Episode 324 | Idea Validation & Risk Avoidance

Show Notes

In this episode of Startups For The Rest Of Us, Rob and Mike talk about idea validation and risk avoidance. They list 10 fundamental questions that need to be answered when starting a new product.

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Mike [00:00]: In this episode of ‘Startups for the Rest of Us’ Rob and I are going to be talking about idea validation and risk avoidance. This is ‘Startups for the Rest of Us,’ episode 324.

Welcome to ‘Startups for the Rest of Us,’ the podcast that helps developers, designers and entrepreneurs be awesome at building, launching and growing software products whether you’ve built your first product or you’re just thinking about it. I’m Mike.

Rob [00:25]: And I’m Rob.

Mike [00:26]: And we’re here to share our experiences to help you avoid the same mistakes we’ve made. What’s going on this week Rob?

Rob [00:30]: Just nailing down the last few speakers for MicroConf Las Vegas coming up here in April. So rounding out that lineup. It’s shaping up to be a really interesting lineup this year. I mean, every year is good in its own way but this year you and I were really deliberate about almost setting up – especially with starter – setting up a curriculum where we want each talk to be all the way from idea validation to launch and everything in between. We’ve chosen speakers that are either experts or they are founders who have done it, each of these stages, and have done it successfully and have a framework. It’s pretty exciting.

Mike [01:01]: It’s also nice to be able to kind of niche down the audience a little bit so that we can target those speakers so that you don’t have people sitting next to each other that are just in vastly different worlds. We’ve got the people who are just starting out versus people who are making several million dollars a year. And they’re at different places in their business so it’s hard for the speakers to talk to both of them at the same time. It really helps to have that separation between them so that those talks are more targeted directly to where their business is at.

Rob [01:28]: Yeah. Just as an example with Starter Edition, Jordan Gal is talking about going from zero to 15K MRR and they’re definitely past that now. But I think his talk goes through there. And Ryan Battle is talking about how to gain traction in a crowded market. Justin Jackson. You’re speaking about idea validation. Sherry Walling is talking about staying sane. And on the growth side, in addition to me speaking about the Drip acquisition, Lars Lofgren, Joanna Wiebe, Russ from Digital Market. We’ve really got a nice lineup shaping up here.

So, if you’re interested, we do still have a few tickets left. I think we have maybe 10 or 15 to each conference. It’s like the perfect amount to have right now. So head over to MicroConf.com if you are interested in hanging out with a couple hundred of your closest bootstrapped founder friends.

Mike [02:14]: Talking about bootstrapped, let’s go in the opposite direction. Did you see that Trello was acquired for $425 million by Atlassian?

Rob [02:21]: Isn’t that insane? I read somewhere – and it was debatable because they didn’t release revenue numbers, but it was kind of numbers have been implied and it was May of 2016. So it was about seven months ago that they were doing around $10 million in revenue.

Mike [02:35]: Yeah.

Rob [02:37]: That’s a hell of a multiple. Forty-two times revenue. Assuming that’s correct. Let’s say they were at 20 or 30 million. It’s still a 10 to 15 times revenue multiple. That’s not net profit like if you were to go to a broker and sell for financial. This is tremendously expensive.

Mike [02:53]: Yeah. I think the interesting thing is that they said that they had 19 million users. I also read that they had over 100 people working on it at this point. So, I think that those things factor in as well. Didn’t they get funding for Trello?

Rob [03:07]: I think they did. They spun it out and raised money. It must have been bleeding cash if they had that many people working on it with that little revenue. It’s a good exit for them. I’ve always liked Joel Spolsky and Mike Pryor. They built something pretty amazing with FogBugz and Stack Overflow and Trello. They got in early and they made a good product. I use it every day and I think they really captured a market. I totally don’t begrudge them any type of success. I feel happy for them to have had a big exit. As far as I know this is their first exit, right? Because FogBugz wasn’t an exit. It’s still running and turning – I mean Fog Creek. I’m sorry – still turning out FogBugz. And then Stack Overflow is just churning along at this point.

Mike [03:47]: Yeah. Spolsky is the CEO of Stack Overflow so it’s its own separate entity. All three of them are separate entities. It’s interesting to watch definitely.

