How to launch a startup pre-funding — Chapter 1

Building a sustainable business is hard, writes James Alexander, so new entrepreneurs should adopt a customer development mindset.

Recently we welcomed a new cohort of startups into the INCUBATE accelerator, a 14-week bootcamp for entrepreneurs building startups or new businesses, not traditional businesses.

As we progress we introduce the startups to some core topics, which I’ll post about so anyone can follow along.

The few weeks are very busy. We introduce the startups to a lot of concepts and our expectations for the weeks ahead. The core topic of the first month of the program is around customers, not product (as many assume).

Our process has been designed for new entrepreneurs; generally they have some sort of early prototype and are pre-seed funding¹. Our advice follows these three themes (and not necessarily in this order):

Problem discovery: What is it? Is it one problem or many? What is the true cause?
Customer discovery and development: Who are they (user versus customer)? How do they solve this problem today?
Solution validation: What does it look like? What will the first solution be? Can you charge for it? (more on this in a later post).

Show me the customers

Customers are something many new entrepreneurs leave to the very end. Lean methodology², which has been adopted world over by entrepreneurs, investors and industry, is the concept of validating who your customers are and defining the problem you’re solving first — before touching any code or spending money building a product. This forms part of the agile ideology of changing the way we create things³.

Put another way: where do you learn the most in the cycle of launching a new product? Is it when you’re cutting code or building product? Nope , though lots of interesting technical problems can arise. Is it when you’re recruiting your team? Nope. Or debating different launch strategies within your team? Definitely not.

You learn the most when you talk to your customers and put your prototype or product in front of them.

You should ask ‘what they think’ and ‘will they buy this?’⁴. So, don’t leave this to end of the product cycle — bring it to the front.

The biggest takeaway for me is that new entrepreneurs almost always get their first customers wrong. They assume it will be a certain type of person who has a certain problem but may miss the mark in a few keys ways:

They’re not a customer, they’re a user (e.g. who actually writes the cheque?);
They’re not the right customer segment to go after first (e.g. there is a more valuable customer or niche who is willing to pay more for this solution or use it more regularly); or
What they thought was a big problem for the customer is more like a ‘meh’ problem (e.g. it’s a ‘nice to have solution’, not a ‘must have’) .

A common misconception is that a great product, design and marketing will lead you to customers. As a new startup with little funding, none of the vision matters if you can’t get a customer over the line and be able to repeat that process time and time again.

Start with talking about the problem first

I believe the correct way to think about a startup is from a problem perspective. This includes identifying the characteristics of the problem such as the cause, severity, workarounds, existing solutions and people affected.

What problem are you solving for the customer you’re going after? Can you define the problem in a clear and succinct way?

You start this by going to your (presumed) customers and literally asking them about the problem they experience. This is a listening exercise, not a selling exercise!

Disclaimer: You may not like the things you hear (more on that later).

To help you understand and plan your business we use a Lean Canvas⁵ in our program. We find it’s easier to start with this canvas when you don’t have a well defined problem and are moving fast.

You want to start by first writing down the main problem and then matching that with the corresponding customer segment who has that problem. Start simple.

A formula you can use to think about this is: Problem statement = customer Segment + problem + limit or constraint.

For example:

I believe (type of people) experience (type of problem) because of (limit or constraint).

Which will end up like this at first:

I believe elderly people experience life threatening problems if they fall overbecause they’re often unable to get help when no one is around.

But the above is actually incorrect when you do customer discovery properly. You’ll land on something more like this after talking to customers:

I believe minders of elderly people experience huge difficulties in monitoring elderly clients/parents as they can’t be in their homes all day every day.

If there is anything you take away from this post it’s this: build your startup to solve one problem for one type of customer first. Apart from making your first product simpler to build, it also stops you diluting your marketing and sales. Getting a foothold into a market (or creating a new one) is very difficult to do going after multiple customers at once⁶. Focusing on one customer segment is very hard for new entrepreneurs (myself included) so don’t get distracted!

I sometimes refer to discussions about future things as the ‘let’s talk about that thing once we have 100 paying customers’ problem.

Side note: There is a some debate⁷ around customer/problem-led versus product/technology-led companies but I’m going to leave that for another post. For entrepreneurs who have never built and launched a product, it’s almost always better to start building a company from a problem-first perspective.

