I started down the road of writing about customer discovery because of a consistent frustration. So this week I wanted to take a step back. And get it off my chest. When it comes to talking about the market opportunity we are awful. Far too many startup and SaaS business plans are terrible. Lacking credibility, focus, relevance and anything else you would like to see. It drives me crazy.
This post made me feel a little better. The author (Tim Devane) sees the same problems. Why should this be? Every entrepreneur I know is obsessed about the market. Investors rank the size of the market opportunity second only to quality of team. No-one doubts that it is important. Yet still it goes on.
Blunt and NOT to the point
I sense some doubt. Some people reaching for the comment box. To explain why market sections in business plans are well researched and written. And I just don’t get it. Let me jump into what the real world looks like….
The bleeding obvious
Sometimes there is a large and visible market. IOT is a good example. I know it is huge. And I don’t much care which gargantuan estimate you choose to quote. On the other hand I will need a lot of convincing that your product addresses the whole IOT market. Using this type of number is just lazy. You business plan needs to explain your real market. Not just some random mega trend.
The highly competitive
You have identified a large and credible market. Often that will be a competitive field. This is where the 1% trap kicks in. So the business plan reads something like “We have an addressable market of $XX billion. Just 1% of that market will allow us to return 10x value to investors.” So what? Just throwing a product out there does not guarantee any level of market share. Not even 0.00001%.
If you are attacking a large established market you must set out what your competitive advantage will be. What makes your product better or cheaper? Or your brand more credible? Or your business model more efficient? You don’t need to be certain. But it would be nice to know you have some ideas. On a personal level, I also love to see a product that offers genuine disruption.
The hard to explain
Many B2B ideas are aimed at markets that are hard to explain. Large complex industries have highly specialised and segmented supply chains. Big market opportunities exist in fields that the ordinary business person has never heard about. But if your business plan leaves the reader wondering what the market is and what your product does? Investors will be scared off. No-one likes to feel they don’t understand.
Here you need to spend a bit more time establishing credibility. Show how the market works. Find credible statistics. And maybe explain who produced them. Your audience may not know the trade body for your industry. Don’t forget that you may still not address the whole market. Tell people what your real market is against this background. And how your new product will be competitive and/ or disruptive.
I love this type of opportunity. Such markets are often dismissed as niche. Yet they can be worth billions of dollars. And the participants are often wide open to new ideas.
The true genius
The genius of Steve Jobs was creating products that no-one knew they wanted. Startups continue to create new markets. Sometimes far from any existing product. This can be thrilling and the opportunity can be huge. If you have an idea that breaks new ground, don’t spoil it by:
You will still find it tough to convince people. Perhaps this article will help you make some kind of start Find One person Who Gives a Sh!t.
Why do startups fall into these traps?
If you have never tried to write a business plan you probably feel quite smug at this point. You are a smart person. You would never do any of these daft things. On the other hand, everyone who has written a pitch knows the truth. Me included. It is so easy to slip into what I call Gartner mode. Find a report or a news item with a nice big number. One that is vaguely relevant to your business idea. And seize on it to build your market arguments.
Why does this happen?
How to avoid the Gartner trap?
No startup has all the answers. Maybe that is another reason why founders lean on Gartner and their competitors. Investors understand this. Honesty and openness are the best policy. I would much rather hear where you are. Give me incomplete data and clear sense of purpose. Rather than rely on clever presentation and glossy names.
Do the hard stuff. Dig as deep as you can and invest some time. Show me a great plan to build up a clear analysis of the market. That is much better than a superficial and generalised chart from a press release.
And remember that every potential customer you speak to is a market indicator. Even (sometimes especially) those who don’t want to buy your product. Draw some inferences from your customer conversations. And include them when calculating your market. There will not be much science behind estimates like this. But the message will be stronger and more credible.
Above all be passionate about your market potential. It is not a cold calculation. Or the product of a business formula. Tell your audience why you believe in your product. In its potential to change lives or businesses for the better. That is your real market.
Once you have captured this, rehearse through with someone ruthless. Send it to me if you like. Just make sure it is less than 10 lines of text.
If I had to pick one common weakness in the SaaS and startup businesses I see it would be customer discovery. I hear a lot about markets. And many great business ideas. Then I start to ask about engagement with real potential customers. Too often the the story gets thin. Yes there are contacts and introductions. Evidence of substantial discussions and learning can be lacking. This article is the start of an attempt to explore two questions: Why is a fundamental and invaluable business idea often ignored. Or at least implemented badly? What startup leaders can do about it?
I have called this the incomplete guide for two reasons. First, customers are people. Every relationship is a unique experience. So no set of rules or methods will cover everything. Second, it is intended to be the first of several parts. I am just not sure how many yet!
