The Essential Fuel for Startup Success – “Monetizable Pain”

July 27, 2011 By 11 Comments

This is a new blog discussing ways to get to product/market fit faster. The first post was written as a humorous  (but very real) list of events that often happen inside a startup when you are a cofounder. I think I’ve personally endured every one of those steps myself at some point.

The second post made the point that “overnight success” startups really aren’t. All successful startups had to iterate in some way or another to get there.

This post kicks off a series of methods for accelerating startup iterations with the goal of getting you to product/market fit faster. It’s not theory from a whiteboard. It’s based on things that have been tried, tuned, and effective across a number of companies (well, startups) in Silicon Valley in a variety of markets. Each subsequent post will describe specific things a startup can try (with real examples) to help accelerate product/market fit.

The Top 5 Startup Epitaphs

A struggling startup is painful and exhausting. It can drive an entrepreneur bonkers wondering where it went wrong. Cofounders of a failed startup even go through a grieving process. For all you entrepreneurs who have endured the rough ride of a failed startup (myself included), we would like to help accelerate the journey through the five stages of grief and get you back on the Silicon Valley horse (so to speak). To begin the therapy, here is the ultimate top 5 list of reasons most offered for startup failure…..

“We were __________.”

  1. a hammer looking for a nail.”
  2. a feature looking for a product.”
  3. a “nice to have”, not a “must have.”
  4. before our time.”
  5. very cool, but no one would pay.”

Most of us have heard one or more of these. (#4 happens to be the one I’ve used most.)  What’s interesting is if you perform an autopsy on all these modes of failure, a pattern arises. Each of these simple post-mortems is a slightly different expression of the same root cause – a weak customer problem.

Single Biggest Predictor of Success

One of the best ever blog posts on startups is from Marc Andreesen in which he explains why a hot market is more important to startup success than team or product. But even if you agree with his arguments (as I do), there is still a small problem – most entrepreneurs are convinced they are in a hot market. Unfortunately, most of them must be wrong. Otherwise the overall startup success rate would be much higher. So what we need are reliable ways to measure the hotness of a market – as early as possible, ideally before we invest and spend money trying to build a product and a business.  More specifically, we need to measure the hotness of a market in such a way that predicts whether a real startup with limited resources (read: limited product features) can actually build a business.

It turns out that the thing you can measure – and what may well be the single biggest predictor of startup success – is the importance of the problem in the eyes of the customer. If you imagine your startup’s product as a rocket, the importance of it’s corresponding customer problem is the fuel. No matter how smart your rocket design, it’s going to need fuel, and quite a bit of it, if it is ever going to achieve escape velocity. Here is the big point – the “if you only remember one thing from reading this” point:

The more important the problem is to your customer, the easier it will be to build a business despite a less-than-perfect product or a less-than-perfect team.

Customer problems that create sufficient fuel to build a business have a special name – Monetizable Pain. It is the idea that a problem needs to be of a certain critical mass if a company that is small, undercapitalized, with no brand, and no track record is going to get those first customers and scale into a good business. If your offering provides relief for Monetizable Pain, you have a real shot at building a business. If it doesn’t, well, it’s going to be a long tough slog as a startup.

Long Tough Slog

The Land of the Long Tough Slog can be hard to see coming. Last week I was meeting with an entrepreneur who had an idea I personally love and honestly could see myself using. He’s been doing Customer Development and asked, “What do I do when it’s tough getting people to take time to talk about the problem?” And, “What does it mean if I have to prompt them quite a bit about the problem before they realize they have it? What if I’m sure they have the problem, but they need convincing?” Suffice it to say there is a lot packed into those questions, including how the entrepreneur is setting up the conversation, talking about the problem, and to whom.

However, if he indeed is doing everything right (which is the topic for the next bunch of posts), then his challenges are in fact signals that he has not found Monetizable Pain. He is instead seeing signposts marking the path to the Land of the Long Tough Slog. It’s a place where the problem you are solving does exist, and you can indeed build a wonderful solution that your hypothetical target users tell you they love. But the underlying customer problem is weak – there is not enough pain there. Or in other words, it’s actually not a hot market. Which means you work darn hard, get nice props from your target customers along the way, yet never get to Product/Market Fit.

