Startup

How to diagnose your riskiest assumptions

Posted on May 7, 2013 by Diana Kander

risk

Most startups fail because they run out of either time or money.  You can significantly increase your chances of success if you save your time and money until you are sure that you are pursuing a solid business model.  And the best way to make sure your business model is solid is to pick out at least 5 of your riskiest assumptions and objectively test them as if you were investing in your own venture.

So how do you find the riskiest assumptions in your business model?

First, you need to create your assumptions.  Whether you are using a lean canvass or a business plan, you need to lay out your vital assumptions about the business.  Here’s a brief list of questions you need to be able to answer about your business model.  Let me know if you think I should add anything.

  • Customers – Who are your customers? What do they do for a living? Where can you find groups of them? How many of them are there?
  • Problem – Have you identified a migraine level of pain for your target customers?  Are they currently doing something to try and solve it?
  • Solution – Will your solution solve your customers’ problem?  Are they willing to pay your designated price for your solution?
  • MVP – What is the Minimum Viable Product for which your customers will pay?
  • Competition – Who else is providing this solution? What is your competitive advantage?  What about your solution makes it difficult for your customers to leave?
  • Sales channels – How will you sell your product/service? Online? Inside sales? Outside sales? Distribution?
  • Supply – How will you produce your product or deliver your service?  What sort of infrastructure or inventory do you need in order to handle 1000 customers? 10,000 customers?
  • Human Capital – Do you or someone on your team have industry expertise in this market? Do you or someone on your team have the necessary leadership skills to lead this company in terms of product development, sales, marketing, financials, etc.?
  • Financials – How many customers do you need until you achieve target profitability? Is that a realistic number with your available resources? What are your key drivers of revenue?
  • Legal Issues – Do you have the necessary intellectual property rights to operate your business? Have you and your team come to an agreement on equity and responsibility distribution?

Next, list each of your assumptions as a line item.  Then, go through each one and write down two numbers.  The first number is on a scale of 1-5, rating the possibility that your assumption might be wrong.  This is like an inverse confidence rating.  So the less sure you are about it, the higher the number.  The second number is on a scale of 1-10, rating how detrimental an incorrect guess on this assumption would be to your business model.

Go down the list of each assumption and write down the two numbers.  When you are done, go back through one more time and multiply the two numbers to get your overall risk assessment.

Here’s a sample layout I created for a company that offers discount fuel cards for truck drivers.

Assumption Possibility of wrong assumption (1-5) Level of Impact if you are wrong (1-10) Total Risk Level
My target customer is the owner operator of a tractor trailer truck rather than the owner of a small or medium fleet 3 9 27
Their problem is that they need to buy as much gas for their truck as large fleets, but they don’t get the fuel discounts that group purchasing affords 2 7 14
There are no good options for fuel discount cards that allow owner operators to save 10 cents per gallon or more 5 5 25
Owner operators of trucks get information on new products from trade periodicals and online message boards 5 3 15
The average discount fuel card that owner operators use saves them 5 cents or less 4 3 12
Less than 50% of owner operators use any discount fuel card 4 8 32
We can sell discount fuel cards to owner operators through an inside sales force over the phone 4 8 32
We can sell discount fuel cards to owner operators through an online presence 4 4 16
We can partner with an existing fuel card underwriter to create our card and discount program 5 10 50
We have the necessary team to understand the trucking industry and deploy this product 3 4 12
We have the necessary team to supervise an inside sales operation 3 4 12
We understand what is required on the backend to process applications, approvals, and customer service 5 5 25
We need 500 customers to achieve our minimum revenue goal 1 3 3
Each inside sales representative will sign up 20 new accounts per month 4 5 20
Our team is on the same page about equity distribution, roles, and responsibilities 4 5 20
There are no regulatory hurdles for us to offer this product to truck drivers 5 8 40

Once you go through each of your assumptions to the categories outlined above, you can prioritize them based on the total risk level number.  Now you know which assumptions to test and validate.

