Most real startups don’t grow like this:

Instead, most successful startups grow like this:

Those initial loops are unsuccessful attempts to create a product people want to use. The problem is those loops can take months and/or millions of dollars to get through, and many startups never get there. But a startup can get through at least one or two of those loops quickly, in a matter of a few short weeks, by using a new concept called Monetizable Pain.

The Nice-To-Have

On paper, in hindsight, those loops look like failures. In practice, in the trenches, it’s never so obvious. The loops always start off sounding like a good idea full of possibility. But before long, after development and launch, it becomes apparent that while interesting, the product is somehow not necessary enough, or useful enough, to really build a business around, even if it’s well designed.  It’s merely a nice-to-have product, one that addresses what Paul Ahlstrom and Nathan Furr, in their new book Nail It Then Scale It, call a “mosquito bite”.

Nice-to-have products are often wonderfully designed and work well. An example is scanR. They built a nice mobile app that turns the camera on your phone into a wireless document scanner. Users liked it. Unfortunately the team ran into challenges building a business around the concept. ScanR, like many smart, capable startups, found that “like” does not easily convert into “here’s my credit card number.” (Just ask any business trying to measure ROI on FaceBook “Likes”.)

The Must Have

The part of the curve on the right, where things are finally looking up, is where a startup has figured out how to offer a must-have. This part arrives when the company gets two things right at the same time:

1. It is now focused on monetizable pain – a problem that Furr and Ahlstrom refer to as a “shark bite”.
2. It is offering a solution that provides a direct, meaningful level of relief for that problem. (Without adding too many new hassles in the process.)

It’s important to note that a viable solution in the must-have part of the curve is not necessarily a mainstream product like the classic model in Geoffrey Moore’s  Crossing the Chasm. Nonetheless, the product begins to sell, and/or the users begin to grow. In my first startup, NetMind, our first customers were Boeing, eBay, IBM and the CIA and I promise you they did not fit the classic profile of an “early adopter” who is tolerant of a crappy product. They were not remotely interested in bleeding edge, early stage solutions. But they had monetizable pain, and we had something that provided real (albeit small, initially) relief. So they bought it. And that began a long journey that eventually ended in an $800 million acquisition.

The Must-Have Shortcut

Most of the good startup wisdom out there, from Lean Startup, to Customer Development, to Y Combinator, emphasize engaging customers early by building something that offers the product concept or a product feature and then measuring customer/user response. This method is way smarter and faster than the old startup (and current big company) process of building out a real product and hoping users come. However, there is a first step that can get you to must-have and product/market fit even faster.

Validate Monetizable Pain First

Offering a minimum viable product is a fantastic way to learn what target customers want. I do it all the time.  The only problem is the learnings you get don’t always lead to a breakthrough product focused on monetizable pain. The reason?

Monetizable pain is about the customer’s problem, not the startup’s product.

For that reason, the first step on the road to product/market fit for any startup is to go deep on the customer problem and test for monetizable pain before building anything.

The monetizable pain discovery and testing methodology is quite aligned with Customer Development, except we’ve found it’s very beneficial to work through the monetizable pain process before (rather than concurrently with) initial product development. While it sounds heretical to delay development, the reality is  no proposed product spec has ever survived the monetizable pain discovery process. It’s a process that forces the entrepreneur to know more about the problem than any one target customer, and it turns out that 100% of all product visions change during this step. And the process of locking on to monetizable pain does not have to take long – if you do it right.

How to Validate Monetizable Pain

Validating monetizable pain requires a method for measuring the value of a problem. It requires the development of a reliable metric for customer problems. Unfortunately the well known business metrics don’t really help us because they have much more to do with the solution side of the equation. For instance, one obvious business metric is sales. Sales can measure the success of a product. But nobody buys problems. (They unfortunately arrive free of charge.)

One way to accurately measure a customer problem is to rely on this principle:

The value of a problem directly correlates to the time people will take to tell you about it.

Time and time again we find that if busy people, who fit your target customer profile, are willing to give you valuable time simply to discuss a particular problem, with no clear promise (yet) of a viable solution, then you have an important problem. The kind of problem a startup, with limited resources, no brand, an incomplete product and a small team can actually sell into.

