This is a post about Startup Fundamentals. Quite often we see Startups running way too fast and falling hard. We began to think really hard as to why this keeps happening, and how we can help Startups to start flying instead. One of the things that we have developed includes what we call Startup Fundamentals.
Startup Fundamentals include a few things, including the Problem, Solution, Market, and Monetisation. Without any one of these fundamentals, it is likely that a Startup may fall. Therefore, validating these four fundamentals of a Startup can help avoid much pain from falls.
Here is how we define our Startup Fundamentals;
Basically, the problem has to be so painful that people want to throw money at it and hopefully the pain goes away. For example, a pain level of 10/10 may come from hunger and basically, everyone will pay for food. Another example is that there is no way most people would pay for an advanced Physics Calculator app on a smartphone, as most people probably don't need one (pain level 1/10). For the problem that you are solving, what is the level of pain? Will people throw money to fix it?
Solutions can be changed anytime so we always look to see if the potential of your product can be 10X better than the best current alternative. For example, back in the early 1990s, everyone was probably using email accounts by their internet provider. Soon came Hotmail, a web-based email that was offered for free and 12m out of 70m internet users switched over within 1.5 years after launch (just before it was sold to Microsoft for $400m). Today, the leader is iPhones' default email client at 29% market share.
These changes happen because the products were 10X (metaphorically) better than the previous product category leader. Hotmail was 10X better with free email disk space and access from any computer in the world (vs only on your own computer). iPhone mail is definitely 10X more convenient for checking emails quickly than on the desktop or laptop.
Ideally, your product is 10X better plus FREE - a killer combo to ensure your product sells fast.
That's not to say that your product should be Free, but that it is possible to have Freemium business models or Hub & Spoke business models like Zenefits (U.S.) where their HR software is free but they do charge for other features. Gmail, for example, is advertisement supported and a Freemium (G Suite).
Does your product have the potential to be 10X better than the existing solution?
The product above may have someone that really needs the product (the inventor), thus making it a market size of one person. That's US$9.95 * 1 person as the market size. This business is probably not a good investment in my opinion. It is important that the target market for the product actually exists and is large enough. A good note is that family & friends are the wrong people to ask if they would buy the product/service you are trying to sell, as the answer always seems to be a resounding YES.
For most Startups, you want to have a large enough market size (defined as your potential revenues, not the entire industry figure) so that Investors will be interested to fund you. To ensure that is the case, your potential revenues have to be on the level of mid-large publicly listed companies. If it does not have that potential, then your potential Investors will not be able to exit, and therefore will not be able to invest.
Monetisation is probably going to be really tough on most Startups. It is a defining moment for Startups to see if they can monetise or not. Do or die.
Most Startups learn if the business works or not at this point when they either realise that they can cover their expenses, or fail to do so (long term and short term alike). Amazon may have taken 5 years to get to profitability, but that was planned very carefully. As a high-growth Startup, producing a profit only slows growth. The trick is to ideally have a net profit of 0 or less to maximise growth. Of course, as you move below zero, you need to ensure you can get back to zero if needed AND continue to raise the funds to support temporary losses.
What most people don't seem to understand is that Amazon, as a scalable marketplace and SaaS business, only needed marketing to grow sales - which can be cut off at any time to get back to zero losses. They can do so without a huge loss in revenues, as their product is highly sticky (tough to replace). It is absolutely possible to get back to a break-even net profit in that way if done properly, and there should still be growth. A bad example is Uber because if they cut their marketing expenses, competitors like Lyft and Grab would take most of their customers away immediately, causing revenues to crash. That comes from the fact that they have little barriers to entry as an app-based business.
Will your Startup achieve revenues that will allow you to achieve breakeven before your funding gets cut off? Unfortunately for most Startups, this is a no. For those who can (and still maintain a high growth rate), there will always be funding!
Again, we have seen many Startups fall because no validation was done. Startup Fundamentals is a framework we use to assess and guide Startups via our mentoring and experience sharing. We do so mainly via our Startup Fund, Startup Accelerator, and even via our Startup IT/Tech Development. We are lucky to be able to work with mentors that are business owners who have sold their business, or still run publicly listed companies on the board level - and yet have the time to guide Startups.
If you believe what we are covering here is relevant to where you may be stuck as a Startup, do feel free to ask us questions in the comments below.