Validate the problem
A remarkable number of products turn out to be solutions in search of a problem. The Segway and Google Wave are two famous examples, but a more subtle one comes from a startup called Patient Communicator, which created an online portal where patients could get in touch with doctors and doctors could manage patient information. If you’ve ever waited in line for a long time to see a doctor, especially if all you had was a trivial question, this feels like a real problem. We might phrase the problem as “doctors don’t have an efficient way to manage patient communication and information.” However, the founder of Patient Communicator, Jeff Novich, learned the hard way that this wasn’t a real problem:
The sum total of our efforts—which included hundreds of cold calls, tens of thousands of emails (I was invited to a “top 20 customers” dinner with TK from Tout), seminars, an appearance on FOX News Live, ads, reaching out to our personal networks as well as the Blueprint Health mentor network—was one paying doctor (who later went out of business) and a handshake deal to partner with a small 20-year-old EMR.[Novich 2013], Jeff Novich, Founder of Patient Communicator
Novich lists several reasons the company failed, including one I found particularly revealing: “doctors want more patients, not an efficient office” [Novich 2013]. This seems like a subtle difference, as a more efficient office could lead to more patients, but focusing on the wrong problem leads the entire company astray.
For example, consider the dental industry. For years, it focused on products and marketing about “fighting gum disease” and “preventing tooth decay,” until some marketing genius realized that the problem customers actually cared about was how to get white teeth and fresh breath. Sure, fighting off gum disease and tooth decay could lead to white teeth and fresh breath, but focusing on the wrong problem means all the products, marketing strategies, and sales materials are wrong. If you focus on tooth decay, you probably don’t come up with profitable product ideas like tooth whitening strips, breath mints, mouthwash, and 3D whitening toothpaste (whatever that is). This is why you need to validate that you’ve identified the right problem before running off and solving it. As Harvard Business School marketing professor Theodore Levitt put it, “People don’t want to buy a quarter-inch drill. They want a quarter-inch hole!” [Christensen, Cook, and Hall 2006].
It’s also important to validate that the problem you’ve identified is big enough to warrant building a startup around it. There are three aspects to consider when thinking about the size of a problem: frequency, density, and pain.
Frequency: Does the problem you’re solving occur often?
Density: Do a lot of people face this problem?
Pain: Is the problem just an annoyance, or something you absolutely must resolve?[Kumar 2015], Manu Kumar, K9 Ventures
For example, consider Facebook and LinkedIn. Facebook scores very high for frequency (you might use it multiple times per day to communicate with friends and family) and density (just about everyone with an Internet connection uses it), but a lot lower on pain (there are many other ways to communicate with friends and family, such as in person, via a phone call, text message, IM, blog post, Skype, Twitter, Snapchat, etc.). On the other hand, LinkedIn scores low for frequency (you don’t need to update your profile, look for a job, or network that often), medium for density (all professionals can use it), and high for pain (there aren’t too many better ways to find a job, find a candidate, or get in touch with a colleague).
Not all products are as obvious as Facebook and LinkedIn, and to be fair, the potential size of these social networks was not obvious in their early days either, so you’ll have to do some market sizing to estimate the size of a problem.
Market sizing
The size of the market determines how much money you can make—and therefore how much money you can raise, how big your company can get, what kind of products you can build, what kind of strategies you can use for sales and marketing, and a number of other factors. A good way to think about market size is to consider the different ways you could build a company that makes $1 billion in revenue:
For example, if you have an idea for a product that costs around $10, then to build a startup around it that can scale to $1 billion in revenue, you need a market that has at least 100 million people in it (or more, as you’ll probably share the market with competitors), and a lot of capital up front (because you make relatively little money per sale and it takes a long time for a product to reach an audience of millions); in addition, you need to devise a marketing strategy that can reach this huge audience, such as advertising. On the other hand, if you have an idea for a product that costs $100,000, then you’re looking for a market of at least 10,000 customers; you might be able to bootstrap the business off of a small number of early customers, and instead of advertising, you might need to focus much more on building a massive sales team.