Categories: Startup, Validation | 2 Comments

12 Tips for Successful Customer Development Interviews

Posted on March 6, 2013 by Diana Kander

clipboard

I love this piece by Giff Constable outlining his 12 Tips for customer development interviews.  Giff does a great job of helping you understand both your goals and mindset when trying to figure out a problem worth solving and a solution that customers are willing to buy.  Here’s a quick summary:

  1. One person at a time – It’s always better to interview individuals rather than focus groups.  Interviewees by themselves are going to be a lot more honest and less likely to be influenced by others the way they can be in a focus group.
  2. Know your goals and questions ahead of time – Figure out which assumptions about your business model you want to test through customer interviews.  Before you start, have an idea of what it will look like when you prove or disprove your assumptions.
  3. Separate behavior and feedback in discussion – Separate out your problem interviews from your solution interviews because your goals for gathering feedback are going to be different in the two scenarios.
  4. Get psyched to hear things you don’t want to hear – You want to seek responses that disprove your assumptions.  That’s the only way you are going to get honest feedback on whether your idea is worth pursuing.
  5. Disarm “politeness” training – During your interviews, create an environment where people can give you negative feedback. Your goal is to find out the truth, not to try to sell something nobody wants. One way to create this environment is to follow #4 above.
  6. Ask open ended questions – You’ll get a lot more value out of interviews if you let people talk about their preferences, rather than limiting their opinions with yes/no questions.
  7. Listen, don’t talk – this one is pretty self-explanatory.  You should be listening at least 10 times as much as you are talking.
  8. Encourage without influencing – Don’t just clam up and expect them to fill up the entire conversation on their own; encourage their thoughts with comments like “I see,” “interesting,” and “tell me more about that.”
  9. Follow your nose and drill down – Whenever they say something that peaks your interest, prod further with questions.
  10. Parrot back or misrepresent to confirm – When they say something important to the interview, repeat it back to them to make sure you understood it right.  They can either correct your misinterpretation or expand on their idea.
  11. Ask for introductions –Use each interview to gather leads for additional interviews.
  12. Write up your notes as soon as possible – This will help you ensure that you don’t lose valuable content.

Customer interviews are a staple in defining your product/market fit.  Follow these 12 guidelines to make sure you are spending your time wisely. Let me know if you have any tips to add in the comments.

Categories: Customers, Entrepreneurship, Startup | 1 Comment

I run from danger, and other dumb assumptions entrepreneurs make

Posted on January 31, 2013 by Diana Kander
What does it feel like to have a terrible business idea? The kind where people laugh behind your back as you walk away? Take a moment. Think about it.
 
It actually feels a lot like having the world’s best business idea…right up until the moment when the market tells you that you don’t have anything anyone wants.
 
I meet with a lot of founders that don’t have any idea how to figure out whether they have the world’s best or dumbest idea.
 
After starting a number of companies of my own, and meeting with entrepreneurs at all stages of the startup journey, I’ve come to believe that the ability to differentiate good ideas from bad ones and massage bad ideas into profitable companies is like being physically fit. The vast majority of us aren’t born fit. We have to train, practice, and push ourselves to get good at it.

running woman

When I was in high school and college I completely ignored all forms of exercise. But I was lucky, I was a pretty skinny kid. People would always say to me, “are you a runner? You look like one!” and it happened so frequently that I came up with a funny quip back. I would say, “I run from danger!…and that’s about it”
 
So one day, I was walking my dogs, and I thought to myself, “Self, if there was danger on this street, could you in fact run from it?” I decided to test my assumption and I took off running. I sprinted as fast as I could. I sprinted for two whole blocks until I had to stop and throw up. And after I was done, I thought, ”Man, danger would have kicked my butt.”
 
That day I learned that it’s pretty easy to make bad assumptions. Just because a lot of people tell you something is true — that you look like a runner — doesn’t necessarily make it so.
 
Your startup idea is no different than my perceived ability to run from danger. The only way to prove or disprove your idea’s likelihood for success is to test your assumptions. And whether or not this current idea makes it, you’ll be developing the muscle memory to validate future ideas.
Categories: Startup, Validation | 1 Comment

My First Forbes Article: The Good Side of Failure: Three Painful, but Worthy, Lessons

Posted on December 2, 2012 by Diana Kander

When you read about startups in the news, the articles usually cover one of three events in a company’s lifecycle: launching their service or product,  raising an investment round, or selling their business.  This paints an unrealistic picture of what startup life is like because these three events do not represent the average lifecycle of a company.  In fact, the vast majority of startups fail. They lay off all their staff and shut down their site. Few of these stories are ever reported.  And when they are, the article is usually a short piece covering the email the company sent to it’s customers or employees describing how the wrap up will take place and ending with “none of the leadership team could be reached for comment.”

