Importance of Sounding Board & First Principles for Young Startups
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According to a 2014 CB Insight Analysis discussion with founders of unsuccessful startups, 42% startups failed because there was 'No Market Need'. No market need to be defined as 'tackling problems that are interesting to solve rather than those that serve a market need'. It must be noted that the survey allowed the founders to select multiple reasons. Still, 42% startup founders agreeing that their product did not have enough paying customers is quite staggering! A distant second reason is 'Ran Out of Cash'.
Let us look at two techniques that can help reduce this high percentage failure, viz. engaging a good sounding board & thinking from the first principles perspective. These suggestions can be effective because they not only ensure that the founders do not build castles in the air but also get them to delve deep into the fundamentals. Let us analyse these two techniques from the market need lens.
Sounding board in the dictionary is defined as "a person that you use to test something such as a new idea or suggestion to see if they will accept it or if they think it will work". In my opinion, a sounding board needs to have the following qualities:
- Be a patient listener
- Understand the growth trajectory of startups
- Have the ability to call a spade a spade
- Have detached passion towards the idea
- Ask the right questions
Any person with these traits - be it a friend, mentor, coach or even the next-door startup founder can qualify as a sounding board. It might be interesting to see a bot play this role in the future!
For this role, the founder needs to choose a person with whom he is comfortable discussing not only his plans but also the issues he anticipates during his entrepreneurial journey. The founder needs to trust the sounding board & be transparent about his plans. The sounding board, on her part, needs to listen to the founder's inputs patiently & dig deeper into the assumptions. She can use frameworks such as lean methodology, business model canvas & others to help structure the discussion. This requires constant interactions for several weeks while covering the strategic & operational aspects of the business. These interactions need to be professional & bound by economic viability. It might be in both parties' interest to sign an NDA to enable mutual trust.
One of the key focus areas of the discussion needs to be around the customer, market needs & the competition. Is the product really solving a true customer need? If yes, what is the value that the customer will put for the same? Is the market large enough for the growth of the startup? If yes, how quickly can the startup get a decent percentage of the market? What about the competition - can the startup nibble away at the competitors' market share. At this juncture, let us look at the second technique.
The basis of the first principles is that it cannot be deduced or broken any further. Its root lies in core physics - building upwards from postulates & axioms, rather than based on analogies. This is a powerful tool to question assumptions. An excellent example of putting such a framework into action was the creation of the printing press by John Gutenberg. He combined the technology of an agriculture screw press with movable parts for ink & paper to create a wooden printing press.
Elon Musk is another proponent of the theory of first principles. In his case, the electrical car's feasibility in today's market was limited because of expensive batteries. This is the fallacy that analogy based thinking would suggest. But the same problem when looked from a first principles lens, purchasing individual battery sources would enable manufacturing of much cheaper batteries. And hence Tesla.
Question the Basics
The idea for the entrepreneur, in this case, is to question the basics - what are you absolutely sure about the paying customers? What do you have as data & facts about them? Do you understand the customer - what is the exact need that you are solving for them? Once you know these basics well, you can then build on them to ask broader strategic questions such as how can the customer acquisition cost be reduced? Would introducing a membership ensure my lifetime value of the customer is significantly higher than my cost of acquiring them or is piggybacking on some partners a better option. How can you use the data about the customers to ensure the product's value is enhanced & you arrive at a value-based pricing? Let us now attempt to weave these two techniques together.
Reduce Failure Rate!
It is always good to learn from other's failures & entrepreneurs should practice combining the above two techniques to overcome the trap of 'No Market Need'. They must ensure that their discussions with the sounding board follow the first principles approach especially to overcome challenges faced with respect to market growth. For this, both the entrepreneur & the sounding board need to involve themselves deeply into understanding the customer.
This article is an inspiration from Ajay's late brother, Jeetendra Jain, who was a strategy guru.