Monetizable Pain

The notion of Monetizable Pain is so essential that one can pretty much sort customer problems into two buckets:

Monetizable Pain vs Merely Interesting“Merely Interesting” problems are smaller. They are attractive but are tough to build a business around. Merely Interesting problems usually come well-disguised with desirable traits that are perfectly designed to woo a budding entrepreneur. A cool solution to a merely interesting problem can generate buzz from the press and bloggers. (Think of Color.) It can get you meetings with prospective customers. It can make your sales people continually talk about how their prospects are really excited about your product. Merely Interesting problems produce recurring sales meetings  with stories of the same “interesting” target customers who are always “interested” in your “interesting” product for their “interesting” problem.  In fact, those wannabe target customers stay “interested” the entire time they are in the sales funnel – not only this month, but next month, and the month after that too. The problem is not that they aren’t interested – there is lots of interest – the problem is users aren’t growing, and/or nobody’s buying.

Or – some do buy. But at a far smaller deal size or price than you modeled (remember those numbers in your “already conservative” spreadsheet? ) Or users do grow. But slowly. Merely interesting problems put you on a path to startup purgatory that is paved with people who love you but never write a check. Merely interesting problems are great at generating lots of buzz and interest in the free version, but never really deliver conversion to the paid version.

Monetizable Pain as an Accelerator

Monetizable Pain is the exact opposite. A startup that begins with monetizable pain is never characterized as a hammer looking for a nail. It will not be trying to reposition itself as a “must-have” 6 months after launch. It will never sit in the deadpool with the epitaph “we were before our time.” It will not be producing white papers to “educate” target customers on how they are really losing money but they just don’t know it. And it will not need an ROI calculator on its web site.

There are five game changing facets to Monetizable Pain:

  1. You can test a problem to see if it is a Monetizable Pain problem.
  2. The test is fast – days or weeks, not months or years.
  3. You do not need to have a product to perform a test.
  4. You do not need a lot of money to perform a test.
  5. Taken together this means you can iterate quickly on the results and get closer with each test.

Monetizable Pain is such a great predictor of startup success, that it makes sense to test for it and find it before we actually proceed with building anything. It’s the first bridge that must be crossed before taking off on our journey to product market fit and eventually startup success. Once we have validated we have Monetizable Pain, we’ll be ready for the second bridge – how to quickly come up with the winning product spec. (Which is a whole other process – more on that later – or sooner depending on how fast I write…)

If we can test for monetizable pain quickly, and iteratively, without spending a lot of money, we are able to begin our fast, accelerated journey through the loops. How do we do that? I’ll start offering those details in the next post….

Filed Under: Stage One: Pre-revenue

The Real Secret to Startup Success

June 8, 2011 By 4 Comments

Note: This post is a “more serious” continuation from my parody about the startup journey,  140 Simple Steps to Startup Success

It was the height of the dotcom boom, and I found myself sitting down for an informal meeting with the one and only Clayton Christensen from Harvard Business School. We had hired one of his former students into NetMind, a startup I co-founded. The distinguished Dr. Christensen was in Silicon Valley after publishing “The Innovators Dilemma” and wanted to hear more about our startup journey.

In that meeting Professor Christensen shared a recent insight about startups  – a secret to startup success – based on the companies he had seen. As you might imagine, he had my attention. The secrets to startup success are vigorously debated in Silicon Valley. In fact, just sitting down in any Starbucks around here will likely place you in the middle of what often sounds like a sports radio call-in show about startups. You can’t help but overhear “Joe from Palo Alto” ranting like an armchair quarterback about why his startup gig is struggling.

The more informed debates about startup success tend to focus on three factors – product vs market vs team. And since I was pretty familiar with these discussions, I was thinking that just this once I might already know what Dr. Christensen was going to say.  Instead, as usual, he said something far more interesting. His insight was that the startups that succeed are simply those that have enough money leftover to try their second idea…….

