Startup 'IdeaFest': Early-Stage Validation & the Rule of One

Uh, the first part of my presentation here is going to be about, uh, how do the basic best practices for, for building a startup idea and good startup ideas and things that we've learned now in the, in the almost 12 years of the Founder Institute. And really, at the end of the day, if there's one thing that I can impart on you today, right, and this is why I'm putting it at the top, is that if you're going on this journey to build a startup Realize that the cards are stacked against you. Okay? There are a million advantages that big businesses have against you. As a startup, there are only two advantages that you have to go against all of those big businesses. All right? The first advantage is speed. For anybody who's worked in a big company, I did for about a year, and I saw how much that sort of crushed my soul, to be honest. But for anybody who's worked in a big company, I'm sure you'll see that, you know, there's bureaucracy, right? The speed at which a big company can learn how to build a product that actually satisfies their customers' need is very, very slow. Whereas in a startup, you can move really, really fast. You don't have to go through levels of bureaucracy. So you can really be nimble to the needs of your customer much more quickly. And you have what I like to call a compounded learning curve, right? So it's— forgot somebody used the to say that it's a very famous quote where compounding interest is like one of the— it's like the 9th wonder of the world, right? It's like helped create this whole society that we built is the concept of compounding interest. When you're a startup, you can compound your learning, right? Every single week you can be running experiments, immediately implement the learning from those experiments and build the next version of your product better and better and better and better. Whereas a large company, the best that they could ever hope for is to have sort of a gradual learning curve. So that's one advantage that a startup is going to have. So if you're not fast, you're gonna lose. The second advantage that a startup can have is their niche focus. Big companies have shareholders, they have, even if they're not public, right, they just have a lot of constituents that they need to report to. So they're never gonna release a product that targets a niche audience with the perfect, you know, with the perfect product for that audience. They're gonna cast a very wide net. And usually what that means is that they create products that are good for a very large number of people. They're adequate for a very large number of people, but they're not perfect for any one consumer. They don't create that like, aha, like, oh wow, this is an amazing product for any one consumer. As a startup, you have the ability to focus on a niche, right? You don't have shareholders in the beginning. You don't have anyone to report to necessarily. You can focus in on a very small niche, build, give them a perfect product. And they will be so enthralled by the fact that they have a perfect product because they're used to having all these mass market products from big companies shoved down their throat with advertising and all this kind of stuff, right? If you can give them a perfect product, they'll tell all their friends about that product, and then your business can build organically from there. That is how startups are built, right? If they're built on a premise of being able to be fast and focusing on a very small niche in the beginning and then growing that niche out from there and utilizing those network effects and the, the fact that their audience that really loves their product is gonna share it with all of their friends. So there is one thing that you can do that negates both of these advantages. And that thing is being unfocused. The number one killer of startups. It is not a lack of funding. It is not whatever. It is that they're unfocused, right? If you only have two advantages and who you're competing against, are big companies and they have a million advantages. If you can't even utilize those two advantages, you will fail, right? You will fail. And it doesn't mean that you're not thinking big, you're not, you know, trying to build an awesome company. It just means in the beginning, you have to realize that your two advantages are your ability to go fast and your ability to focus on a small market in the beginning. And if you don't use those advantages, you will fail before you even get any kind of any kind of traction. So being unfocused is actually even worse than being wrong. Okay? If you're wrong, if the business that you're trying to build is wrong, but you're focused in figuring out that it's wrong, you're going to learn super quickly. If you're unfocused, you're not going to learn anything and you're just going to be kind of going on and on and on trying to build this business. It doesn't make a lot of sense. And this is a term that a lot of people in the startup industry refer to as zombie startups. Zombies, right? They're walking around there. They're still sort of alive. They're still walking around, right? But they're dead. They just don't know it yet. Right? So you don't want to be a zombie. That's actually the worst thing that can happen to you because that's a great way to burn a lot of money and burn a lot of time. Right? Be focused, learn if you're wrong quickly, adjust and try to get closer to being right. Alright, so I do realize that Just saying, okay, you