Rob [03:55]: Yeah. They’ve done a lot to impact our community both of software entrepreneurs and then now with Trello and Stack Overflow kind of the rest of the world. They just really done a lot. It’s pretty impressive. Anything else for you before we dive in?

Mike [04:10]: I’m experimenting with going to a three and possibly a four monitor set up. I’ve got my main desktop. It’s a 30-inch monitor. And then I’ve had a 20-inch monitor next to it for a while. And I’ve always been thinking to myself it would be really nice to have a third monitor up above that so that I can have something else up there and use it for reference if I’m working on stuff that I need a lot of screen space. And I’ll say it’s a little dicey. It’s a little rough at the moment trying to get used to having that third monitor. I have the ability to have a fourth monitor. I just haven’t done it yet. I’ve seen people on Twitter recommend that I go to a 55-inch 4K TV setup instead. I think Andrew Culver had showed a screenshot of what his looked like and he was able to put the equivalent of nine screens on the TV all at once. My TV in my living room is 55 inches so I think that I’d have a hard time with that.

Rob [04:59]: And you’d need it to be 4K because the resolution of TV’s is so different. Because HD, or 1080P I should say, is not actually that great a resolution these days now that we’re looking at retina screens. So you’d have to do the 4K in order not to see the pixels and be really irritated by it. You’d also need really good window management because I don’t want to be manually resizing windows. I want to snap it into a grid. You’d have to some app that manages that where you’d say I want basically a 2×2 grid because I only want four and I just want to be able to snap it there and have it expand.

Mike [05:32]: Yeah. There’s a few different options for that because I have it hooked to my desktop on Windows and there’s a few different options which I’m still running Windows 7 but I think that Windows 10 they do a little bit better job with that. I’m not real sure how that would shake out. I don’t know, we’ll see. I might consider doing a single larger screen at some point but I’m just kind of experimenting with it to see how the third screen works out for now.

Rob [05:53]: So I think you’re first problem started with the sentence, “I’m still running Windows.”

Mike [06:01]: One of many problems I’m sure.

Rob [06:03]: Anyways, let’s dive in. What are we talking about today?

Mike [06:05]: Well, today we have a listener question from Simon over at Small Farm Central. He called it into our voicemail number and here is the message. “Hi, Mike and Rob. It’s Simon from Small Farm Central. I came to your conference last year and I just had one question that I thought you might be able to answer. I’m considering doing something new. A big new project and I’ve been talking to customers over the last couple of months and I’ve got them actually to prepay and sort of buy it ahead of time and do things the right way there. I think I really have something that could work. My question is: you do all this validation ahead of time and at a certain point you still need to make a leap and say, yes, I’m going to do this and I’m going to commit the next three to five years of my time to making this work. What do you look at as you make that final leap and make that final decision to really go for something new? Thanks.”

Rob [07:03]: Cool. So that’s a good question. Let’s dive into this.

Mike [07:06]: I think one of the things that I pulled out of this was: how do you evaluate something where you’re trying to make that leap from the validation stage where you’ve put in the time and effort; you’ve talked to customers; you’ve got some prepaying customers and you’re looking at spending the next three to five years working on it? What sorts of factors do you take into account and what are some of the questions that you ask yourself in order to help avoid the risks of taking that leap and spending whether it’s six months or two years working on something only to have it either not work out or just not be something that you want to work on?

I think there’s a number of fundamental questions that you have to ask yourself when you’re going through this. Some of them relate directly to that validation process, but some of those questions also pertain to down the road once you’re past the three month, six month, nine month window of getting started working on that product because you have to look at this a little bit long term.