The following list summarizes different ways to estimate the size of the market (the full list of market-sizing resources can be found at http://www.hello-startup.net/resources/idea-validation/):
- Advertising
- Many advertising companies offer ad-targeting tools that you can use to research the market without actually paying for any ads (although buying ads can be a good way to test your MVP, which we discuss in “The MVP”). For example, you can use the Google AdWords Keyword Planner to research how many searches there are per month for specific terms. When doing research for hello-startup.net, I looked up about 50 relevant keyword groups (e.g., “startup ideas,” “code review tools,” “equity calculator”) and found that they averaged more than 12 million searches per month. This gave me confidence that “how do I build a startup?” is a real problem. It also helped me hone the language on the resource pages. For instance, I found that “business ideas” was a common synonym people used for “startup ideas.” I also used the ad tools from several other companies and found that there are roughly 16 million people interested in startups on Facebook, 2 million people interested in startups on Twitter, and 13 million people who list entrepreneurship as their industry on LinkedIn.
- Competition
- If there are already companies solving this problem, it’s not necessarily a bad thing. If anything, the fact that your idea isn’t unique is validation that you’ve found a real problem. To find a list of competitors, use the advertising tools just described to find the right keywords and try to search Google and the mobile app stores to track them down (it shouldn’t be too hard, or their customers won’t be able to find them either, in which case, you don’t have to worry about them). To see how a specific competitor is doing, you can try website analytics tools (e.g., comScore, Quantcast) and mobile analytics tools (e.g., App Annie, Xyo) to estimate their traffic. You can also see how much funding the competitors have and what investors are backing them using websites like CrunchBase and AngelList.For example, when I was considering turning hello-startup.net into a mobile app, I did some research on competitors. Through Google, I found several other apps that contained startup resources, such as Elevatr, Tech Startup Genius, and Crazy About Startups. From Xyo, it looked like none of these apps had much traction, with Elevatr in the lead at around 17,000 installs. I also searched for other companion apps for books and found several with more traction, such as an app for George R.R. Martin’s A World of Ice and Fire (free; 420,000 installs) and an app for Mark Bittman’s How to Cook Everything ($5; 230,000 installs). This information gave me a ballpark range for how many installs this sort of app could get (from the low thousands up to several hundred thousand) and even different pricing models (free or $5).
- Community
- Another good way to validate problems is to see if there is already a community of people talking about them. You can search for meetups, conferences, user groups, and online forums to estimate how many people this problem affects. For example, while researching hello-startup.net, I looked on Meetup.com and found 15,000 entrepreneurship groups (4 million members), 3,000 tech startup groups (1 million members), and 2,200 Lean startup groups (650,000 members). On Lanyrd, I found 119 startup conferences and submitted proposals to a few so I could actually talk with the people in these communities. I also found the startups subreddit (roughly 74,000 members), startup and entrepreneurship groups on LinkedIn (roughly 150,000 members), startup topics on Quora (roughly 800,000 followers), and, of course, there’s Hacker News (at least 120,000 unique users per day reading about startups).
- Market research and reports
- Some good old-fashioned research is always worth the effort. Search online for newspapers, books, journals, classes, podcasts, and blogs that discuss your topic. When relevant, you can also look up SEC filings and government reports (e.g., from the US Small Business Administration). During my hello-startup.net research, I found hundreds of blogs that focus on startups (e.g., Paul Graham’s Essays, TechCrunch, OnStartups), dozens of books (e.g., Founders at Work, The Lean Startup, The Startup Owner’s Manual), and several courses (e.g., Stanford’s How to Start a Startup and Coursera’s Startup Engineering).There are also a number of companies that specialize in gathering data and publishing reports on specific industry topics. Some of the data is free, such as the World Bank Data. For the rest, you can pay a company such as Nielsen Media Research to do market research for you or a company like AYTM to send out surveys to targeted audiences on your behalf.
- Product data
- If your product is already live, there are many metrics you can gather and analyze to estimate the impact of a new feature. See Chapter 4 for more info.
This list is not comprehensive, but it should be enough to get you started so that you can do some back-of-the-envelope calculations to estimate the size of the market. Once you’ve identified a problem of a reasonable size, the next step in the validation process is to identify a small number of customers who have that problem and talk to them in person.
Talking to real customers
When you talk to customers, your goal is to learn everything you can about their day-to-day lives and determine the following:
- Is this a real problem for the customer?
- What possible solutions are there to the problem?
- How much is the customer willing to pay to solve the problem?
