“If your startup failed, it’s because it didn’t solve a tier 1 problem for a large enough audience — here’s how to never make that mistake again.”
Last week I announced my new startup studio, Capital H labs, where me and a handful of talented engineers and designers are working on products that will help companies grow faster and more predictably over time.
We’ll be launching our first product soon and we’ve essentially spent the last 5 months doing two things: validating the need for the product and creating the product once we’d validated the demand.
Today I want to share the simple framework we used to validate our first idea, in the hopes that it will help other entrepreneurs avoid failure.
For reference, this is the exact same framework we used to validate the idea for Bigcommerce (which I co-founded) back in 2009. Today Bigcommerce has over 100,000 paying customers, 500 employees and $125M in venture capital raised.
Validating the demand for your product is more important than ANYTHING. More important than the features, your team, the design, the pricing - everything.
Without market validation you’ll have a product that no one will pay for. You’ll burn a lot of time, energy and cash and you’ll end up stressed, probably depressed and definitely burned out.
And that hurts — a lot.
OK so let’s get to it : here’s how to validate your startup idea before you launch, before you invest or raise your very first $1, and definitely before you hire anyone.
Step 1: Write Down the Problem, not a Specific Solution
You want to be able to clearly articulate a problem that you or others experience regularly. Notice that you’re only focused on the problem here, not any specific solution — that comes later.
You want to be able to write down your problem in a simple statement. A few examples:
- It’s impossible to follow up with customers once they leave a restaurant.
- It’s hard to determine which customers will churn before they actually do.
- It’s too hard to design professional-quality graphics for social media.
You get the idea: keep it basic and refine the problem until you can articulate it with one sentence.
Step 2 : Determine if it is a Tier 1 Problem or Not
It’s easy to identify problems — they’re everywhere. What you’re really looking for is what I call a “tier 1 problem” — which means the problem you’re looking to solve is one of the top 3 problems your potential customers are experiencing.
Let’s say your (eventual) target buyer is the CEO of a small business. Their top 5 problems might look something like this:
- Generate more sales
- Get marketing running efficiently (hire a head of marketing)
- Outsource our payroll and benefits
- Increase our product selection
- Get better at social media and invest in Facebook ads
If you’re planning to launch a social media tool, you can see that’s NOT a tier 1 (top 3) problem for the typical CEO of a small business — it’s #5 on their list.
They’ll be so focused on solving their first 3 problems that you’ll never get a look in — EVEN if you have the best product, and EVEN if you have the best support. They simply won’t have time (or budget) for you if you’re not solving a problem that’s top of mind for them — a tier 1 problem.
This is probably the hardest lesson to learn and the one most startup founders ignore . “But my product is so great," the thought goes. "Once they use it they’ll sign up for SURE!” If you're not on top of mind, you're miles away from a purchase.
So how do you validate that your problem is actually a tier 1 problem? First you need to know who might typically buy your product. You want to build a basic profile, like this:
- Company size: 100–500 people
- Role: CEO or VP of Marketing
- Location: North America
- Industry: Retail, Technology & Hospitality
You then want to come up with a list of 20–50 prospects who meet this criteria. The easiest way to get that list is to jump on LinkedIn and research. Then just connect with all of the prospects you find with a message like this:
We’re hoping to spend 15 minutes on the phone with CEOs who are experiencing [problem]. We’re doing research and have nothing to sell. Would you be available for a quick call tomorrow at 3pm?
A few pointers here:
- Be short and to the point — don’t waste their time.
- Include a specific day and time when you want to talk — avoids email ping pong.
- Reach out to 3x the number of prospects you actually want to talk to. So if you want to talk to 20, message 60. Most won’t reply and some won’t be interested.
Great. Now you’ve got at least 20 people ready to chat who are experiencing the problem you’ve identified.
I realize I’ve dramatically simplified this step — but you’re an entrepreneur, so be creative and put in some hustle. If you don’t like talking to people on the phone then maybe this startup thing isn’t for you.
Before your first call, you want to come up with about 10 questions to ask them. The entire outcome of the call is to validate:
- Do they experience the problem?
- How painful this problem for them? (i.e. is it a tier 1 problem?)
- How do they solve the problem now?
- Would they pay for a solution to the problem?
Collate the answers from all of your calls in a Google document, Evernote, etc. After 5 or so calls you’ll start to get a sense of whether this is actually a big problem or just a “nice to have”.