A Different Growth Model

This was a bit jarring for a first time entrepreneur who was still paddling hard in the murky soup of a first idea. We had taken a sizable venture round, on the premise that our idea, which had a lot of traction with non-paying customers, would soon explode into world domination. In fact, we had even come up with a clever and unique graph to show our trajectory. It looked like this:

hockey stick revenue projectionUnfortunately, as you perhaps might recall about the dotcom bubble, there were – in fact – just a few other startups that also predicted this same trajectory. Thankfully, we’re all much smarter now and we’ll never do that again……right?…….

The key point Clayton Christensen was making is that successful real startups don’t actually follow that trajectory. He was saying a real startup trajectory might look something more like this:

more likely startup trajectory

Real startups that succeed go through a loop first. If you have ever ridden a roller coaster, you know how a loop feels. It spins you around and induces a temporary loss of direction. Which means for startups, this should be a normal and expected feeling. The big trick is to survive the spin cycle.

The Truth About Successful Startups

The idea that a successful startup most often fails before it succeeds is becoming quite popular. But the concept has been alive in the DNA of Silicon Valley for quite awhile.  Silicon Valley is really one of the only environments in the world where failure is actually treated like a good thing – but only if you learn from it and keep going.

Because the truth is that Professor Christensen’s initial observation was only half-right. The honest stories of startup success actually get more interesting. Most entrepreneurs will tell you that idea number two also failed. If you talk to the Twitter co-founders, they will tell you it was a long road to their “overnight” success. For most successful startups, the real curve, actually looks a lot more like this:

3 loopsAs if one loop wasn’t enough…… Successful entrepreneurship requires persistence and maybe a big box of Dramamine.

The Real Startup Success Secret

What is the Real Secret of Startup Success? Clayton Christensen was really close. It starts with having the persistence and resources to continue iterating. There is, however, an important detail – you can’t iterate wildly without context or direction. Buckshot doesn’t actually work for startups. But iteration does. Did you notice in the above graph how each successive loop is a little bit higher than the last? That slightly upward ramp is really important. It means you are learning.

The real secret is to build on what you learned in the last failure.

Which means if you want to succeed, you have to start your journey with a clear understanding of the critical assumptions in your business, and design in the ability to clearly know which of those assumptions are actually wrong. This is very different from throwing any new idea against the wall and seeing what sticks.  An iteration based on this knowledge is called “a pivot” by the Lean Startup community. I got to have dinner with Dave Binetti ,Founder/CEO of Votizen one night and he explains pivots way better than I do.

How to Use the Real Secret

But wait a second. If we know the Real Secret to Startup Success, than why is the failure rate of startups so high? Ah, if only it were so simple. I’ll get into more details (with some great ways to avoid common problems) in ensuing posts. However, our loopy trajectory model exposes two huge reasons:

1)      The amount of persistence required to get through the loops is pretty high. It takes a special kind of person with a special level of passion. Even then, each loop is full of drama and emotional issues that can derail a team despite their commitment (which is a topic for other posts).

2)      Having enough resources to get through the loops is hard. “Resources” usually means money. It also means time. The traditional method for getting through each loop is to build something that might work, get it out to customers and see what happens. That always takes money (unless you are still living at home and can do it all yourself), and time (unless you happen to be traveling at the speed of light.)

So the model tells us your risky startup is actually a sure thing if you can satisfy three simple conditions:

a)    You are unusually persistent by nature, and

b)    Your parents will let you have your old bedroom back (for free), and

c)    You can make your parents house travel at the speed of light (while you’re inside working away.)

We can all see the obvious problem here ……no pizza delivery car can travel at the speed of light, and let’s face it, you can’t do a startup without pizza. So if you can’t do those three things, fear not, there is a support group for you called “the rest of us.”

How Mere Mortals Use the Real Secret

But what if, (just run with me for a second here)……what if mere mortals working in earth time could accelerate through those loops with minimal time and money? Imagine those dazzling graphs shown above with the X axis representing “Time and Money” (which would be a good thing to imagine because that’s what the axis is.) What if you could somehow compress the graph and do this…..compressed loopsIn this scenario, we still accept the journey through the loops as an immutable law of physics for successful startups. Except this time, we magically sprint through those loops, and do it in a way that still picks up the same wisdom and insights that might come from spending more time and more money. To the outside world, it looks like a lucky overnight success, but those of us who were actually on the ride would know we indeed paid our dues and we look smart for a reason. Our success is not about luck.

