The biggest lesson from my first startup is that need doesn’t equal opportunity
—Patrick Smith, founder MarketHardware
Vetting the opportunity – not just the market need – is critical for the lean startup. In ManyWheels we successfully used lean approaches to identify a market need and a solution that solved it. In retrospect we could have saved ourselves months of work by asking our customers for early sales commitments. The sale didn’t matter as much as the customer learning from trying to sell.
Last week I decided to move on from ManyWheels, my second start-up. I had a blast, met fantastic people, learned a ton, and can’t wait for my next startup.
(More on “what’s next for Kevin” in the future.)
Vetting the Market Need
Last year I began working with folks in the automotive market to explore an automated dispatching and routing application for shipping cars. Picture a service like Expedia that allows car dealerships, auctions, rental car agencies, etc. to automatically schedule and dispatch vehicles for transport.
We spent several months talking to everyone in the industry we could find. We learned how relationships and contracts are structured, how data flows, the motivations of different players, and the current shortcomings of existing solutions.
During this process we found a group at one of the largest corporate players in this market – I’ll call them “BigCo” – which provided us tremendous insight into the market needs. The team at BigCo had thought a lot about the problem and cobbled together technologies to find a solution. The situation read like a page out of 4 Steps:
You’re almost there: you’ve found a customer who has such a desperate problem that he has had his own homegrown solution built out of piece parts.
–Steve Blank, 4 Steps to the Epiphany, page 35.
We started proposing solutions to BigCo and screen mockups of different ideas. At first they rejected almost all of our ideas, but after a few iterations they became more interested. Eventually we got to the point where the conversation turned to “when can I get it?” They started taking the idea into new directions beyond what we had envisioned.
We expanded our conversation to other prospective customers and got similarly positive reaction. We reached the point where we felt comfortable building a working prototype.
Prototype Development and Pilot Projects
We asked BigCo if they would be a pilot customer but they advised us – and we agreed – that BigCo was too big for a first customer. We decided to go ahead the build the working prototypes and look pilot customers during development.
We found a smaller-market pilot customer – I’ll call them “SmallCo”. Our working relationship with SmallCo was even better than BigCo. Not only did SmallCo have the same problem and want the same solution, but we worked directly with the owner/operator who was in a position to make purchasing decisions. The SmallCo owner also a leader in industry groups and seemed like a classic earlyvangelist:
We need a word to describe visionary customers – those who will not only spread the good news about unfinished and untested products but also buy them. For that reason I often refer to them as earlyvangelists.
–Steve Blank, 4 Steps to the Epiphany, p. 34.
We cut all but the barest of features and got a working tool in the hands of SmallCo as fast as we could. We seemed to be firing on all cylinders and everyone started getting excited.
The Market Speaks with Real Data
Unfortunately, 2 months into our pilot projects with SmallCo we ran into some real roadblocks: SmallCo had the same needs as BigCo, but SmallCo was too small to be a first customer. We needed a much higher level of market penetration before our solution would be useful for SmallCo.
We needed to first sell to a bigger company – a company like BigCo. We began looking for candidate companies that matched our vision. Unfortunately our search lead us to the conclusion that our solution was not going to be adopted by the market in any timeframe we found acceptable.
Faced with this reality, we decided to move on.
My Key Lean Startup Lesson
In hindsight, we did a lot of things right:
we validated the need before we wrote a line of code,
we cut scope like crazy and got a solution into the market quickly,
we listened and learned and looked for evidence.
Most of all we realized all of this in months rather than years.
However, we failed to do one thing that would have saved us months of time:
We failed to vet the OPPORTUNITY in addition to the market need.
A Simple Way to Vet Opportunity
The biggest mistake I made was in failing to vet the business opportunity and not just the market need. I had a hard time getting myself to talk about pricing and sales early in the process. In my experience, pricing discussions with customers on product concepts can be a huge waste of time with enormous data variability. In retrospect I think there is a better way to approach these discussions than asking people “how much would you pay for…?”
We initially started down the right path in creating a “contract” with BigCo but didn’t continue it long enough. I recently read a great case study on the Google Group Lean Startup Circle:
We visited each potential customer a minimum of twice, if not usually, three times. Each time we would come back with a few more “screenshots” and tell them that development was progressing nicely and ask them for more input. We also solicited information as how they were currently solving the problem and how much they paid for their solution.
On the third visit, we pressed those who saw merit in the idea to sign a legally non-binding Letter of Intent. Namely, that they agree to use it for free, if we deliver it to them and it is capable of X, Y and Z. And not only do they use it, but that they intend to purchase if by Y date at X price, if it meets their needs.
This is exactly what we should have done. I actually don’t think many customers in this market would sign an LOI. But the conversation would have brought out market insights into volume, financial modeling, and demand that took us months to figure out once we started deploying solutions.
The Key Point
This is the key point of this case and worth emphasizing:
In early product phases the sale doesn’t matter as much as customer learning from trying to sell.
Fortunately we had enough experience to change paths and ask the tough questions once the real data started coming in.
[Author’s notes: I use “we” frequently in this case study to recognize the contributions of a part-time partner, consultants, and advisors who helped get ManyWheels going. I had a lot of help, but the bulk of the operational work of vetting the market, product development, and operations was done by me. I only make this point because team structures are a critical part of startups.]