Every year Google hosts their annual startup pitch competition called #GoogleDemoDay. Early-stage startups are selected from across the world to compete on the global stage. One of the differentiating factors of Google’s pitch competition is its requirement that startups demonstrate market traction. For many of these startups, deep market validation was a significant factor in driving that traction. If you haven’t seen these pitches, I’d highly recommend you spend the time doing so (the winning pitch ShearShare begins at the 27:40 mark). I recently chatted with last year’s Google Demo Day winner, Courtney Caldwell. She is the co-founder and COO of a Texas-based and minority-owned startup ShearShare.
When discussing market validation, Courtney said “we are fierce believers that you don’t optimize until you reach product market fit. For us, we realized this accomplishment before we knew it had a name. Fast forward to Google Demo Day 2018, and we were recognized as the first Texas startup to bring the award home to the Lone Star State. All because we chose to follow the principles of early-stage product development (aka solving our own problem)!”
With experiences leading corporate voice of customer strategy, as well as helping early-stage startups articulate market-fit, I’ve seen firsthand how a structured approach to market validation can lead to funding. I’ve also worked with founders that can’t see the obvious holes of their ideas, and to date those ventures remain unfunded.
If you are looking to position your new startup as investment ready for both individual and institutional investors, you must move beyond the perceived pain inside of your head. Investors want to know that you can quantify the real unmet need you are trying to solve for with your product.
According to Fortune, the number-one reason for startup failure, cited by 42 percent of polled startups, was the lack of market need for their product. What this means is that most startups never get the funding they need. This isn’t only an issue for founders looking for angel or VC (venture capital) funding, but as more startups look to partner with corporate venture groups, corporate innovation experts expect startups to use an analytical approach when testing new ideas. “From my perspective, startups are well-served from a quick look or similar process when dealing with large organizations. Why? Because large organizations also use a business case methodology and like to see key business issues addressed in a rational manner,” says innovation consultant and former Head of Innovation at USAA, Mick Simonelli.
So where do you start? At the University of Texas at Austin, they teach entrepreneurs and future startup founders a business-oriented approach to market-fit — the Quicklook. It is a lean model meant to be completed in roughly 60 days. Perfect for founders looking to move fast. One of the benefits of the model is not only the structure, but its scalability. It fits well within corporate innovation labs as well as startup accelerators. The Quicklook’s major focus is on assessing your idea with broader strokes so that you can stress test it. The outputs include several cycles of mini assessments that evaluate market fit, with a heavy dose of validation with your future customers. You can read more about it at the IC² institute.
I know what you are going to say…have patience young grasshopper. No, you don’t need to attend an entrepreneurship graduate program at a top b-school to learn the basics of validation. Because in this digital dojo, I am going to share some practical and real-world approaches that I’ve used to help founders like you fine-tune their ninja startup skills. Now put your ninja hood back on and keep reading. I’ll focus on market sizing as well as validation in this article.
“At DataWing, we are entering a time where growth capital is needed. We’ve validated our market and identified key use cases that are maintaining market traction. We have proven how our technology can now solve real world problems. Having the actual numbers, and identifying real margin improvement, has made the path to institutional investment easier.” — Landon Phillips, Co-Founder of DataWing Global
Up until this point, you may be the only one who thinks your idea is great (sorry, but ego strokes by family and your friends don’t count as validation). Investors expect your customers to love your idea as much as you do. They also want to know if your idea can generate real revenue.
I hate to break it to you, but your market is not the entire software business space, an industry vertical or even the entire U.S. population. As a rule, using a needs-based segmentation approach is recommended when determining who your real customers are. Your market size is modeled through a drill down process and takes place in three phases. The first is the Total Addressable Market (TAM), the second is recognized as the Segmented Addressable Market (SAM), and the third is known as the Segmented Obtainable Market (SOM). I know, what language am I speaking…just stick with me here.
The data sources you pull to model each estimate (TAM, SAM, SOM) will be scrutinized by investors. So your sizing data needs to come from highly credible sources, such as government statistics, industry reports or global research databases.
Here is an example — assume your idea is to offer a mobile app that utilizes artificial intelligence to identify “fake” news online (true story — I worked on this app). More specifically, you want to address the “fake” news about weight loss. Your target market will most certainly not be the entire U.S. population. As a matter of fact, and based on the Center of Disease and Control and Prevention (CDC) data, your market sizing would be as follows:
- TAM: Total obese population in the U.S. are 93 million users (these are the folks that may use your app).
- SAM: You then take the 93 million and further divide it. Needs-based translates to identifying which states have the largest population of obese citizens. The top 11 states with the highest concentration of obesity can be identified by reviewing CDC funding by state. So, this equates to 26 million users per CDC data. Stay with me, we are almost there.