How do we do that? To travel fast, you have to travel lightly. Everyone who has seen or ridden a motorcycle knows it is far more quick and agile than a car. Yet a motorcycle has a much smaller engine than a car. It gets its speed from traveling lightly. Startups often make the mistake of trying to get the through the loops in a car, or a jeep, or an SUV, or if you were WebVan, a big-ass semi.

What we need are efficient, smart ways to accelerate (that means getting the job done without spending a lot of money or time). We have to accelerate like a rocket or an electron trying to achieve escape velocity. The Lean Startup movement and incubators like Y Combinator preach speed – they are all about being fast through the loops; however, with each post, I plan to walk through specific new stuff you can do that no one else is talking about and will help you accelerate and iterate quickly. (Thus the name…….Smart Fast Startup……)

The first huge accelerator comes from a new concept called Monetizable Pain. It’s something I wish I knew back in those dotcom days during my first startup. Check it out in the next post coming up.

Filed Under: Stage 2: Repeatable Business Model, Stage One: Pre-revenue

140 Simple Steps to Building a Successful Startup

May 26, 2011 By 4 Comments

Ah, the invigorating life of the fearless entrepreneur. A warrior of capitalism, armed with nothing more than a dream and a laptop, risking all in hopes of changing the world.

But how do they do it?

Careful analysis of successful Silicon Valley startups has revealed a heretofore secret list of 140 steps outlining what really happens in a technology startup. Want to know the real story? Buckle your seat belt, here it is:

1) Figure out what you want to sell.

2) Find out if it’s already out there.

3) If not, shout “We gonna be rich!”

4) Choose a name

5) Incorporate

6) Write a business plan

7) Calculate your market size

8) Build financial projections

9) Adjust financials – downward. Then call them “conservative”.

10) Notice that your financials show magical profits in year 2.

11) Stare wondrously at those magical profits in year 2.

12) Shout “We gonna be rich!”

13) Search for co-founders.

14) Show them your financial projections

15) Then say, “these financials are conservative”

16) Recruit potential cofounders with this phrase, “We gonna be rich!”

17) Add co-founders to your team.

18) Discuss how to share equity.

19) Realize that conversation sucks

20) Replace co-founder you just pissed off

21) Spec the initial product

22) Set a launch date

23) Talk to customers

24) Assume the customers who “don’t get it” must be stupid

25) Add features from your customer meetings

26) Work on the product

27) Discover its taking longer than you thought

28) Move the launch date

29) Work on the product

30) Discover its taking longer than you thought

31) Move the launch date

32) Work on the product

33) Drink stronger coffee

34) Determine which features are closest to complete

35) Push the rest into the “the next release”

36) Work on the product

37) Figure out which features actually work

38) Push the rest into “the next release”

39) Launch the product Oops, find a major bug

40)  Call the fix “non-trivial” (a term derived from the ancient greek, meaning “impossible”)

41) Somehow fix it anyway

42) Feel lucky

43) Launch the product, but call it “beta” (a term derived from the ancient greek, meaning “this might suck”)

44) Tell your Board it’s a “soft launch”

45) Experience new emotional highs, and new emotional lows – all in the same day.

46) Look for a way to reach customers

47) Discover your “way to reach customers” costs more than what you sell them.

48) Look for a new way to reach customers before the next investor meeting.

49) Realize a startup is very different from having “a job”

50) Prioritize the bug list

51) Prioritize the new feature requests

52) Create an investor pitch deck

53) Get investors to meet with you

54) Feel euphoric as they praise you, smile and say thanks as you leave

55) High five your cofounders in the parking lot

56) Get in the car and say “We killed it!”

57) Shout “We gonna be rich!”