Execution not strategy
My usual introduction to a company is a business plan or a pitch. Any competent business plan includes a view of the market. If the company is making progress there may also be some evidence of traction. My habit is to dig into these areas to find the answer to one key question: How close is this team to knowing who their real customer is?
In a good business this is a great conversation. It gives me confidence that the founders are engaged in customer discovery. Sometimes they are all the way there. More likely they are part of the way along the road. That’s fine. Good teams will talk about that journey. And that will build confidence.
Customer discovery is a fundamental part of the startup journey. All it means is talking direct to people who may buy your product. And finding out what their needs are. So that feeds into the design of your product. The phrase was coined by Steve Blank in his best selling book Four Steps to the Epiphany. You can read the reasoning and the theory in the book.
For me this is a make or break question. Customer discovery is execution not strategy. I don’t expect to see it written down. I do love to hear smart people describing how they are reaching out to customers. What feedback they are receiving. How the dialogue is changing their product strategy.
Who to talk to
I don’t care much if you have read the book. What counts is the practical stuff you are doing to build your business. The first question is who are the potential customers that you are trying to talk to. The base answer to this is the people who have the problem your product is trying to solve. And for a consumer business this is straightforward.
In a B2B SaaS business this can be the first point of confusion. The people who have the problem will be end up being users of your product. They may be different from the people who write the cheques. Even in a small business the owner may see a difference between using a tool and buying a tool.
As a result, it is easy to go wrong right at the start. Many startups (and many advisors) will gloss over the difference. they will pick companies as the target customer. This looks neat. Now users and buyers are the same people. And if the companies are large or well known, a nice target list will impress investors.
Neat but a mistake. Companies don’t talk. So they are impossible to listen to. Worse, people in companies do talk. Speak to the wrong person and you will be hearing the wrong message.
One option is to use a standard model to identify the right person in a company to talk with. There are several of these based on decision makers and influencers. Organisational roles. Job titles. In my experience this approach does not work. Every company is its own world with its own unique culture. Even within one organisation, different products may be chosen and bought by different routes.
I prefer a map building approach:
The risk with this approach is that you invest a lot of time for no reward. If you end up selling to large enterprises this will always be a challenge. In the early days you have little to lose. Handled well, every meeting will add to your understanding. And improve your chances of finding good paying customers.
The deeper you go the greater the risk. There is no complete answer to this. The best advice is rigorous honesty. Be clear about the progress you are making. Be prepared to walk away if it becomes evident that your product will not work for that customer.
How to find the right people
A journey, as Mao sort of said. begins with a single step. To chart a path you need to find the people who have the problem you are trying to solve. This can seem like a scary task when you first start your SaaS business. Where to begin?
Having the conversation
If you are sticking with me you will now be working towards 30 or so introductions. The warmth will vary but they are at least not stone cold. Your objective is to have a conversation with as many of these people as possible. A discussion about the problem your business is going to solve.
This discussion can be quite informal and maybe short. A quick 10 minutes at a conference or meetup can be enough. You will not need an agenda (unless you are asked to provide one). But you do need to do 3 things:
These principles apply however you are introduced. If your contact makes a personal introduction, framing should be your first words. If you strike up a conversation setting the frame is the switch from small talk to business mode. If you call the person it is the way you describe the purpose of the call. It also forms the structure for any introductory e-mail that you send.
If you want to know more about this, read The Mom Test by Rob Fitzpatrick. If you are confident you know what to do, read it anyway. There are few books that I consider essential reading but this is one. If it contradicts what I have just said, follow Rob’s advice.
Keeping track - The anti-CRM
As soon as you starting talking to potential customers, you are building your business. The most tentative chat about solving a problem is part of that process. The connections you make will form part of the future of your SaaS. It doesn't matter if they never buy or use your product. They will be the start of the thread that leads you to your first paying customers.
So you should keep a record of who you talk to and where it leads. A whole sector of the software industry has grown up around doing just that. Its called CRM. It covers the spectrum from spreadsheets to the largest B2B SaaS company in the world.
The trouble is that it is a false model. The initials stand for Customer Relationship Management. But the software is based on a top down management of the sales pipeline (or funnel if you prefer). In essence the software does not do what the name implies.
The reasons for this would make a whole book. The point is to think different. When you are in customer discovery mode the issue is simple. You are nowhere near ready to sell. Even if your contacts want to buy. Trying to track these conversations in a sales funnel truncates all the value.
Concentrate on gathering the lessons learned. And the connections that are growing your network. Make note of demographic information like roles, titles, interests and so on. You can use this to help build up personas when you are ready for your marketing campaigns. All this will be much more of an asset than an artificial pipeline.
Don't stop exploring
Customer discovery is about execution not strategy. It is a lifetime process. The biggest companies with the longest established products are still doing it. Still talking to customers and potential customers. Still learning and building better products. Delivering the solutions their customers value.