My Favorite Test for Monetizable Pain in B2B

Our favorite (and most dramatic) monetizable pain test has been proven to work well across a number of different B2B market segments. The B2C tests are different and very interesting as well. The posts on those are coming.

This B2B test works like this:

Place a true cold call to your hypothetical target customer – meaning the actual role/title of the person in the big name brand you would actually like to sell to – and leave a voice message that does little more than ask, “Do you have this problem?”

It sounds crazy. And even though I’ve done it a lot, I still get nervous making the calls. But if it is a monetizable pain problem, and you indeed say the problem the right way ( the right specific description using their jargon), to one of the people in the organization who most feels the problem, they call you back. In fact, we use a rule that its not monetizable pain unless 50% of the target customers call you back.

My marketing brethren find this hard to believe at first because they live in a world where a single digit response rate is celebrated. The monetizable pain test, however, is quite different. It’s not a marketing campaign. We’re not selling anything, even if at the end they want to buy. (Which sometimes happens, and that’s an important scenario that I’ll post about soon.)

In fact, there are key things to say in the call that make the differences clear. I will share more in the next post (sorry, I’m not trying to leave anyone hanging, just need to wrap this post.)

Four Important Words

There are important nuances to the call script, and very important structure to the short but sweet interview you do when they call back. For now, I’ll share the most important thing to say in the cold call – probably the four most important words after your problem description – “I’m not selling anything.” This sentence alone distinguishes the process and makes you sound completely different on the phone.

Beware

There is so much more to this so if you decide to try it on your own, please wait until I share more in the next post or contact me. Hopefully you have enough to be interested. Unfortunately this is not quite yet enough to give you meaningful data from the test yet.

Next up: real examples – real results.

Please share in the comments if you have ever tried cold calling target customers…..were you nervous?

Today we held the third Lean Startup Lunch in Silicon Valley at Ephesus in Mountain View.  The discussion focused quite a bit on gaming and the challenges of launching a good game. We also discussed how some technical challenges for entrepreneurs have become easier in recent years (versus some that seem to never go away) and how that changes the fundraising game.

One of the attendees was Shirley Lin, the founder of gaming company YoXi123 who shared her insights on the pros and cons of launching on FaceBook versus launching elsewhere, like the iPhone. She mentioned that FaceBook is a bit of its own ecosystem, and its important to know that going in – meaning be prepared to experiment and learn what works. One of the benefits of FaceBook is the ability to experiment with small amounts of targeted advertising to figure out the profile of your sweetspot user, because it’s often not exactly who you think it will be. She offered an example of an entrepreneur who developed an app targted at Foodies, and found that the best predictor of interest in the app was if someone had played a particular Zynga game.  And that would have been almost impossible to see coming.

Another discussion was on the ways services like S3 and EC2, and others like it, along with languages that are relatively easier to learn, like Ruby, and services like Heroku have in some ways democratized innovation, compared to older days that were not that long ago. Or add the fact that one or two people can develop and launch an iPhone (or Android) app and begin collecting payment immediately.  In many ways this has changed the traditional VC game, and the numbers bear this out.

On the other hand, the discussion raised points on how some things haven’t changed. For venture funding, while it no longer takes (much) money to launch a software company, it still takes a lot of money to scale. The opinion at lunch was this potentially reduces risk for VC’s as they can sit and watch and wait for traction. (Some VC’s I’ve spoken to say it’s not quite that simple – another discussion for another day.)

On the technical side, arguments on which coding language to use will never go away. I shared a story from my very first startup back in the dotcom days of initially building stuff in Perl, and refactoring into C++.  There were immediate laughs from two cofounders who had the same argument just yesterday, using Python instead of Perl.

Unfortunately I had to leave early, and the discussion was still going strong. If you were there, or at the Lunch in San Francisco, feel free to share more in the comments.

 

In Silicon Valley, we know Winter when we see it. The weather cools, there’s less daylight, and it rains a lot. But I’m not talking about the annual winter on the calendar. We’re talking about Startup Winter.