need to be focused is a broad term and maybe it doesn't mean very much, right? So let me give you a framework on how your startup idea can be focused. Number one, it has to solve one problem for one customer with one product, one killer feature, and one revenue stream. All right. Anything else is a rookie mistake. And I'm going to go through all of these components now one by one. Alright, so the first thing to understand about startup ideas is that nobody cares about your product. Okay, people don't buy products, people buy solutions to problems. That's what people care about right now. I do realize I picked a funny image here, right? But I would imagine that whoever came up with the picnic pants idea was like, oh wow, this is such a cool you know, product, right? But they never thought to go back and think about, okay, what is the actual problem in the mind of a consumer that they have that would compel them to search, find, and purchase my product, right? It's just the way that our brains work. As soon as the startup idea kind of factory starts going on in your brain, you're going to think about what the product is going to look like years down the line. Oh, it's going to do this, it's going to have all these different features, right? And you're going to lose sight of actually what the core problem that you're solving for the consumer is, right? You have to solve a problem. We're all freaking busy, right? We're not necessarily looking for nifty things that add a little bit of value here. We all have problems as humans. We're all looking to solve those problems. You have to focus on a problem that you can solve and customer development. And this is obviously a very common term in startup land. I believe it was, it was termed by, by a gentleman named Steve Blank, but I could be mistaken on that. But it's used in Lean Startup methodology by Eric Ries and a lot of the best practices for startups that are out there today. But customer development is essentially the process of finding a problem that's actually worth solving and then understanding that problem so well that you can build a perfect solution, right? So if you go back to what I was saying before, you have to build a perfect solution for a niche audience. And that's what customer development is. And you can Google that. You'll go down a pretty large rabbit hole there, but it is an extremely important thing that you need to do in order to fully understand the problem, the one problem that you're going to be solving for a customer. And that problem, in order for the business to be worth solving, or for the problem to be worth solving, that problem needs to affect a lot of people. In other words, it needs to possibly equate to a business that can be sustainable. And number 2, it has to be enough of a problem that those people are willing to pay to solve that problem. There's a lot of problems that I have that are just weird little small problems. Those problems generally aren't worth solving. You want to find a problem that annoys people so much that they'll pay to actually solve it. That's the litmus test, right? If you ask your mother, you ask your cousin or whatever, they're going to say, oh yeah, it's a great idea. But if you really get to the brass tacks of saying, will you pay to solve this problem? That's how you know if this is something that's worth building or not. And the first step in solving and figuring out, you know, what problem you can solve and validating that problem is in creating a problem statement. So the Idea Fest worksheet, which you can see here, bit.ly/ideafest. This is gonna be the first thing, and we're gonna, I'll dive into this a little bit more later in this presentation, but this is what we're gonna do today here during the networking sessions. But the basic problem statement is, I believe that a defined audience has a specific problem, okay? And an example would be, I believe first-time mothers have difficulty buying supplies they need for their children before they run out, right? Or if it's a B2B business, I believe HR executives just see way too many applications in the current day. But the first step is to actually start to define the problem that you're trying to solve. And then the second step is to interview those customers. All right. And this is a big component of customer development. And there's a lot of templates that you can find out there to interview customers. This is the one that we like to use sort of right off the bat. Simple stuff, right? What's the hardest part about whatever the problem is that they're trying to solve? Why was it hard? Have you looked at other solutions? If you haven't, why or why not? Why was that solution not perfect? And is this something you'd be willing to pay for? Now, one thing that you should notice in these set of questions is that not one of these questions actually talks about your solution. Okay. If you start to bring your solution into your interviewing of customers, that's going to sort of, you know, move their mind into a very certain direction. It's going to create a lot of bias in any of the feedback that they give you. As an entrepreneur trying to validate a problem, you don't want to talk about your solution just yet. You just want to talk about your problem. You want to start to understand that problem. Okay. Now, in the workshop today, we're going to talk about, you know, you're going to be allowed to talk about your ideas and that kind of stuff because this is an Idea Fest. But just when you are working