Idea, Execution, and Market
An idea is not a mockup
A mockup is not a prototype
A prototype is not a program
A program is not a product
A product is not a business
And a business is not proﬁts
It’s useful to actually keep a single Google Spreadsheet with all your ideas, organized by stage in this manner.
Expect most to stay at the idea stage!
When it comes to starting a business, the conventional wisdom is that the idea is everything, the rest is just a matter of details. This is how the general public thinks technological innovation happens. Remember how people felt about the Instagram acquisition?
Execution is everything. Ideas and inventions don't matter if you cannot make a single sale.
The rationale here is that it’s easy to come up with a trivial idea like “let’s build a social network”, but quite nontrivial to work out the many technical details associated with bringing that idea to market, from large-scale to small-scale decisions.
It’s also extremely nontrivial to actually turn a popular technology into a proﬁtable business.
If someone can steal your idea by simply hearing about it, you probably don’t have something yet that is truly defensible.
You can usually be reasonably open about discussing your ideas with people who can give a good bounce, who can understand the idea rapidly and throw it back with modiﬁcations. The vast majority of people are busy with their own things, or aren’t uncreative sorts who are both extremely good at execution and just waiting around to steal your idea.
BEWARE: If you have a pure internet startup idea, you should think carefully about whether you want to promote it on HN or the startup community before you’ve advanced it to at least a prototype stage.
People will copy the idea as soon as the market is proved out. It is far easier to verify a solution than to find one in the first place. A product selling like hotcakes is the ultimate demonstration that you have found a solution to a market need.
You’re going to need excellent execution to survive, because sometimes these “clones” far surpass the originals. Sometimes it makes sense to keep your head down and grow once you’ve hit product-market ﬁt without alerting competitors to the scale of your
“It’s not the idea, it’s the execution”. From an investor's standpoint, “It’s not the product, it’s the team”.
A strong team will execute on that idea and push through all the details (financial, regulatory, technical, legal) to get that product to market.
The newest conventional wisdom: market is the most important factor in a startup’s success or failure. Why?
The Idea Maze
In a great market – a market with lots of real potential customers – the market pulls product out of the startup.
The market needs to be fulfilled and the market will be fulfilled, by the first viable product that comes along.
The product doesn’t need to be great; it just has to basically work.
And, the market doesn’t care how good the team is, as long as the team can produce that viable product.
A good founder doesn’t just have an idea, they have a bird’s eye view of the idea maze. A good founder is thus capable of anticipating which turns lead to treasure and which lead to certain death. A bad founder is just running to the entrance of the maze without any sense for the history of the industry, the players in the maze, the casualties of the past, and the technologies
that are likely to move walls and change assumptions.
A good idea means a bird’s eye view of the idea maze, understanding all the permutations of the idea and the branching of the decision tree, gaming things out to the end of each scenario. Anyone can point out the entrance to the maze, but few can think through all the branches. Historical perspective and market research is key. Find a hidden door, a unique insight from deep thought that others did not see.
The Execution Mindset
The execution mindset means doing the next thing on the todo list at all times and rewriting the list every day and week in response to progress. This is easy to say, extremely hard to do. It means saying no to other people, saying no to distractions,
saying no to fun, and exerting all your waking hours on the task at hand - run the maze rapidly.
The most important tasks are those that get you to the maze exit.
Everyone in the company should at all times know what their one thing is, and others should know that as well.
Periodically write down what you just did and then cross it oﬀ.
Even if you get oﬀ track, this gives you a sense of what you are working on and your progress to date.
Implement “Thiel’s One Thing” with chat status.
If there’s something that’s worth nagging people about, it’s keeping their Gchat status up to date with their latest Github issue. It constantly refocuses you on your one thing, and allows the entire company to know what that is without constant interrupts. Periodically, you too can scan what others are working on without disrupting their ﬂow.
What Kind of Business Do you Want to Build?
Startups vs. Small Businesses
- A startup is about growth and usually involves new technology and unproven business models.
- A small business, by contrast, does not have ambitions of world domination and is usually geared towards a particular geographical area or limited market where it has some degree of monopoly through virtue of sheer physical presence.
You can start to see why startups are associated with the internet and small businesses with physical storefronts. There are exception, e.g. "life-style business" internet companies like 37signals, and physical operations like McDonalds that aim for world domination.
Small businesses must usually generate profits right away, while startups often can be in debt for a while.
