Launching A Startup? Ask Yourself These Questions First
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I frequently meet entrepreneurs who have great ideas, but more often than not, there’s no clear answer as to how these ideas will turn in a full-fledged business, with paying users and an attractive market. In my previous article, I shared seven guidelines to help you launch and grow your startup. In this article, I will elaborate more on the first step, which is to research and plan before you go all in on your new adventure. When done well and diligently, the outcome of this step should give you a very clear idea on where you expect your business to be in five years, and what you need to get there. More importantly, it will give you the confidence that you will need to finally launch your company. We’ve used this approach with Pricena, so I hope budding entrepreneurs will find these tips helpful.
1. What is the problem you are trying to solve, and where does it sit in the pain/effort curve?
All great products are solving a specific pain point for their target users. Most entrepreneurs are good at identifying a pain point, but the pain must be acute enough to justify people putting in the amount of effort to use your product. The formula is: high user pain + medium user effort = maybe success. Point is, most people won’t bother putting in the slightest effort. They just live with most of their pains and especially the small ones. Example of products that sit well above the pain/effort curve: Careem/Uber, ATMs, paying speeding fines online, Expedia/Booking.com, Souqalmal/Compareit4me, Nabbesh/Upwork. Example of products that sit below the pain/effort curve: QR codes.
2. How big is your market?
This is one of the most overlooked questions. In our region, you must have a clear path to monetization from day one, and a pretty good idea of how big you will become if you own 60% + market share, or even 90% market share if you’re in a business that enjoys very high network effects. If you don’t have experience or knowledge about your market, seek guidance from experienced professionals and mentors. Whether you monetize from business or consumers, is your target segment large enough and can you retain them?
3. Who is your competition, and how far ahead are they?
Don’t listen to people that tell you “Company X is already doing it.” You’re an entrepreneur; do your own due diligence. Is their product good enough? How much traction do they have? If they have a head start, is it surmountable? At Pricena, we felt confident that nobody had solved the shopping comparison problem well enough, and nobody had achieved good traction. The opportunity was wide open for anyone who could build the right product and market it well. In our case, the “build it, they will come” motto seemed to have a good chance of succeeding.
4. Can you solve the problem?
If you’re a technology startup, having a technical founder in your team is crucial to the success of the product. Your bread and butter is solving a problem using technology. Assuming you’ve assembled the technical skills and identified a sizable market for your idea, is the technology readily available for you to build a solution that’s good enough? The Palm Pilot was the precursor of the iPad in the late 1990s, but failed to get traction. The human interface technology simply wasn’t good enough back then. Beware of building technology for the sake of building technology, and always focus on whether you’re relieving the user’s pain point with your solution, no matter how simple or complex the solution is.
5. How will you market your product and how difficult will it be?
If you’re a first mover and you’re solving a problem above the pain/effort curve, you’re lucky. Consumers will be receptive to your message and value proposition. If you’re a second mover in an early market, focus on building a good enough product for retention, and on executing on your marketing. If you’re a second mover in a market where there’s a dominant player, your product has to be orders of magnitude better than the first mover to get any user traction. As a web product, your main marketing channels are paid search marketing, organic search marketing (i.e. SEO) and social media.
For each channel, you need to understand how hard or expensive it will be to promote your product. For example, if you’re a credit card comparison site, you will be competing with big banks with massive budgets on paid search marketing. This raises your marketing costs significantly, so you might want to focus on a more cost effective channel if you don’t have a sizable budget. But before you go on a marketing spending spree, look at your direct traffic. If it’s growing, spend. If not, you have a product problem and you need to go back to the drawing board. There’s no point in paying to attract users if retention isn’t there. If you’re in a business where you can reliably measure your customer acquisition cost (CAC) and your customer lifetime value (CLV), you’re again lucky and at a big advantage since your profitability comes down to a formula.
6. Finally, do you need funding, when, and how much?
There are three reasons why you would need funding. The first one is to pay your startup’s monthly bills so you can continue to grow. The second one is to pay your personal monthly bills. The third is to compete on winning markets. The first and second reasons require much less funding than competing to win markets. As a founder, remember that you want to be capital efficient and stay bootstrapped for as long as you can, but if competing and winning means giving up equity to outside investors, go for it. It’s better to own 50% of a $50 million business, than 100% of $5 million.