Rob [07:55]: There’s a bunch of questions that you need to think through in order to be able to “A”: reduce risk, but also, I think convince yourself that it’s a good idea to move forward. The thing is you’re never going to be sure and that’s the unfortunate part. I feel like trying to get 100% confirmation where you totally know everything is going to work, I just don’t think that exists. I think the best you could get is – I don’t even know – 50%, 60% sure. I’ve never felt 100% sure about anything. I think even after I had 11 people committed to paying $99 a month for the original idea behind Drip, I was maybe two-thirds sure that it was going to work. I knew that we would figure it out eventually and, in fact, what we wound up building originally was not the end product. We just kept kind of moving around and adding features and doing stuff until we became a marketing automation platform. But I think that’s a thing you have to think about is entering a space a being willing to pivot or to adjust or to add stuff that makes it not equivalent to your original vision. If you’re not willing to do that then you have a much lower chance of success. No matter if you say yes to all of these questions that we’re going to run through. But if you are willing to be flexible and potentially do stuff that’s outside of your initial product vision, I think you have a good chance of finding a slot that you’re able to fit into in the market and that can lead to success.

Mike [09:11]: So what we’re going to do is we’re going to run down some of the fundamental questions that we’ve probably discussed quite a few times on this show. The first one is: are you going to be solving a problem that people actually have? And, if you’re not, then obviously you’re not going to get to that point where people are paying you money for it. If you’ve got prospects who have already prepaid you money, then you’re sort of past this point.

The second one is: who is it solving a problem for and who would pay for it? These are actually two different questions because not it’s not always the same person. You might be selling to the business owner, for example. But they might have a marketing person who is actually going to be using the software. So you have to just be at least aware of who it is that’s actually paying for it versus who’s problem it is that you are solving.

And then the third one is: are they willing to pay for it? And, again, this is something that Simon seems to have gotten past. He’s figured out, yes, they’re willing to pay for it; how much it is that they are willing to pay for it. Whether you charge somebodies credit card or not, I think, is a question to be asked of yourself depending on how long you think it’s actually going to take, what your comfortability is and whether or not these people are known to you or unknown to you. And whether or not you’re going to be able to deliver what the terms are for that. Are you going to refund their money if you don’t do it, etcetera? There’s a lot of things that kind of factor into that. Those are the three questions you ask up front before you get to the point of having those paying customers.

Rob [10:25]: And it sounds like Simon has this part dialed in. He’s talked to folks, got them to prepay. There are a bunch of different ways to validate this. It depends on the market and who the customers are and stuff. Sometimes it’s face-to-face conversations, getting them to write you a check that you won’t cash until it’s up and running. Sometimes it’s SKYPE conversations, email conversations and getting them to give you their credit card number or even charging it and keeping the money for now. And other times it’s having a landing page and getting a bunch of emails and seeing that you have 2,000 people on an email list who are clamoring for this solution. It depends on what lengths you want to go to but I think that these are fundamental and I think that a lot of folks listening to this show will have heard these before. But that’s where you want to start certainly before diving into a market.

Mike [11:07]: Once you’re at that point where you’ve got at least the basics carved out, I think the next question you have to ask is: are these people searching for a solution to the problem? And if they are, who is doing the searching? How are they solving this problem today? I think that those questions are not necessarily things that people always ask themselves because it seems to me like when you’ve got those people who you’re talking to and you say, “Hey, I’ve got this solution for your problem over here.” It’s very easy to talk yourself into the idea that, “Oh, these people have each given me $50 and I know that I’m going to be able to solve this problem for them.” You can certainly sell somebody on the idea or the vision of a solution to a problem. But does that mean that they were searching for it already? Sometimes the answer to that is no and you may not find that out unless you ask yourself or ask that question of the situation until you’re much further down the road. And at that point you end up with this issue or this situation where you’ve got a solution to a problem but nobody’s searching for it. Then you have to figure out how it is that you’re going to get in front of those people and educate them about a solution you have to problem that they’re not, quite frankly, all that interested in solving because they haven’t gone out and looked for solutions for it.

Rob [12:18]: Right. And if you don’t have in mind how you are going to reach your prospects, you’d better have a lot of money or a lot of experience because this is not for the faint of heart and this is why some companies raise buckets of funding is purely to go into a market where people are not searching. So there’s market education and the outreach is super expensive. Especially if you’re early, if you’re more of a beginner entrepreneur this is a real danger sign to watch out for. If you can find five or 10 people who are willing to pay for it, that is one step. Then the next one is, “How am I going to find hundred’s more in a scalable fashion?”