We lose so much value as a community when we let these stories go.  There are so many valuable lessons hidden behind their shuttered doors.  And their failures can save a lot of time and money for future entrepreneurs who are willing to learn from their mistakes.

So I’ve started a series of interviews exploring failed startups.

This is my first interview from Forbes.com: The Good Side of Failure: Three Painful, but Worthy, Lessons

A few years back I was doing an interview for a business paper and when the reporter asked me if I had a business motto or phrase to live by, I replied “Fail quickly!”  She looked at me funny and I quickly realized that what she heard was “Go out of business quickly” but what I meant was “Failure is completely normal. It happens to all of us. And the only thing you can do is minimize the consequences to your business by realizing that small failures are going to occur early on and saving yourself a lot of time and money from going in the wrong direction.”

I hope this column helps you identify failure before it happens by understanding that it is a normal part of startup life.

Categories: Failure, Forbes articles, Startup | Tags: | 3 Comments

3 Things You Should Never Do to Get a Customer

Posted on November 14, 2012 by Diana Kander

(Part 2 of 2)

In my last post I wrote about the importance of First Customers and the 5 things you can do to find these early adopters. But not all early adopters are created equal and you should limit what you are willing to do to earn a customer. If you don’t establish these parameters, some first customers will take advantage of you. Giving in to your excitement too early can poison your organization.

So here are three important rules for you to follow when pursuing First Customers:

1. Never give your product away for free.

It seems obvious, but this can actually be very tempting. You desperately need First Customers. You think your product can eventually sell for $100 per use or unit if you could just land those first users. You just know the great testimonials or referrals will follow. Or maybe you want feedback on your product that only customers can provide. Believe me, you’ll find a million ways to rationalize giving your product away for free, including the naïve assumption that you will one day convert the account to a paying customer.

Here’s the problem: You need First Customers to figure out if you have a product/market fit, i.e., if the marketplace has a need for your company, and unfortunately free customers aren’t going to help you figure that out. Just because someone takes your product or service for free doesn’t mean they would be willing to pay for it later. In fact, the opposite is probably true. Think about how many Facebook or Twitter users would stop cold turkey if they had to pay even a nominal fee on a monthly basis.

Giving away your product or service for free will only delay the time it will take you to figure out if you have achieved a product/market fit and extend the time and money it will take to find a successful business model.

2. Never perform tasks outside your expertise.

Some of your early prospects will say, “I really like what you are trying to do with your company, but I would love it if your company did x or y”.  One of these prospects might even be a really big fish.  But getting distracted will only cause damage to your company.

If you start performing tasks outside your initial business scope or try to make your product fit a very particular set of requirements for a single customer, you will likely a.) Do a bad job because now you are operating outside your area of expertise and b.) Waste valuable time and resources for a side project while taking your eye off the ball of finding your First Customers and building a successful business model.

First customers should help you find a product/market fit and build your company. Anything else is a distraction to be avoided.

3. Never put up with overly demanding clients.

No paying customer is so invaluable as to justify a never-ending string of requests that hinder your ability to serve other clients. A very small percentage of your First Customers are going to be emotional vampires. They will have complaints and suggestions and demands that far outstrip the amount they are willing to pay.

You must be willing to fire these customers. Your emotional well-being is a valuable commodity to your company and it is simply too important to spend on the demands of problem customers. Instead, use the same valuable time and resources to find bigger and better customers.

Finding a product/market fit is the single most important step in proving your business model. The best way to confirm a product/market fit is to have First Paying Customers with reasonable expectations and a need for your expertise.

Categories: Customers, Startup | 2 Comments

5 Ways to get your First Customers

Posted on November 6, 2012 by Diana Kander

(Part 1 of 2)

Do you know the difference between a startup idea and a startup company?

Paying customers.