The next part of this guide will look at how you use the information you have gathered. For now, remember three things:
I am a big fan of sharing. I worked in an incredible collaborative environment most of my career. And when I see great things happening in startups an open attitude to knowledge is always a part of it. I also know that no-one person has a monopoly on the best ideas. And luckily a whole lot of smart people love to share their best thinking.
One of the themes of this website is sharing the best ideas I find. You can see this in action in my SaaS Pricing section. The focus is SaaS and startups. But from time to time I will wander into other areas. I pick up ideas all the time from blogs and newsletters. I also share ideas generated in discussions I have with great founders and startup teams. For example the SaaS Scotland Group.
You can see these in real time by following my twitter feed. One theme at this early stage in 2016 has been guidance on some basic and early stage stuff.
As a startup founder or leader you will be asked to cover a bizarre range of skills and disciplines. Technical and sales of course. Strong marketing is obvious. But also finance, HR, procurement, strategy and planning, operations and many more. At the same time you must be an inspiring leader and a great manager. Make tough decisions. Take the right risks. Find and persuade investors. Contribute to the ecosystem. I could go on but it gets scary.
No-one has all these skills. So in this post I am sharing the articles and guides I have found to a whole range of basic skills. If you are just starting out on the startup journey you should find some help here.
I also read and reread some of these posts. When I was young (a long time ago) I played chess a bit. And I was always struck by the attitude of the Latvian former world champion Mikhail Tal. He told an interviewer once that he always watched the chess lessons for beginners broadcast on Soviet TV. (Proving the USSR was a real fun place.) As far as he was concerned it always helped to be reminded of fundamentals.
I think the same applies to business. Things can get complex. But it is easy to forget the basics. Keep your eye on the simple things. And keep doing them right. You will go a long way to succeeding.
For many entrepreneurs the move from idea to a real business is the hardest step. You meet lots of people in everyday life who have a great idea for a business. They may be unwilling to take the risk. Yet the biggest obstacle is often just not knowing how to start.
Regular readers of this blog or my newsletter will know that I am a huge fan of the Crew blog. The writing is excellent and the content is consistently thought provoking. So I love this collection that forms a complete guide to building an online business. It is great for first steps and goes quite a bit further as well.
If you prefer a more dynamic, rock’n’roll approach then this quick and dirty guide is also excellent.
As in many walks of life, the best way is often to learn from others. In this blog post the founder of a classic B2B SaaS business tells his story. ToMo is an employee onboarding tool and this is how they got from idea to tangible product fast.
A big challenge for many founders is tech skills. It can feel as if only programming geeks know how to create a software company. Or people who have lived on their X-Box for 10 years. This is far from accurate. Many great tech companies have been built by non-tech founders. HelloCompass tells the story of building a tech startup without tech founders.
Accelerators have become a popular option for startups worldwide. The original and many would say the best is Y Combinator. This series of lectures put together by Y Combinator founder Sam Altman. He has pulled in many of his friends and Stanford University. You need a bit of time. But How to Start a Startup takes you through the whole accelerator journey with some of the most inspiring speakers you can find.
Making the leap
The mechanics and methods are fine but you still need to take the risk. Most businesses fail. Wherever you look. In every country. All types of business. Any strategy or none. The chances are your business will fail. Yet so many people believe there has never been a better time to try. I agree with them. Perhaps one of these articles will help you make the decision…but remember no-one else can choose for you.
Let’s start with Ash Maurya. Ash is one of the gurus of the startup scene. And his book Running Lean is one of the best practical guides you will find. He also supplements the book with regular videos and posts to encourage real action. He gathered some of this philosophy into the Bootstart Manifesto.
Nonetheless you will probably fail and this article explains why. SaaScribe by the way is a great regular collection of interviews and articles. With a specific SaaS focus. The team are also involved in SaaS meet ups and conferences in Europe. Full disclosure - I also write for them on occasion.
Continuing the SaaS theme. In this article another SaaS guru, Jason Lemkin, explains that it takes 24 months to succeed. The time is not a fixed point. But he is dead right that perseverance is one of the qualities need to build a business.
If there is one practical step you can take before jumping, it would be validating your idea. You need to feel confident that here is a viable, paying business for what you are trying to do. This is no guarantee. You still need, talent, execution and a bit of luck.
Will anyone pay you money?
This is the first of 3 sections with money in the title. The order is customers, profit and loss, investment. This is deliberate. Tackle the money in this order. Too many founders jump straight to fundraising. Too many seed investors fall for this and give them cash. Bootstrap your way to early customers. And have a clear idea of a viable business model. Then raise funds if you need them. Always in that order.
My first selection is about what not to do. This just such a fundamental point. I see lots of business plans that talk about great markets. Yet have no mention of real customers. Aiming for the sky is awesome. Finding the first users and customers is indispensable. Your market plan must build from the bottom up as well as the top down.