58) Wait for the investors to follow up

59) Wonder why the investors don’t follow up

60) Email them

61) Text them

62) Call them

63) Wonder why the investors don’t follow up

64) Tell your co-founders, “Those VC’s must be knuckleheads”

65) Actually get an interested customer

66) Totally cave on the price

67) Somehow close the deal

68) Feel lucky

69) Go to a friend’s party to unwind

70) Discover everyone at the party thinks Googlers are cool, but…..

71) No one’s impressed with “Founder/CEO of random startup”

72) Meet with more investors

73) Revise your presentation

74) Again

75) And again

76) Tell yourself the investors “who don’t get it” must be stupid

77) Discover investor silence means “probably not”

78) Learn “probably not” means “no”

79) Promise yourself to remember a startup is very different from having “a job”

80) Meet with more investors

81) Receive a term sheet

82) Learn what “participating preferred with a 3x multiple” means (a term derived from the ancient Greek, meaning “indentured servitude”)

83) Negotiate with investors

84) Discover VC’s are very good at negotiating

85) Somehow close the round

86) Feel lucky

87) Get the money in the bank

88) Shout “We gonna be rich!”

89) Receive the legal bill and recite out loud, “Wow we’re in the wrong business”

90) Start trying to hire

91) Realize it’s hard to hire the right people

92) Discover it’s harder to fire the wrong people

93) Realize the firing conversations suck.

94) Promise yourself to remember that a startup is very different from having “a job.”

95) Start holding weekly sales meetings

96) Again

97) And again

98) Wonder how customers all say the same polite excuses for not buying, but….

99) Have completely different feature requests

100) Discover customer silence means “not this fiscal year”

101) Learn “not this fiscal year” means “no”

102) Somehow close a few more deals

103) Feel lucky

104) Hire a few more people

105) Wonder if you are paying too much salary and equity

106) Wonder if you are paying too little salary and equity

107) Feel like you didn’t get anything done today

108) Hold an all-hands meeting. Use the metaphor “it’s a marathon, not a sprint”

109) Secretly hope everyone still sprints

110) Notice one of your cofounders doesn’t seem as capable as he/she used to be

111) Notice everyone else is noticing too

112) Realize you need someone else doing his job

113) Realize that conversation sucks

114) Feel like you’re getting good at conversations that suck

115) Realize most of what’s new in Version 2.0 is really bug fixes from Version 1.0

116) Look back at your original business plan

117) Laugh

118) Look back at your original investor slides

119) Laugh

120) Look back at your “conservative” financial projections

121) Stare wondrously at all that magical profit in year 2

122) Laugh

123) Add up your monthly burn rate

124) Cry

125) Realize you need a business model, not a business plan

126) Feel like you didn’t get anything done this week

127) Spend 4 solid days preparing for a board meeting

128) Announce a change of strategy

129) Call it a pivot

130) Receive a call from your lead investor because she wants to “help” with your “pivot”

131) Begin weekly updates with your lead investor about progress with said “pivot”

132) Try to sound intrigued as lead investor suggests bringing in a new exec to help get you to “the next level”

133) Wonder what she really means by “the next level”

134) Receive an unexpectedly friendly voice message from CEO of a pseudo-competitor

135) Have a remarkably friendly lunch with CEO of pseudo-competitor

136) Be charmed by remarkably friendly CEO as he suggests “working together”

137) Call your lead investor from the car.

138) While you are still driving back to the office, agree to be acquired.

139) Negotiate the title “Chief Business Segment Strategy Development Officer”

140) Promise yourself to remember a startup is very different from having “a job”

 

But wait, you say – this list is crazy because I already know better than to do a lot of this stuff. Indeed, if you are listening to startup wisdom from people like Eric Reis, Steve Blank, Sean Ellis, Brant Cooper, Brad Feld, Fred Wilson, Nathan Furr, and many others, you hopefully saw numerous mistakes in the above list, and already have ideas on how to avoid them. Nonetheless, just about everyone who has been in a startup, even one enlightened by startup wisdom, still identifies with at least some of the above steps.

The good news is there are numerous battle-tested methods for dealing with each of the situations described in the above list. And that is what I hope to deliver in the smartfunstartup.com.

The first step is to change the way many of us think about startups. That’s what this next post is all about…..”The Real Secret to Startup Success“.

Filed Under: Startup Stages