I’m not talking about the .1% of startups out there like Facebook or Instagram that raise millions of dollars in venture funds and build up a user base of millions of people before they need to make any money.  I’m talking about the 99% of companies that bootstrap, raise 500K or less in investment dollars and have to figure out how to generate revenue in order to stay in business.

These early adopters are a very special breed and they are EVERYTHING to your business.  They don’t need testimonials. They understand that errors will happen.  They are patient, interested in your success, and most importantly, willing to pay you for your product or service.  The number of early adopters you need may vary.  If you sell a 100K product or service, you may only need one or two.  If you sell something for $1, you may need hundreds or thousands to prove that the marketplace is interested in your product.

Early adopters are more commonly known as your first customers.

These are the five things you need to do to find your first customers:

1.    Use every relationship you have

It’s hard enough to make cold calls, but it’s extremely difficult to sell new and innovative products and services through cold calls.   You need to meet with people that have some connection to you, no matter how small.

When I started my first company, my clients were supposed to be businesses. I sat down and made a list of everyone I knew who owned a business and there were only five names on the list.  This was very discouraging. But I decided to grow my list through existing relationships, so I met with almost everyone I knew who might have ties to the business community and I asked each of them to introduce me to five business owners.  I was surprised at how willing people were to help.  I quickly grew my list of prospects and even snagged a few early customers.

2.   Stalk and Awe

There are always going to be potential customers that are totally out of your reach but would make an incredible early adopter.  This is where I like to employ my signature “Stalk and Awe” campaign.   First, I stalk them.  Not the kind of stalking that’s an unwanted, obsessive intrusion on someone’s personal space that can get you arrested.  I’m talking about a kind of stalking where you find multiple points of contact and references for your meeting.  Find anyone and everyone who might have a connection to the person you want to meet and ask them for an introductory email or a warm up call.  The harder this person is to reach, the more recommendations you will need.  Next, send a letter of introduction and follow up with a call. Finally, find opportunities to attend events where they will be so that you can “run” into them. Networking and business events only. I’m not suggesting you crash a wedding or join their gym.

If the first part of the campaign works, and you actually get a meeting, you now have to Awe them.  Do a lot of research on the potential problems in their business.  Spend the first half of the meeting just asking them questions about potential pain points, and try to offer something of value completely independent of your business.  If you bring enough value to the table, and awe them, they will be a lot more interested in you and your company.

3.   Accentuate the Positive

When you are talking to potential customers, they might have all sorts of questions that don’t have great answers.  How many other customers do you have?  How long have you been in business?

Try to answer their questions by accentuating the positive about your company.  How many other customers do I have?  That number isn’t as important as the fact that of everyone that’s tried our product or service, 95% would recommend it to their friends.

How long have I been in business?  I have years of experience in this market segment, but I recently chose the opportunity to bring the same quality service that I offered through such and such big company at a much lower rate.

4.   Create Partnerships for Credibility

No one has ever heard of your startup. You have zero brand credibility.  So why not use the credibility of an existing trusted brand to get your first customers?  Find a group or a person that your target customers trust.  This could be someone that is already providing them with services or just a well-known name.  Offer this potential partner a percentage of certain kinds of revenue.  Offer them a sponsorship agreement.  Offer to let them be a customer for a significantly discounted rate in exchange for a public endorsement.

5.   Become an expert

When you don’t have a track record of happy customers the next best thing is expertise in your chosen domain.  If you can get your early customers to trust you as a knowledgeable resource in your subject area, they will buy from you. The key here is not to fake it – before you start proving your expertise, you have to actually develop it.

Once you’ve developed your expertise, you can express it through any media resource.  You can tweet, facebook, blog, guest blog, etc, to get your message out.  You can write a white paper and email it to your target clients.  You can put together a “lunch and learn” seminar and invite your prospects to learn about your subject area.

There are many ways to prove expertise in a particular area, but it is very important to fight the urge to spend all of your communications trying to sell your company.  Use your platforms to try to help people and your first customers will follow.

First customers breathe life into your startup.  Now that you know the five things you must do to find them, I’ll caution you against doing anything and everything to please them.  In fact, in my next post I’ll cover the three things you should never do to sign up your first customers.

Categories: Customers, Entrepreneurship, Sales, Startup | 3 Comments

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