Mike [12:52]: Something else that kind of comes into that is how quickly and easily you were able to find that initial group of people to begin with. If you’ve done idea validation on a bunch of different ideas, then you can see dramatic shifts between one idea and the next in terms of how interested people were; how quickly they were willing to say, “Yeah, I’d absolutely pay for that” or “I’m using this other thing and it doesn’t work” and they have questions that will help lead you in the right direction for the design of the product and how it’s going to be implemented and how it factors into their business and how it’s used. But if you have a hard time finding those things, then it’s going to be much more challenging to be able to market and sell that product just because it’s harder to get in front of those people. Then your cost of acquisition goes up as a result of that. And cost of acquisition can be your advertising dollars but it also could just be a factor of how much resources you have to put into it in order to acquire those customers. It’s not always a direct correlation between advertising dollars and cost of acquisition. There’s lots of other things that go into it.

Rob [13:51]: The fifth question you’ll want to think about is: what roadblocks are there to customers implementing your solution once it’s built? Because prepayments can be a mixed bag. Buying into an idea and me writing you a check for $100 to get access to the product isn’t the same thing as being willing to follow through and implement it even if you do build the software. If it adds a bunch of items to my to do list as the potential customer or it takes me 20 hours of development time to implement and integrate with you in order for me to get value out of it, then the check I wrote you for $100 really isn’t my commitment. The commitment is I have to carve out all that time to be able to integrate with you. So give some thought to how hard is it to basically get to that point where you’re getting value from your product.

Mike [14:37]: I think this is a really important one especially if somebody is actively ripping out an existing solution that they have in place and they need to put yours in. There’s definitely ways around that piece of the problem. You could go in and let’s say that in the case of Drip, for example, you offered to go in and move people’s data and information over for them from one account to another and you handled that for free in the early days. But, at the same time, your customers were probably not willing to do that themselves because it was just such a colossal headache for them to have to do that. And that’s how you overcame that. But there’s other situations where that might not be as easy to do. Maybe there’s other integrations that they have or there’s other pieces that their existing software integrates into and you have to be able to support those things and if you don’t they literally can’t move over. Even if they’ve bought into the idea and they like it and they want to, if it doesn’t do those certain things, they can’t move and there’s almost nothing that you can do to change that unless you’re able to implement those pieces. And knowing what those roadblocks are in advance is going to be a huge factor in whether or not you’re going to be able to avoid some of this risk of building something, putting it out there and giving it to these prepaid customers and then having them not be able to use it or implement it because those roadblocks are in the way. So asking what those roadblocks are up front is another step you should probably go through before you get to the point of trying to roll it out to a larger audience or pursue it.

Rob [15:58]: The sixth question you’ll want to think about is: how will you acquire customers and do you have the ability and the resources to do so? It helps to think about this maybe in terms of three phases. The first one is your initial alpha/beta/early access customers who are early adopters and they’re going to give you a lot of feedback and making a lot of money from them is not as important as the input you’re going to get. So you have to choose them carefully because certain people want to give you a lot of feedback and expect you to do everything and their feedback may not necessarily be helpful.

The second phase is launch customers. This is the tried and true page out of “How to Start Small, Stay Small” which is build the landing page, build up that big list and get as many people on it – whether it’s paid acquisition, whether it’s writing blog posts. Whatever it takes – all the marketing approaches – to build up that list so that launch day is your big revenue day. It should be the biggest revenue day of your first six to 12 months if you’re doing things really well.

The third phase is long term customer acquisition. And this is the stuff that’s long term sustainable. It’s getting the fly wheels going whether it’s paid acquisition, a webinar funnel, just getting your SCO going, content marketing, all that stuff that we talk about is that third phase. And that’s how you’re really going to scale something up once you have product market fed. Keep in mind that after launch you’re probably not totally not going to have product market fed and you’re going to still be fumbling around a little bit to find it.

Mike [17:14]: The next thing to think about is the feasibility of the product itself. And there’s, I think, three different aspects of this. The first one is the technical side of it which, for developers, the answer is almost always yes, it is going to be technically possible. The real question at that point is: how long is it going to take you to get something that is minimally usable and solves the core problem that you’re trying to address in a way that people are willing to pay for it. That’s kind of the MVP philosophy.