- SOM: Finally, focus on what you can obtain. The entire SAM market number is not realistic, so for giggles, let’s say Texas has the biggest weight loss problem (hey, we love our tacos). Per CDC data, the obese population in Texas is nearly 9.5 million.
What does this mean? Let me explain. Nice try, but you don’t have 9.5 million customers. Instead, 9.5 million or SOM is your piece of the pie. You are only expected to own a fraction of the SOM market, as this projection can’t yet account for your competitive landscape, churn and burn rate. Now consider using simple math to reduce this market value by a reasonable market share. Multiply 20 percent (.20) of the pre-determined 9.5 million users in Texas and you will reach a final tally of 1.9 million, which is the absolute target market for your product.
Lastly, quantify the revenue projections and annualize these figures. Sorry, I got excited. What I meant to say is simply show investors how much coin you will make annually. Assuming you can charge (we can talk about pricing later) $4.99 per user/per month, each user can then generate $59.88 in revenue per year. That doesn’t sound like a lot, but when you overlay it across 1.9 million users, the market size for those users in Texas equates to nearly $114 million ($59.88*1.9 million users) a year.
A novice founder may now believe they are ready to put their power point skills to the test and get that sexy pitch deck out to investors. No way Jose, that’s a bad move. So from this point forward, you need to keep that ninja mask on, do a backflip (like the Kinjaz video above) and move from showing how much money you can make to how much street cred you can get in the shortest possible cycle. And by street cred, investors want to know if you can generate a value to the customer, or a product demand for your solution. And that requires getting in their heads.
Getting inside the mind of your customer
You need to get inside the mind of as many potential validators (customers, experts and partners) to test your hypothesis. I’ll share the approach I used at Roog, a startup we are launching in Austin that solves many problems women and minority small business entrepreneurs face in the U.S. — a lack of awareness and low foot-traffic.
Roog is developing a novel search and digital marketplace that connects consumers to small businesses owned by women and minority entrepreneurs. Based on our hypothesis we predicted that small businesses owned by non-minorities were disproportionately more successful than businesses owned by women and entrepreneurs of color. This was a guess initially, deduced through personal experiences without hard data. We also predicted that if a better solution was available to increase shopper engagement, and would drive more online shoppers to these minority-owned businesses, it would incent small businesses to switch from their current solutions, to one that more closely met their needs (Roog).
Early on I mentioned the importance of using reputable data sources. We analyzed data from the U.S. Census, Department of Commerce, MBDA and we also used both national and state level reporting for small business sales receipts. What we discovered is that nearly 40 percent of small businesses in the U.S. were owned by women and people of color; however, only 8 percent of U.S. e-commerce sales went back to these businesses annually. I have the actual dollar disparity called out on my site. The results are shocking.
We then turned our focus to the users of our technology. First we reached out to small business owners, then to online shoppers and finally the experts. We used several web-based surveys from Qualtrics, as it had built in analytics, aggregation tools and support various delivery channels. By creating a survey we used standardized questions to collect over 100 unique perspectives (data points). Although this data was higher level, it helped us to see trends. In the aggregate, nearly 80 percent of our competitor’s customers, like Yelp and Google were all willing to switch to our solution. We also asked pricing questions to help glean insights on our competitors.
Then we asked our online shoppers about their shopping preferences. We wanted to know if shoppers were conscious consumers. If they were not, it would kill our idea. The data was clear. Nearly 50 percent of online shoppers were conscious, meaning they actively searched for women and minority owned businesses online. We also discovered that 90 percent of them would do it more, if there was an easier way to identify these businesses in search, which there was not. We then left the classroom, put on our Jordan’s (and chanklas) and hit the streets. We visited several cities in Texas and interviewed more customers to help us explore deeper areas of feedback (again, product roadmap inputs).
During our final pass, we talked with the experts and potential partners. This included a small business celebrity talk show host from the Oprah Winfrey Network, CEO’s, various Chambers of Commerce, as well as state and national political leaders that represented large swaths of minority citizens. Every single interview informed our product development sweet spot.
This structured approach and data served and continues to serve as our north star at Roog. In the end, we took several innovation awards at the University of Texas and our venture was named most likely to succeed across 90 plus highly competitive entrepreneurs and teams. To date, it has helped us to secure over fifty thousand dollars in grants, competition funds and angel investments. Since UT, Roog went on to be named a “Top 10” startup concept by MassChallenge, the nation’s largest startup accelerator.
As startup founders, you must develop an idea that is both balanced and sound. Specifying your path to funding requires structured muscle movements. Identifying your market, and the legwork needed to validate their unmet needs is part in parcel to getting to your value proposition. If done right, you will find these ninja skills will position your venture better and investors will then bow to you.
Remove your mask. Class is over — OSS!