Never, ever build a startup that solves a “nice-to-have-fixed” problem. People will use your product but never pay for it.
Step 3: Properly Determine Existing Solutions
One thing you’ll have after your 20+ calls is an idea of how your target customers currently solve the problem. They might discuss specific products and companies or might reference a company process, someone they outsource the problem to, and more.
It’s really important to drill into this concept on the call.
Don’t ask “which product do you use to solve that problem today?” because they might not use a specific product.
Instead, ask “so how do you handle that today?” and just listen. They might use a product or they might hack together a bunch of tools or processes to solve the problem.
Generally speaking, you want to solve a problem where there are already other competitors. Most times that verifies you have a large enough market with a tier 1 problem — assuming at least one of the existing competitors is doing well (that is, has traction, has raised money, has been around for a few years and is growing).
Be careful if there are genuinely no companies trying to solve the same problem as you. Most times that means you’ve got no market or your problem is too specific to too few people. Specificity is good, but you need to counter-balance that with a large enough market.
Step 4: Look for Pain in Existing Solutions
Whether they use an existing product or not, you really want to identify the pain in the current process of solving the problem.
If they use a product, what do they dislike about it? What is it missing? What do they need in that product to make their job easier/faster? You never want to launch a “me too” product.
It’s OK to have feature parity as a baseline, but that should only be 80% of your product. There should be at least 20% that’s better — not different just to be different, but distinctly better.
A clear benefit potential customers can see and understand when comparing your product to others. And one that you can position around after you launch.
If they don’t use a product to solve the problem, look at what they do use. Is it a combination of email, outsourcing and Dropbox, for example? Is it a manual process they employ 2 people full time to take care of? Search for the pain (time/complexity/cost/frustration) in that process.
Keep digging in until you can recite it back to them on the call.
OK, so just to recap you now have:
- A clearly articulated problem
- That is being experienced by at least 20 people you’ve spoken to
- Where there is an opportunity to solve that problem in a better/easier/cheaper way (the 20% better we spoke about above)
- And you can clearly articulate that 20% — which is why your solution will be better for them than existing products or processes
Step 5: Verify There’s a Budget for a Solution
If you have existing competitors aiming to solve the same problem, you can look at their traction. Are they growing fast? Do they have a sufficient volume of customers? Are they (or have they) raising money? Are they hiring? Look for clues of growth.
In most (not all) cases, that’s a great sign they not only have a good product, but are generating revenue and finding paying customers. Which means someone has a budget allocated for products like theirs (and yours).
You also want to set a second follow up with at least 10 of the prospects you spoke with on the phone and get their views on pricing. Not specific, “$5/user/month” pricing, but their initial reaction to paying for a solution to the product they told you they were experiencing.
You would start by recapping the problem and explaining your solution to them (spend extra time talking about the 20% — or why your solution will solve the problem better than anything else).
Next you just come right out with it:
“So if we build something that solved the problem in a way that I just explained, what would your thoughts be around pricing?”
You’ll get one of three responses:
- They’ll come right out and say they won’t pay for it
- They’ll be somewhere in the middle — non committal, if you like
- They’ll say they would pay for it
If they tell you they won’t pay for it or are somewhere in the middle, dig in a bit.
Why won’t they pay? Would someone else in the company? Is it budget? Are they on a 100 year contract with IBM for their existing solution? Do they just not like startups? Is the problem not really a tier 1 for them? Is it because it’s Monday and that’s their moody day?
After talking to at least 10 prospects on the phone about pricing, you want 5 or more to say yes to pricing. Not to a specific price, but yes to actually paying for your solution when it’s ready.
The huge caveat here is that having someone tell you they will pay for your product in no way, shape or form means they will. But it’s a good start and I guarantee it will stop you in your tracks for at least 50% of your ideas — if you have more than one.
Step 6: Use Your Prospects to Define your Roadmap
Assuming you solve a tier 1 problem that enough people will pay for, you now have a somewhat captive audience of 10/20/30/50 people.
If you decide to proceed with your startup (congratulations!) you now have a built-in audience you can talk to about features, wireframes, design, and more as you build out your product.
Eventually some of them might even become your first paying customers.
You have what I call a short feedback loop. And the best part? You’ve spentliterally $0 to get to this point.