Should you take outside capital and try to grow the business more rapidly, or should you rely on steady organic growth? Most go for outside capital.
Startups Must Exhibit Economies of Scale
Do a simple calculation to determine whether a given business is capable of getting there, i.e. it exhibits an economy of scale.
- Shift per-unit costs into fixed costs (e.g. via software).
Costly up-front software development can pay off in the long run.
- Determine how much capital is needed before the business breaks even.
- Pricing is important; to the extent that you are not constrained by competition,
you really do want to charge the highest possible price at the beginning to get into the black as soon as possible.
Moreover, free or heavily discounted customers generally don’t value the product and are the most troublesome;
paying customers are surprisingly more tolerant of bugs as they feel like they’re invested in the item.
- Incredibly difficult to achieve low price points (e.g. $199 or $99) without massive scale. It’s hard to make a profit!
Startups Must Pursue Large Markets
The annual market size is the total number of people who will buy the product per year multiplied by the price point.
To get to a billion dollars in annual revenue, you need either a high price point or a large number of customers.
Note that low price points require incredible levels of automation and industrial efficiency to make reasonable profits.
Do Market Sizing Calculations Early and Often
With all else held equal, you want to pick the project with the largest market potential.
Among other things, market size determines how much money you can raise, which in turn determines how many employees you can support. Among other things, you won’t capture the entire market, but only a portion.
The best market size estimates are both surprising and convincing. To be surprising is the art of the presentation. But to be convincing, you want to estimate your market size in at least two different ways.
Top-down sizing: Start from the top (high-level numbers) and work down from that overall number to figure out what’s relevant to your company.
Use Fermi estimates to determine the number of people who will buy your product (top-down market sizing). This will require knowledge of general stats like 300M Americans, 6B world population, 6M US businesses, as well as domain-speciﬁc stats like 4M pregnancies.
Bottom-up sizing: Look at individual customers or competitors and roll them up to get the overall size of the market.
Rolling up the revenue from individual companies (e.g. using SEC filings) to look at the overall market can be a great approach when there is a relatively small number of public companies in the market (e.g. US car market). In smaller and more fragmented markets, adding up individual competitors quickly becomes painful, but it can still be your best option.
Bottom-up analysis is generally more reliable, but you have to be careful not to overstate the boundaries of the relevant market. Usually the addressable market won't be the overall market, but a specific sub-market. Be a little critical of your own estimate and make sure that you’re sizing the market that you or your client can actually address, not a general market that looks impressive but isn’t really relevant. Also keep in mind that bottom-up analysis is generally not exhaustive.
Every market sizing approach involves a good bit of uncertainty. Time and data permitting, you should triangulate among a top-down analysis, a roll-up of individual customer spending, and a roll-up of competitor revenue. In an ideal world, these numbers should all be in the same ballpark, but if there is a discrepancy, you can troubleshoot your analysis or do a weighted average of the estimates based on your most reliable information. The resulting number won’t be perfect, but you’ll have a good analysis to walk clients or investors through to get their buy-in.
Tip: If data is really scarce, you can do some very rough market sizing by estimating company revenue based on employee numbers (which is typically easy to find, e.g. LinkedIn, Wikipedia, company's team/about page, Google Finance). This approach doesn't work well for early stage or small (< 100 employees) companies.
Tip: Stats Canada is a good source for market sizing. US sources.
A full market sizing example for board games.
Time to market
Time to market (i.e. how long until shipping) is everything in startup land, due to the compounding effect. This is a second and crucial consideration in addition to sheer market size.
VC's will often use the following formula to help deciding on investing:
((QMP) / (SNT))^(1 / T)
- Q: probability of success, or one minus risk
- M: market size (in dollars)
- P: percent of the market attained in the first year
- S: average salary per person (in dollars per year)
- N: headcount
- T: time to market (in years)
This can be thought of as the amount of money returned divided by the cost of generating that money.
It measures a company's growth factor (because compounding is everything for investors). More accurately, it's the measure of first-year-revenue divided by cost to get to first-year-revenue, renormalized for time to market.
Tools for market research (!)
- A good idea means a bird’s eye view of the idea maze.
- The execution mindset means rapidly navigating the idea maze.
- Market size drives not just the relevance of the company, but also controls downstream parameters like the quantity of money that can be raised and hence the number of employees.