with customers, you want to not talk about your solution. Okay. You want to talk about your problem. You want to understand the problem. So the second part, right? So now you figured out a problem to solve. Now you have to solve it for one customer. Now, this is a big thing that we see is a problem that we call customer confusion. Your customer is the exact person who's going to pay for your product. Now, in some cases, it could be the person that directly influences that payment decision, right? So maybe it's a parent, for example. Obviously, a child's not going to whip out a credit card. In most cases to buy your product if you're building something for children. But even though the child directly influences that purchase decision, the number one person is the person that actually takes out the credit card and pays. Okay. So that is the number one person that you should be worried about. And you need to really, really have a focused definition of who they are. I can't tell you how many startups pitch me and I hear, oh, I'm helping women. Really, you're helping like half or whatever, close to half of the population of the world. That tells me that you're pretty lazy in trying to understand who your consumer is and what their problem is. Right? You have to be specific. Something like single women aged 22 to 34 in the US that practice yoga and work full-time. Similarly, if you're building some kind of small, you know, if you're targeting small businesses with some kind of SaaS product, again, you can't sell a small business, right? It's not the small business who whips out the credit card. It's going to be one specific person in that small business who has their own set of KPIs, who has their own set of goals they need to reach to get their next raise, and you have to be solving their problems. So the more defined you can be on the consumer or the customer that you're focused on, the better. And again, you know, being really niche and really focusing on one customer is not— I'm not trying to limit your aspirations here. Okay. Jeff Bezos, With Amazon, right? He first focused on people that wanted to buy books that were hard to find in physical stores. Mark Zuckerberg, it was a social, not even a network. It was just a place to see pictures of other people in your dorm, one dorm at Harvard, right? Big businesses are built by focusing on a niche audience first, understanding that audience really well, and then essentially creating a playbook to build out more and more audiences, more and more geographies. Et cetera. From there, you have to start niching. You have to understand that audience. The third thing is you have to do this with one product. All right. I hear so many people tell me, oh, I'm going to create a whole brand, a whole line of things, right? And it's, believe me, it's hard enough to create one product for one customer that solves a problem they're willing to pay. If you try to do multiple at one time, like at least any investor or anyone that knows what they're doing in startups is just going to sort of they're going to roll their eyes at you. All right. And these are some of the rookie phrases that I hear: a family of products, suites of products, lifestyle brand, whatever, right? You have to start super focused. And the beauty of it, and this is one of the beauties of the internet and all the different tools that we have here, have now, is that you can validate the customer demand for your product before you spend a lot of time or money building it. Okay, here's the wrong thing to do is to have your idea in your head. You've thought about what this thing's gonna look like years from now. Then you go online, you pay some developers somewhere where developers are cheap to build it, you put it out there and you realize that, you know, you're a solution trying to find a problem, right? Nobody wants your product. Now you're screwed, you're out of money and you're out of a lot of time. The right way to do it is to validate now. And at the Founder Institute, this is one of the big things that we do with our companies and with our founders that come through the program. We've portfolio companies that have achieved amazing things literally before writing one single line of code, right? Not only does that save them time and money, it puts them in a position of strength, whether it is to raise funding or hire awesome people before they actually go out and, you know, put their livelihoods on the line, so to speak, to build their businesses. So the first method to validate your business is to interview customers. And I mentioned this before, and This is part of what the, what the goal of today's event is for you to interview people that could be potential customers. The second method is what is known as the concierge MVP. So for those of you who don't know, an MVP is a minimum viable product, okay? And this is a first or an early version of a product that you put out there into the marketplace where it's clearly not the final product you're going to build. It's clearly not something that's ever going to be sustainable. The only point of the product is sort of to use a scientific method where you can validate yes or no, whether, whether people want this product and whether it could become a viable business. So, Xerocater, which is an interesting company out of Silicon Valley, I really enjoy telling their story because to me it's just sort of brilliant. Okay, so they essentially had a couple of guys who realized, okay, it's really hard. They worked at a