Talking to potential customers

Once you’ve defined (e.g. guessed) your problem and customer segment, get out of the building and go talk to them. It’s much harder than it sounds for most.

The difficulty is finding the customers and getting them talking. If you’ve never done sales or cold calling⁸ it’s a pretty daunting task, but an essential task for any good founder. So get practicing!

To give you an idea of volume, in INCUBATE’s accelerator we aim to get our entrepreneurs talking to at least 50 customers for business-to-business and 80–100+ in business-to-customer startups.

You will want to prepare some questions before you go out and starting asking questions. I generally recommend 10–15 questions. These are qualitative interviews (open ended questions), not quantitative (e.g. binary answers)!

The 15 minute rule: An important question here is can you get your potential customer talking for more than 15 minutes?

A customer who experiences the problem you’re trying to solve will often happily talk — or vent — about the problem you’re going after. Getting them talking for more than an hour is easy once they start going.

Getting a stranger talking for more than 15 minutes (let alone an hour) might sound quite hard. However, realise if your potential customer couldn’t take more than 15 minutes to talk to you about the problem you’re solving, they are unlikely to buy the solution you’re about to build. Ask yourself, how severe is this problem?

If it’s less than a 15 minute discussion the answer is probably ‘not very severe’. You should reflect on why this is and what is wrong about your assumption of the problem.

Some questions to think about for your interviews:

How your customers are behaving today (e.g. “How do you currently solve this problem today?”);
The constraints that affect the choices and actions that your customers take (e.g. “What else is affected by this problem such as time or resourcing?”);
What frustrates or motivates your customers?
How your customers make decisions, spend money and determine value; and
Pro-tip: always add, “is there anything else about X that I should have asked?” You might be pleasantly surprised at the answers!

Listen out for these things

One of the best feelings as an entrepreneur is when you receive a response that is full of emotion when talking with a customer about the problem you’re solving.

The phrase “shut up and take my money” has literally happened to some of our startups. This confirmation is a big indicator that you’re on the right path, but not the only signal you should look for.

Your first customer segment should want to use your solution even if it’s not ready.

When listening to your customers’ responses be careful around:

Confirmation bias;
Aspirational behaviour versus actual behaviour (e.g. everyone wants to watch more indie/artistic films but most revert to blockbusters);
Ignore wish lists (e.g. don’t build a faster horse⁹); and
Learn to enjoy the silence of a hard question (i.e. avoid leading your customers to the answer you want).

Things to list out for:

Statements that confirm your assumptions;
Statements that deny your assumptions;
Anything that takes you by surprise; and
Anything full of emotion.

While the above recommendations might seem like a huge waste of time away from building product or meeting investors, it’s perhaps one of the most high leverage activities you can do in the early days of your startup. Also, information about your customers are often one of the first questions incubators and investors will ask.

Information is your strategic advantage.

The information you glean from these initial conversations will help you shape and plan out your business for the coming months and importantly help you avoid building something no one wants.

Anyone can create a product. Few build a sustainable business.

Footnotes

By pre-seed funding I mean before any investor comes into the picture. We give our startups a $5,000 grant, which sounds small but goes a long way. It’s also quite a obtainable amount for many people to invest themselves.
Lean methodology has influences from agile software development and lean manufacturing. But for startups its well articulated by Steve Blank in Why the Lean Start-Up Changes Everything.
Atlassian, an Aussie startup success story, has great online Agile Resources being one of the pioneers of this style of software development.
These are simplified version of the questions you should ask but keep in mind not to ask questions that a customer will always say yes too!
Lean Canvas is adoption of the Business Model Canvas that we prefer using for startups. Nice summary here.
Check out Geoffrey Moore’s seminal book Crossing the Chasm if you’re interested in why, especially for B2B technology startups, going after one segment is vital to becoming widely adopted .
Venkatesh Rao has an interesting take and breaks down the product versus customer-led argument further with interesting results. In a way, we have Steve Jobs to thank for the ongoing debate.
In INCUBATE we have saying which is “10 before 10” meaning if you can call 10 customers everyday you’ll learn a lot. Thanks to Mike Nicholls for this mantra. There are lots of cold calling tips out there like this one.
Turns out Henry Ford never uttered the phrase “faster horses” but the sentiment is still true today.