Establish that a market exists before building a so-called minimum viable product (MVP).
Get some news coverage or research papers to establish the overall frame and display in any pitch to investors.
Use Google Books, Wikpedia, SEC filings, and so on.
Back of the envelope estimate of market size, googling as necessary for any statistics.
Further validate this market with some modern tools, including Google’s Keyword Planner and Facebook’s Advertiser Tools.
If that proves fruitful, develop a simple landing page by using a service like Launchrock, with some photos and icons. Use ConvertKit to improve conversion rates. For more resources on photos, icons, etc, check out my bootstrapping gist. You may also want to do some basic SEO.
Tip: how to measure success of your launch page
Allocate a small Google Adwords or Facebook Ads budget to test out the market, and see how many conversions you get.
A framework for determining product tiers
You've got a market and product idea, what features do you build first?
- Figure out the precise minimum scope of what you want to create
- Calculate how much money is required to achieve that minimum goal
- Consider the power of your social network. In other words, how much money do you realistically think you can raise?
Pricing tiers depend on what you're offering. On KickStarter, common high-grossing tiers (by percentage contribution) are:
$10,000 (have some intermediate tiers to make this one seem more attractive)
People don't mind paying $50 or more for a project they love. Be careful, mindset changes for mobile apps.
Avoid tiers less than $25, they are statistically insignificant.
5 tiers maximum, too many tiers can put off supporters.
Create tiers for the exact same product with backer caps at each one until the highest one.
Bulk discount tier.
The average pledge is around $62.50 (based on old KickStarter data).
You're not just raising money, you're also building a community of supporters through the fundraising process.
For crowdfunding, keep your funding period to 3-4 weeks. Any longer and it will likely have stale periods.
Reach out to blogs, relevant news sites, social media, personal & marketing mailing lists early on. Send about two emails on the mailing list at the beginning, one midway, and one near the end (e.g. 3 days or less).
Think in terms of micro-seed capital not one-off money.
Use these steps to aid with selecting product tiers and prioritizing features/versions.
The basic idea is that the ultimate market research is a table with 7 billion rows (one for
each person), N columns on their attributes (e.g. location, profession) and K columns (one
for each product version), with each entry giving the amount that person will pay for those
features. You won’t be able to sample all 7 billion, but you can sample a few
hundred (e.g. with Google Consumer Research Surveys
or Launchrock landing pages), and this gives you a conceptual framework for how to set up your product tiers
In particular, you want to conﬁrm that you will make enough money on version 1 to pay for version 2.
If this is not the case, you should rearrange the order of features until it is true, at least on paper.
The vast majority of people will pay $0 no matter how many features you add (or remove).
A big mistake software companies make is charging too little, but the biggest mistake is charging too much, so they don't get enough customers. People tend to believe that you get what you pay for. When you're setting a price, you're sending a signal. Price below your competition and people think it's crap, price significantly above and it's outstanding.
You're not trying to maximize units sold (i.e. sales), you're trying to maximize profits.
When calculating profits, disregard the initial/upfront costs, those are sunk costs. Instead, consider the incremental/recurring cost of selling each additional unit (i.e. marginal cost), which may include S&H, support, etc. Your actual profit is
units_sold * (price_per_unit - marginal_cost). Plot your profits for different price points to figure out how to price your product.
You'll want to capture the consumer surplus from consumers who would spend more than your decided price point and sell to them for a higher price. You'll also want to email/call back and beg those consumers who were willing to spend at most some price under your asking price and offer them the product for cheaper.
Separating your customers into different groups according to how much they are willing to pay, and extracting the maximal consumer surplus from each customer is called segmented pricing.
Different ways to segment:
- discounted people/times/days (e.g. student or senior discounts, matinee movies, ladies night)
- different brands (e.g. Old Navy, Gap, Banana Republic. For software: "Home" vs "Professional" edition)
Be careful, segmenting pisses people off, they want to pay a fair price. It creates no loyalty. It's also difficult to pull off properly. Don't use segmented pricing if you want to avoid headaches.
The only way to determine how much someone will pay for something is to put it up for sale, and see how many people actually buy it. Seriously consider spending about $250 for a demographically targeted survey with 500 responses. If you genuinely can’t afford this, ask 10-20 of your friends how much they’d pay for different version of your product, or run a poll on Facebook. Any feedback on pricing and features, even biased, is better than none.