small, small company in Silicon Valley and they realized, you know, it's really hard for the office managers that these companies to order lunch for everybody. Every day. Okay, the office managers have a budget. The office managers get, get, you know, kind of crap when, uh, if they keep ordering the same thing every day. And the office managers have a shit ton of other stuff to do, right? It's not, it's not easy being an office manager. So, uh, what they realized was, okay, what if we could figure out a way where they could quickly, uh, and cheaply get a variety of different food to order for their office for lunch every day, right? So literally, before building anything, they literally did a spreadsheet. They called restaurants in their immediate area and said, hey, if we were willing to give you bulk orders, how much of a discount could you give us, right? Then they started reaching out to office managers. Hey, if we could give you bulk orders on this, is this something that you would subscribe to, right? So they literally just created a spreadsheet. Then they created a landing page using probably like a $5 tool where people could fill out their information. They manually put it in there and they manually created those matches. All right. And between the difference of the discount that the restaurants were giving them and the discount that they were giving to the, to the business managers, the office managers, they were taking a profit. This is what they did. They were able to do that, to hire people and raise money. Again, they're doing this manually. They're sort of like a little hamster wheel in the background of this business. To the consumer, they think that there's some algorithm perfectly matching them, right? But they're really just doing it manually. So again, this is not something that is sustainable over the long term. It's just to prove the business case. Before they really then quit their jobs and went all in to build this business. So this is something that's known as the concierge MVP, because on the front end, it looks like, oh, this is, you know, amazing algorithms are doing all this. On the back end, it's just a bunch of people in a hamster wheel kind of concierge-ing it out, right? The second thing is the piecemeal MVP. So Sprig is a company that was founded by Gagan Bihani, who was also one of the co-founders of one of the most successful FI companies, Udemy. And what he did here, it was a company that was essentially trying to get you, you know, freshly cooked healthy meals within 15 minutes or less, right, in your city. So they focused on San Francisco. What they did was literally to test out the economics to see if it could work was they hired chefs and drivers off Craigslist, they took orders on Eventbrite, All right, so they went on Eventbrite and they created a quote unquote event, right? And instead of a certain type of ticket, oh, you can buy a VIP ticket or you could buy this kind of ticket. Those were actually the dishes that you could order for dinner on a specific night. And then they shared it out through various Facebook groups to all their friends and things like this. And then in order to track and optimize where all the drivers were in San Francisco, they used the Settlers of Catan board, literally. Okay, so they pieced all of these things together in one night to see if the model could work. and they proved that it could work. Now, eventually the business failed because a lot of these businesses failed. The, the food delivery space was a really tough one. Um, but the business was around for several years. They raised a ton of money and it was just a super interesting way that this business was, was able to validate what they were doing without spending really much money at all. Um, as a corollary, a corollary to that piecemeal MVP, there are so many no-code products out there right now where you can piece together technologies from a lot of different products to create something that, that that resembles what you want to build in the future. Okay. I forgot again who said it, but they said, you know, if you don't— if the first thing that you release, you're not kind of ashamed of or embarrassed by, then you're doing it wrong, right? With all of these tools, depending on what type of business you want to build, you can cobble something together that it could at least help you hedge your bet and figure out, okay, is this actually a business worth building? And if you want to learn more about some of these no-code things, I would recommend nocode.tech. And then the last way that we see a lot of people kind of start to validate before they build businesses is through building an audience first, right? So let's say that you wanted to build an app for runners or something like that. You know what's going to be really helpful when you're building that app for runners is to actually have a community of runners. Under your control, so to speak, right? So start a meetup group for runners, start Facebook groups for runners, start a newsletter, start a blog, like start those things now as you're building the business and build those things out. Because over time, number one, that's going to give you an audience to help you validate that business. And number two, that's actually going to give you a built-in first customer list. Okay? Traction trumps everything. If you have a first customer list when you're building your business, that's probably the most important thing that you have. So if you have an audience that you're trying