You can read the theory of this in detail in Steve Blank’s book Four Steps to the Epiphany. In many ways this is a terrible book. The prose is clunky and jargon laden (pot calling the kettle black I know). The author describes a business far removed from a typical 2 or 3 person startup. Yet the ideas are essential and universal.
Who do you sell to first? Friends and family are a start. But you need to get out into the wide world at some point. In B2B this can seem daunting. Try this guide to finding your first leads.
The founder of the company also contributed this piece to SaaScribe. How to find your first 20 customers.
In the early days you are not trying to make sales. Your first job is to figure out if your product is right for your market. If not you need to change the product. Or choose a different market. Or a bit of both. In this post the Lean Startup team looks at this process. Known in startup speak as product/ market fit.
For a simpler guide try this from yet another SaaS guru, Tom Tunguz. Finding the right answers is often about asking the right questions. The 8 in this post are relevant to anyone.
At some point you will feel as if you are reaching a good fit. Then it is time for another giant leap. Paying for some marketing. Dropping money into the wide blue ocean to see if anyone bites. This is a bit more technical. But a good guide to spending those first advertising dollars - the first $10k to be precise.
Just buying advertising is a crazy strategy in today’s world. You need to drive demand in other ways to. Here Drifft offers a 7 step process covering the whole product launch process.
And don’t be afraid of something new. I found this site recently. It offers practical tools for every step of the process. From defining a market and prices to checking out the competition. It is a paid SaaS product with a 30 day free trial called Edison Plan. Would love to know if it works.
Can you make money doing this?
First you find a market i.e. some real people prepared to pay real money for your product/ thing/ stuff. Next, will this make a viable business? This can be tough for founders without a financial background. Or even sometimes for startups with good finance knowledge. Building a financial model which reflects your business model is essential. You need to understand how your business will make money. If it makes money at all.
Begin with a plan. You will need accounting soon. But step 1 is to make a plan. Model some numbers and see if there is at least a chance of making money. That is the subject of this post. It also has links to some handy free resources like example spreadsheets.
On the other hand you could try building your own. This is nice guide to the basics of making assumptions and assembling them into a financial model.
I also think this is an excellent example. Written by top European SaaS investor Christoph Janz. It includes another free model and lots of good ideas about planning.
In similar vein check out this post. It is in effect an interview with someone who spent 20 years building this type of model.
Peter Reinhardt is a recent discovery of mine. Almost anything he writes is useful and in this post he covers the accounting basics you need to know.
It is also worth understanding some accounting concepts. Focus on those that are most relevant to your business model. For SaaS and many others this boils down to many different ways of measuring revenue. If you think cash being paid into your bank account is revenue its time to think again! Profitwell explains what this means for SaaS here.
Let me close with a link to the next section. When you start a company your biggest concern is going to be running out of money. Once you start fundraising this mutates into asking how much money do you need. The amount you spend every month is known as the cash burn. If you know this, you can figure out how many months your cash will last. Back to Tom Tunguz for some ideas on figuring out how much cash you should burn.
Where can you find the money to build your business?
I cannot say often enough that raising money is not the objective of a startup. Building a great business is. However, chances are you will need outside investment at some point in the journey. So here are three posts to help you on the way.
Back to Y Combinator. They run an excellent blog called the Macro. In this item they have included a podcast covering all the basics of legal and finance. Some of the legal stuff is US specific. But there will be an equivalent in every country. Essential basics to avoid being trapped by more experienced or unscrupulous investors.
Philipp Moering has written a good post on the fundraising process from an investor point of view. What do investors focus on? How does the early stage process work? What should you do to get ready? Includes a key message. Get to know investors before you start asking for money.
If you live in Scotland there is a proven source of some free(ish) money for your startup. The Scottish Edge awards round 8 has just opened up.
Final post is a collection within a collection. Another blogger I follow is Alex Iskold. He has put together this article with 25 of the best posts about fundraising. Some great choices.
Some help with other things
There is no complete answer to all the things you need to cover when you are running a business. To round things out a couple of links to places you can find help. Addresses a wide selection of other business and management questions.
You are not alone. These are the top 15 areas where startups most often ask for advice. If you are not asking these questions, maybe you should be!
Or maybe you just need a place to go and look for help. Founder Centric is startup focused and has some nice free tools on some key topics. Management Help is much more traditional business. On the other hand it has a more comprehensive collection of useful guides.
Nothing is a complete answer. I will keep sharing ideas. And writing blogs or developing tools which share my own experience. You can download a couple of free things on this page. I also share a small selection of the best ideas every week via my newsletter. No matter what you read or what you do, we all make mistakes. If you sign up below, I will share the best posts I know about on founder mistakes in next week’s newsletter.
Kenny Fraser is the Director of Sunstone Communication and a personal investor in startups.