To answer these questions, you have to “get out of the building” and talk to real customers. However, there’s a catch: it’s not always effective to directly ask customers what they want. Some customers have no idea what they want. Some customers know what they want, but they tell you they want X even though they actually want Y. Sometimes this is because customers don’t want to hurt your feelings, so they tell you they like your product even though they know they’d never actually buy it. Sometimes it’s because the customers have an incentive not to tell you the truth, such as not telling you how much money they are willing to pay for a product. Sometimes it’s because customers aren’t even aware of their own preferences.
If I asked all of you, for example, in this room, what you want in a coffee, you know what you’d say? Every one of you would say, “I want a dark, rich, hearty roast.” It’s what people always say when you ask them what they want in a coffee. What do you like? Dark, rich, hearty roast! What percentage of you actually like a dark, rich, hearty roast? According to [Howard Moskowitz’s research], somewhere between 25 and 27 percent of you. Most of you like milky, weak coffee. But you will never, ever say to someone who asks you what you want that “I want a milky, weak coffee.”[Gladwell 2004], Malcom Gladwell, Choice, Happiness and Spaghetti Sauce
Even if the customer is fully aware of their own needs and even if they are willing to be honest with you, most of the time they still won’t be able to help you find a good solution, as customers usually only think in terms of 10% better, faster, and cheaper [Kawasaki 2011]. Many customers will ask you for specific features, but your goal is not to walk away with a long feature list. Small incremental improvements and slightly better features rarely make for good startup ideas, as we’ll discuss in “Focus on the differentiators”, so your real goal is to get a deep understanding of the underlying problem.
Henry Ford
To get to the underlying problem, you’ll have to do a lot more listening and observing instead of talking. Don’t push your ideas on the customer or try to convince them. Instead, try to get them to do as much of the talking as possible. A classic technique you can use, pioneered by Toyota founder Sakichi Toyoda, is the five whys. This technique is best illustrated with an example. Imagine you’re the owner of a trucking company and one of your employees, Bob, tells you that his truck won’t start. Instead of jumping straight to a solution, you repeatedly ask “why” to get to the root cause:
Bob: The truck won’t start.You: Why?Bob: The battery died.You: Why?Bob: (Investigates) Looks like the alternator isn’t working.You: Why?Bob: (Investigates) The alternator belt broke.You: Why?Bob: (Investigates) The alternator belt is really old and should have been replaced a long time ago.You: Why?Bob: I guess we haven’t been maintaining the vehicle according to the proper maintenance schedule.
If you solved the first problem you heard, that the truck won’t start, your solution would’ve probably been to replace the truck or the battery, which would only be treating a symptom. By asking the five whys, you’re able to uncover the underlying problem: lack of a proper maintenance schedule for the trucks in your fleet. It doesn’t always take exactly five whys to get to the root cause, but you should almost always ask why at least once to make sure you’re identifying the real problem.
After a number of customer conversations, you should have a better understanding of what the real problems are. Before jumping in and building a solution, there is one final quality you must check for: feasibility.
Feasibility
- The problem can be solved.
- The problem can be solved by you.
The first question is about market realities. It combines the market sizing and problem validation from earlier in this chapter with a reality check of whether the technologies you need to solve this problem exist and if the economics of the solution work to create a profitable business. The partners at Sequoia Capital, one of the most successful venture capital firms in the world, ask founders the following question: “Why now?” [Calacanis 2013]. What has changed in the world that now is the perfect time to build this company? What do you know that other people don’t? Why didn’t somebody build this company two years ago and why will building it two years from now be too late?
For example, Webvan was an online grocery store that became one of the most famous dot-com flops when it went bankrupt in 2001, after having burned through more than $800 million by building warehouses and buying its own fleet of delivery trucks. Today, many new grocery delivery startups are appearing, such as Instacart and Postmates, and they seem to be doing better than Webvan. Their “why now?” story includes the fact that consumers are far more accustomed to ordering things online today than 15 years ago, and the recent advent of smartphones, wireless data, and GPS connectivity makes it possible to build a delivery fleet on top of drivers using their personal vehicles and to build an inventory on top of existing grocery suppliers.
If the problem can be solved, the next feasibility check is if you are the right person to solve it. Part of this has to do with your personal assets, including not only financial resources (e.g., cash and property), but also your skills, knowledge, and connections. This is yet another reason why domain expertise is so essential. Another important aspect is whether this is an idea you really care about. As I mentioned in Chapter 1, building a successful startup will take on the order of 10 years, and requires an enormous amount of hard work and sacrifice, so you not only need to find a problem you can solve but also one you’re willing to spend the next decade of your life solving.