to target with the business, maybe you're not sure exactly what you're trying to do with them yet. Start building that audience now before you actually start building a business. It will be an invaluable resource for you. Okay, so I'm going to wrap up here in a second, but the fourth rule is one killer feature. All right. There's a common misconception that consumers want choice. And you could see here, this is a screenshot from, I think, Dell, right? It's probably from a couple of years ago, but it's a bit overwhelming, right? I mean, look at the number of permutations you could do here is, you know, probably in the thousands, tens of thousands of all these different options that they're giving you. Consumers don't want choice. Consumers want freedom of choice. Okay, think about it. Let's say that you're searching for an app on your phone to schedule a meeting easily or something like that, right? That's one problem that you have. You just want one app that does that really, really well. You're not going to download an app that's an all-in-one schedule meeting collaboration blah blah blah platform, right? You want to solve one problem. That's your mindset as a consumer. That's what you're looking for. Okay, you want to find that one killer feature. Because believe me, this is another kind of hack that companies use that eventually will drive them out of business, is that they can't find that one killer feature, they just start adding on all types of other features, right? And believe me, having 10 decent features is nowhere near as valuable as having one great feature. Your goal is to find that one killer feature, all right? And if you can find that one killer feature, if you can solve that one problem with one feature, Customers will tell you, they'll help you build your product roadmap after that. They'll help you understand what are the next features that you need to build. There won't be any guessing in place. All right. You just need to have that match of an audience. One killer feature solves one problem for them that is really important to them. And then after that, they'll, they'll, they'll share your product out. They'll give you feedback. They'll make you understand where your product can go. Take all the guesswork out of it. And then finally, one revenue stream. So one of the biggest pushbacks we get on this is people will cite, oh, well, Google didn't start with the revenue stream or Snapchat or Twitter or whomever. And that's true, right? But that's also, that argument is like saying, okay, well, you know, Brad, Brad Duke here won the lottery, so I should play the lottery too, right? Like the lottery is a good strategy to make money, right? You don't wanna isolate out The people that essentially won the lottery, all of those businesses rode some of the fastest growth patterns in startups that the world has ever seen to get where they were. And they had so much growth so quickly that so many VCs were willing to just throw blank checks at them to take their money, that that's how they were able to grow without a revenue stream. So if you're thinking about a strategy, it's probably best if you assume that you're not going to win the lottery and that you're going to have to have some kind of sustainability right off the bat. Now, the other thing that I'll say is not advertising. Okay. This kind of pisses a lot of people off, but do some simple math here. A CPM is cost per thousand. This is kind of just how advertising works. A $5 CPM. I'm simplifying things a lot here. Okay. but a $5 CPM, which is sort of an average, general average, means that for every 1,000 people you show an ad, you're gonna make $5,000. So that means, do the math, you're gonna have to show an ad to 1 million people to even make $5,000. All right, that's nothing. That won't even cover your server costs necessarily, right? It's certainly not gonna cover full-time salaries for a lot of people, for anybody that needs to sell the advertising or anything like that. All right, advertising in general is not a great revenue stream. Now again, obviously, if you can become a Facebook level, Twitter level or whatever, then they are able to vastly increase their CPM costs because they can target people so well. Right. The math starts to change. But generally speaking, advertising is not a good way to get started. And usually when I see an early stage startup say that they're going to make money on advertising and they don't have a massive amount of traction, it's sort of a laziness on their part. I read it as, okay, you don't have a revenue stream, right? The other thing about revenue streams is that you don't want to get clever. There are so many other ways, so many other parts of your business where you want to get clever with the revenue stream. You know what the best revenue stream is? I sell you a product, you give me money. Okay. Or an extension of that is subscription where you agree to do that exchange for many, many months over time. right? That's the best revenue stream. Simple. You don't have to say, okay, I'm going to provide this value to this customer, then they're going to do this here, and then I'm going to get money on the back end from this person, the money from this person, right? You don't, don't be like, what's his name here in The Hangover, and try to, you know, piece all these things together. Simplicity is what's important in revenue streams. All right, so in summary, solve one problem, One customer, one product, one killer feature, one revenue stream. Alright.