Moving on from that, the second one is the dependencies. Are there any dependencies or things that are outside of your control that you need to execute on? Those might include things like having delivery partners or if you’re running a productized service of any kind of and you have to plug people into different phases of a workflow, are you going to be able to plug people in at a price point that you’re going to be able to support and customers are going to be able to pay for to deliver on whatever it is that the final product is. So there’s things that are outside of your immediate control. What are the risks associated with those things?

The third one is: what does the road to profitability look like? Are you going to be able to make the product profitable in a short enough timeframe that you have the runway to get through that? Because if you don’t, you’re going to stall out somewhere along the way and you’re not going to be able to finish it and whether that constitutes non-delivery to the initial people or getting to the point where you’ve got three months left of runway but you know that you’re going to need at least nine in order to make it profitable. That’s a bad situation to be in but there’s plenty of people who end up in that situation and some of it’s just being able to evaluate what that is going to look like in terms of your launch process getting the product itself built and then having that marketing engine that is built up at approximately the same level as the product is moving forward.

Rob [18:54]: The eighth question you’ll want to ask yourself is: do you have the capability to execute on both the marketing and on development? This depends a lot on the market you’re entering into. If it’s really crowded or not. It depends on your experience level with marketing. And then on the development side, it depends on how complex the product is. How much experience you have either writing code or managing people who do it.

It’s something to think through because let’s say you wanted to build a competitor to Kissmetrics or Mixpanel. That’s an insane development and scaling effort. If you’ve never built something that’s big and complicated and you don’t have a technical cofounder who can handle that for you, this is not something that I would recommend trying. It’s also really expensive. You’d need to raise buckets of money just for the server costs alone. But that’s something to think about. Do you have the capability to execute on both marketing and development?

Mike [19:41]: That also plays into does it fit within the runway that you have available because some of the marketing activities can’t really be done until after the development is finished. You don’t want to be in a situation where you’re just barely finishing up the code and, oh by the way, you’ve got all these marketing things that you need to do almost in parallel. And if you could clone yourself easily with a 3D printer it would be great, but that’s really hard to do. So being able to bookend those things together so that you know that you have the time available to do both of them or to alternate back and forth between them in a way that is conducive to getting the product out the door and doing those marketing efforts. Sometimes that’s not just about ability it’s just able how many hours you have available in a day to be able to get things done.

Rob [20:24]: You said that cloning yourself with a 3D printer is hard to do?

Mike [20:28]: That wasn’t quite what I meant.

Rob [20:30]: You didn’t say it’s impossible.

Mike [20:30]: I didn’t say it’s –

Rob [20:31]: I thought you were going to say that’s impossible but you’re like, “That’s really hard to do.”

Mike [20:34]: That’s really hard to do. I’ve done it before. It’s just that that little model sits there and does nothing. He’s totally worthless. Haven’t you done this?

Rob [20:42]: Kind of like the human he’s based on?

Mike [20:44]: Yes.

Rob [20:44]: Oh, boom!

Mike [20:47]: Should we just end the episode right there?

Rob [20:49]: You [?] for that one, dude, I’m sorry. Alright. What’s our ninth question?

Mike [20:54]: So our ninth one is: can you find examples of similar offerings or products that have succeeded and failed? What this will do is this will give you a general sense of how those other products are doing? How they’re acquiring customers? Especially for the successful ones. And if you find examples of failed ones, you can see what sorts of things they did and try to reverse engineer why it didn’t work for them and whether or not there’s tweaks to their process or to their launches that you can do that are going to make it beneficial for you.

The other thing that it does is it gives you an idea of the competitive landscape and whether or not you’re going to have to take customers from them. Because when you’re launching a new product there’s two types of people that you’re going to end up with. One is people who don’t have an existing solution in place and they’re signing up for your product. And then there’s another group of people that you’re going to try to pull away from other products that are in the space. If you can analyze those existing products that are being successful, see what they’re doing and try to replicate it to some extent but, obviously, put your own spin on it. Then look at the ones that failed and try to avoid the mistakes that they made. It puts you in a much better position as opposed to having this greenfield opportunity that nobody’s ever done or tried before. And, I think, we both know that when you’re trying to do something like that and it’s a brand new thing, it’s really difficult to explain it to people and make them understand what the value is that it provides.

