There is an endless, ever-growing list of startups that fail, despite a huge potential on paper. Most startups have a tendency to delay the “moment of truth” with their customers, until they have the dream product. The thinking goes like this:
“Before launching, we have to add feature X and Y, make sure debugging is completed and that the company infrastructure is ready and up to the task of handling the (huge) expected demand”
Although that might seem reasonable and even strategic, it simply doesn’t work as expected. Waiting to launch insulates the company from the only valuable information that matters: the one that comes from customers.
Not the press, not investors, not “beauty contests”. The market.
More than 90% of startups fail, due primarily to self-destruction rather than competition
So the big question is: how do you determine whether you are on the right path, and not wasting resources and time on something that will simply not make it?
Why the Red/Blue pills?
As a geek you are definitely familiar with the movie “Matrix”. Remember that scene with the choice between taking the blue pill going back to unawareness and taking the red pill to enter the “real world”?
You take the blue pill, the story ends. You wake up in your bed and believe whatever you want to believe. You take the red pill, you stay in wonderland, and I show you how deep the rabbit hole goes.
“Idea” Startups are wonderful, attractive and shiny. Just like the virtual world at Matrix. Running businesses that make revenue often look less fascinating, less visionary. But they attract customers. They sove real problems for real people.
Not able to bring in paying customers yet? There’s a lot of excuses that entrepreneurs say to themselves to explain this. Let’s hear some.
- Our product is so innovative that customers do not understand yet how much they need it
- People don’t buy our product because it only has these 5 features. It needs 10 at least.
- We don’t sell yet because we need investment to build an international presence
Take the red pill. Seriously. If your company solves a real problem that at least some real people are willing to pay for to get solved, you must find a handful of early adopters: paying customers that feel lucky that someone did a startup to solve their problem. If you’re onto something that will work, you should even find people willing to pay for the promise of a future product (ever heard of pre-sales campaigns through crowdfunding?).
Are you launching a company that has to get non-paying users before they can make revenue (say you’re launching a new social network)? That’s ok, but keep in mind this rule-of-thumb conversion: 1 paying customer equals some 1000 free users.
Or maybe you can’t sell yet, because your technology needs investment to switch from prototype to product? That’s right too, of course, but you should be able to find a way to solve your customers problems, today. Maybe through consulting, through an alternative product, or whatever makes you build a relationship with them, starting from today. “No, I’ve got a world-changing product in my hands, the next big thing, and I don’t want to make a less beautiful product just to start dealing with my customers”. That’s the blue pill doing a great job in your mind.
Players and Engagers
Clear to Engage, since its first editions, has been following all of its candidates startups, winner or not, to stay up to date with their development. Unfortunately, several promising businesses in this group failed prematurely, even some of the best ones. Somehow, these companies underestimated the importance of talking to their customers, or have waited too much to launch, waiting for an investment or for other arbitrary signs of success.
All of these startups have a common trait: they fall in love with their initial “idea” and stick to it no matter how many indications they might receive that things are not taking off.
Starting from 2015 edition, Clear to Engage introduces a distinction between
- Players (i.e. blue pill startups), that have a great potential, but almost everything in their model is likely to be changed or even abandoned
- Engagers (i.e. red pill startups), that sell something that works with customers and just have to figure out how to make things faster, easier and more profitable
Players have a top priority: validation. Whatever product or service is to be sold in the future, players need to start as early as possible (that means the first day) to identify the core assumptions of the business and set up market experiments to understand if these assumptions are correct, before putting their time and effort into building anything.
Do customers really have that problem you want to solve? How strong is their need for a solution? Do they look for a solution today? Where do they look? How many of such people are out there? When they see a description of your future product (website/brochure) do they signi up to know more? Are they resonating with your message?
Chances are that, in the end, Players will have to change a lot of what they were thinking initially. In startup terms, Players could and, probably should, pivot a lot.
Things that Players should not dedicate too much attention during this process: writing a detailed business plan, fundraising, overbuilding the product, press coverage, idea awards and everything else that has little to do with real customers saying they like what you sell and wish to buy it today (or sign up for buying it tomorrow).
Players need to focus (in order of importance) on the “WHO” and the “WHAT”
Engagers have a different priority: metrics optimization. They already have paying customers, and they are working with them, collecting feedback about what to improve. Their product or service is not likely to change a lot anymore because they already found what works best in solving the customer’s problems.
Engagers, instead have to work on the engine, that is all the processes that attract people’s attention, bring users onboard, turn them into paying customers and make them coming back again to buy more or to invite others. These processes are described by means of metrics, quantitative parameters of early stage company performance, such as acquisition, conversion and retention, among others. Take a look at Dave McLure’s AARRR Pirate Metrics.
Other numbers Engagers have to carefully check for, regarding their businesses: how expensive it is to bring customers in (through marketing, website, campaigns, etc.), and how much revenue each customer is going to generate. These two crucial values, known as Cost of Customer Acquisition (CAC) and Customer Lifetime Value (CLV) respectively, are useful to assess the profitability of your model.
Engagers need to focus on the “HOW”