). The test helps you validate that the theoretical solution (a lead/sales page ) generates a significant engagement (see the necessary resources here and here). In the iterative tests (sample test, A / B test) you’ll do, you’ll discover a lot of useful information about the market (ICP, UX / UI, copy, promotion channels, etc.), the final objective being to obtain a conversion rate over 5-10% and a CAC below the market average. I call this phase „Problem-Solution Fit”. This is the stage in which I do not have a concrete product, but a description of it. So only a theoretical solution that I’m testing.
  3. Only after you’ve reached the validation indicators above, you can start to effectively code a „single-feature MVP”, to practically test how your real customers use the product and if it solves the problems identified in phase 1. There are many iterative tests you can do at this stage — on usability, UX / UI, etc.. The final objective is to obtain a DAU / MAU ratio over 5-10% and a churn rate below the market average (see resource). I call this phase „Solution-Product Fit” because this stage is about an actual product that applies what was previously validated in theory (you’ll see that other experts combine phase 2 and 3 into one).
  4. If you obtained the validation indicators above, you could begin the real work — finding the legendary „Product-Market Fit”. But if you get here and have a good „traction”, you will have access to all the financial and human resources you need (see resource).

From an investments point of view:

  • in phase 1 you resort to bootstrapping and FFF (Family, Friends and Fools), 
  • in phase 2 you go to angel investors and accelerators,
  • in phase 3 you can look for investments on private equity crowdfunding platforms, angel investor groups or seed VCs, 
  • once you reach phase 4, only VCs remain (although lately there’s this trend in entrepreneurship to avoid the VC type investments altogether, and use only the resources mentioned in the previous phases).

Congratulations on your courage and ambition to launch a company! Please study these resources carefully and thoroughly before anything else. You’ll understand the terminology above and not waste your time, money and energy like the founders of the 92% mentioned above. 😉