Rob [22:12]: Yep. It’s easier to enter a market and find a position than it is to invent a whole new market.

Our tenth and final question that we think you should consider when you’re validating an idea and trying to avoid risk is: do you want to work with this customer base for the next three, five or more years? This is a questions that Ruben Gomez actually asked me several years ago. It was pre-Drip and I had a bunch of different product ideas and I was going to acquire one in a particular space where my customers would be very particular occupation and type of person. He said, “Are you interested in really getting to know that group and going to their conferences and that being your focus for the next several years?” And in the long term my answer was like, “You know, it really isn’t.” It was something that I hadn’t thought about before in that way. But you really are committing to an industry and you’d better like both talking to folks in that industry because they’re going to be your customers whom you’re supporting. And you should like hanging around and being around that industry. I think if it’s something that’s not exciting to you I think it could get really boring over the course of years of going to these trade shows and interacting with folks that you don’t have interest in being around.

Mike [23:17]: So beyond the questions that we’ve already asked, we came up with some other questions or thoughts that you might want to consider when you’re going through that validation process and you’re trying to figure out whether or not it’s worth it to make the leap or whether you should make that leap. The first one is: has the validation that you’ve done thus far uncovered any new and meaningful information or was it simply confirming what you already knew? If you’re looking at that and thinking to yourself, “I didn’t really actually confirm anything. All it did was told me stuff that I already thought to be true.” I think when you find out that that’s the case from your validation efforts, you’ve got to try and prove the opposite. That’s really difficult to do because you’re suffering from what’s essentially a confirmation bias. You want it to be true and what you’re really trying to do is prove the opposite. And that’s not an easy thing to do. It’s more of a mental challenge than anything else but try and find ways to disprove your idea. What can you do to prove that it’s going to be false or that things are not going to work? If you still can’t do it from when you’re taking a look at it from that perspective, then you’re probably on the right track.

Rob [24:20]: Another thing to think about is: are there assumptions you’re making that are potentially invalid? Do they need to be tested? If so, how would you test those? I think it’s really easy to make assumptions and not even realize it. Whether you can get an external sanity check or whether you can go and take an entire day and really get your mind thinking about what assumptions you could potentially be making and where you might have a blind side. I think there’s value in that.

Mike [24:46]: A lot of those you could probably pull out from a marketing plan that you put together in advance and almost everything in that marketing plan is going to be either a fact that you believe to be true or an action that you need to take. If it’s a place where there’s a fact of any kind – let’s say, for example, your ideal customer is a dental assistant. How do you know that those are the right people to be talking to? Is it them that’s going to be paying for it or is it going to be their boss? Those are the types of assumptions that you need to make sure that you’re validating because if they’re not true, then you could run into problems down the road.

The last thing that I think you need to ask yourself is: how far can you get before actually building something that requires a meaningful commitment of time and resources? And that goes to the idea of building mockups; having those customer discussions; getting prepayments from people; doing prototypes. You could go so far as to build a prototype with Balsamiq Mockups or with Power Point, for example, and show people what it’s going to look like without actually building it. It is a fairly hefty amount of time to put effort into building something like that so that when you click on a button it actually goes to a different screen or shows different information. But at the same time, if you put that in front of somebody and they look at it and they say, “Yeah, this actually won’t work for me because I need to do this, this or this.” Or, “How would I do X, Y or Z?” If those things aren’t in there then it means you haven’t designed for them and what will happen is you build it, you show it to them and then down the road they’re going to say, “Well, this doesn’t actually do what I need.” If you can design that up front, then it eliminates that risk downstream that you’re going to run into anyway.

Rob [26:19]: Thanks, again, for the question, Simon. I hope that was helpful. If you have a question for us, call our voicemail number at 888-801-9690 or email us at questions@startupsfortherestofus.com. Our theme music is an excerpt from ‘We’re Outta Control’ by MoOt used under creative comments. Subscribe to us in iTunes by searching for “startups” and visit startupsfortherestofus.com for a full transcript of each episode. Thanks for listening and we’ll see you next time.

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