This post is inspired by startup guru Eric Reis who recently offered his own take on current events, with a thoughtful warning that Winter is Coming. Startup Winter occurs when startup financing goes cold. Most people believe we’ve been enjoying a Startup Summer filled with plenty of funding and lucrative exits.

If indeed Winter arrives soon, this will be the third Winter in Silicon Valley since 2000 (including the nuclear winter of the dotcom bust.) Are there any patterns in the previous two downturns that might guide entrepreneurs to survive the next one?

Opportunity Slows but Innovation Doesn’t

During the last two Winters it was hard to get a financing deal done. Venture investors (including many angels) spent more time on portfolio triage and less time on new investments. Expect that pattern to repeat in the next Winter. But the thing you don’t often hear is that even in the nuclear Winter of 2001, series A financings were still happening. Indeed there were way less of them. But the innovation engine never stops, and there was still plenty of dry powder (the name for cash in a downturn) looking for a good home. What does this mean for a Winter entreprenuer?

Stop Thinking “Startup”, Start Thinking “Good Business”

In Summer, financing happens everywhere. We see a sort of gold rush of ideas (which by itself is not a bad thing). But exuberance takes hold, valuations get frothy, and before long we are at a point where numerous “wantrapenuers” are taking something that is really a project, calling it a startup, and successfully raising money. So it’s not totally surprising when a downturn starts draining the water out of Lake Exuberance and suddenly all the sandbars are exposed again.

In Winter, there is still money available, but only for a “good business”. The trick is that the threshold of proof that a startup can become a good business is higher.

What’s a Good Business?

Every venture investor (including VC’s, super-angels, regular angels, or your rich uncle) is different in how they choose to invest.  There is no one-size-fits-all formula for a startup to raise money.  That said, the true north on the compass for most any Winter investor is demonstrated proof of a repeatable business model. Investors in startups, regardless of season, are always interested when “dollars in” can be connected to “dollars out” in a credible, scalable way.  This doesn’t mean you are killing it with revenue yet. But it does mean you can demonstrate on a small but repeatable level that you know exactly where and how to spend money that in turn makes more money.

One way to envision this idea is to take Dave McClure’s AARRR model, and add a thermometer that shows where investment happens according to season:

Needless to say, the dotcom boom set record temperatures. The mid-2000 Web 2.0 bubble was comparably cooler but still pleasantly warm. Summer, as noted on the thermometer, is a time when startups that are able to grow users, but have yet to make subsequent progress beyond Activation, can nonetheless raise plenty of money. In fact, I just met with an entrepreneur last week who is about to launch a social media startup (it’s actually something interesting and new) and is confident in raising money after some level of user growth. Despite  my advice, he has little interest in developing, let alone proving, his monetization strategy. So he will have Activation, but the rest of the rows will be zero. He is basically betting there is still time to get over the fundraising mountain before Winter hits.

Repeatable Business Model

No one knows for sure when the next Winter will hit, or how cold it will be. But the point is this – entreprenuers won’t care what season it is if they keep their burn rate low while they work their way down the chart until they get to revenue. This does not require huge overall numbers. The idea is to test, measure and tune each of the core assumptions in business and growth models until you get it right – until you show revenue actually works, with clear elements of scalability. Think of it as iteratively converging on conversion. As Dave McClure says, double down after product-market fit.

Not Risk Capital

Sometimes entrepreneurs get frustrated (or even scoff) at developing greater levels of business proof. Unfortunately, even after locking into a repeatable business model, plenty of risk still remains in the startup before investors have a shot at seeing real ROI. Back when I was raising money for the first time, Chris Marino, who was then founder and CEO of Resonate, gave me great advice – never think of venture capital as risk capital. Investors, even venture investors, aren’t doing this because they love risk. They are just looking to put money to work in a good business. Regardless of the season.

Perhaps the most important observation from the last two Winters is this – Winter does end. And if you play your cards right, you will be one the skiing on all that leftover snow.

What is your best advice for surviving Startup Winter?