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Revenue or Funding First? Which is Best for Your Startup?

Ep 11

Revenue or Funding First? Which is Best for Your Startup?

Hosted By
Robert Kaminski
Ryan Hatch
Guest
Heading

Episode Details

This month on Exploring Product, Ryan and Robert discuss the balance between cash in the bank and money needed to validate and grow your business - the ultimate chicken-and-egg problem for founders. Raising money and finding first customers will look different for every startup. Investors want to know if you're making money, but maybe your product can't be created without investment. Learn mindsets and approaches to raising money and getting first revenue.

Key Discussions in this Episode: 


00:00 - Introduction
01:03 - Generate Revenue or Raise Capital First?
03:27 - Fact or Fiction: "You need money in order to build a product."
14:49 - Fact or Fiction: "Funding affords your business expertise & resources for growth."
25:01 - Fact or Fiction: "It's better to have 20% of a unicorn than 100% of a small company."
39:02 - Fact of Fiction: "You need funds to find and scale Product-Market-Fit"
48:24 - So should you raise?
52:27 - Wrap Up

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Show Notes
Transcript

Rob Kaminski: Good morning, everyone excited to be here on exploring products. I'm joined by Ryan hatch on the headway team. And we're talking about a question today, Ryan of do I raise money or do I go after first revenue and get my first customers when it comes to myself? And what better way to talk through this then through a Wisconsin startup week exercise.

And so the way today's gonna roll, uh, we'll, we'll share a bit of information. And then Ryan and I are just going to have an open discussion around this question, things to think about how we approach it and our mindset against things that we've heard in industry. You're working with entrepreneurs and startups and venture capitalists.

And so the way Ryan and I look at this is it's really that ultimate chicken and the egg problem, right? It's one of those things where. Well, I need money to build my thing, but I also need my thing to generate money so I can build more and serve customers. And so, which do you do first in this true chicken concepts?

And so when Ryan and I got on this, we sort of started putting our thoughts together. And the way we look at it is that this generating revenue side of the equation, we see this as building the chicken with the idea of being that if you build the chicken, you can almost create your way to more eggs or the capita.

To fund what you're doing with your startup. And the biggest highlight here is when you're building the chicken, you're working on your business, you're building your product. You're selling to first customers, you're searching for product market fit and all the activities that fall under that sales, marketing development, et cetera.

Um, but you're in the weeds on your business. Day-to-day. On the flip side of this equation is the raising funding, the raising capital. And we see this as the egg, and there's a core set of activities here with the egg that's completely different than raising or then working on your product. And this is more about narrative building telling the story of your business while you're going to be so successful.

Putting the pitch deck together. Uh, and then networking and selling you think of the day-to-day being interacting with potential investors, um, working through due diligence processes. And so these are kind of at odds with each other, right. Today, we're going to have a bit of fun with this, and we're going to kind of pick out some sediment that's out there, kind of in the ecosystem when you're raising, when you're building your product, uh, to hopefully shed some light and perspective on how, you know, some of the entrepreneurs listening and those with an idea can glean into what they might do if they were in a situation of this.

You ready to go? 

Ryan Hatch: I'm ready to go. I feel like we're on a game show. I 

Rob Kaminski: know I want one of those long skinny Mike's maybe set up 

Ryan Hatch: Parker style. We're going to be, so we're going to be going back and forth and switching perspectives on the topic. You know, when Robert and I first did it. Um, you know, it was like, okay, who's going to, who's going to be pro chicken.

Who's going to be pro egg, but then we actually talked about it. Like we could make arguments for both. So we're going to be switching perspectives the whole time and what you're going to find through the theme. You're going to find it through this is that there isn't one right answer and what we hope this is going to help you, um, kind of look at it from different perspectives, give you different viewpoints and hopefully help you navigate what's right for you.

Rob Kaminski: Perfect to yet. I say we jumped right in off of that. So the first one here, Ryan factor fiction. We hear this a lot. You need money in order to build your product. 

Ryan Hatch: Yes, it's true. Isn't it? It's true. And there's lots of questions. This brings up you, you need, you need stuff to build your product. There's a whole bunch of talking points because we're going to kind of tear this thing down here.

So you need money to, to build your product. I think one, one question is kind of brings up is like, what does build mean? The term build is very overloaded. Like how, how deep down the build rabbit hole do you get? Um, this could mean, am I going to build designs? Like, you know, my build screens, we're going to build like what it could look like.

Am I going to build the first working prototype? Or it's actually like, you can see it functioning, but it doesn't look very good. I kind of like Legos put together. Are we talking about production ready? Right. So, so what does build mean here? I think the next question I would ask is like, why do you need a.

Writers assumption that, Hey, I need to go build, I think we all just start with our idea and like, we feel like we have to make it totally real. Totally real. Again, there's the bill, you know, before we go show anybody, let's talk about why, why are we building in the first place? I kind of go down the path of like, You know, selling is cheaper than building, you know, what do you, how much money do you need to sell your product?

It's probably cheaper than what you need to actually go to go build it. And one of the things that you'll hear, Robert and I talk about a lot is that we feel like market testing often should come first because we feel like the desirability side is often the biggest, the biggest thing, unless we're talking about like really high tech stuff, test stuff that.

You know, maybe you have a, maybe you have a breaking, breaking, new technology that you need to prove out. Well, that's going to be different. Um, but a lot of I've 

Rob Kaminski: got a scenario to teach with where you're at and this whole, we were sort of chatting about this before we came on today is let's say you've sort of done some of the selling.

Let's say perhaps, maybe you had a website or you've had some mock-ups that you're showing potential customers and they get they're excited. When can I get my hands on? Um, is it out yet? What, in that setup? And let's assume it's not there. We're not in healthcare. It's not a deep tech actually for specific sake, it's a marketplace, right?

So let's say you have this marketplace idea and both sides of the marketplace are like, yes, I want that. And so with that in mind on this, you know, DSL, do you build production ready? I think we're in that frame where it's, I want to get first users to start to get something functions. Where do you come to a statement like this factor fiction?

And if so fact, what, what would you even guide someone to do in that? 

Ryan Hatch: Yeah, so assuming you've got like, you know, some of the market evidence side ready to go and people are kind of amped up about this and that's a big assumption because a lot of people come to us and they, you know, they don't have that.

They think they do, but they really, they really don't. Um, But, yeah. Okay. Let's, let's, let's dive into build. Right? What does that really mean? Um, I think. There was a really big assumption here. That building is expensive. You know, like the other thing here, and this isn't 19 70, 19 70, the biggest question was, can I fit the computer in the room?

Right? The, the assumptions, the questions were, does this have enough storage or memory? And like we're so far past a lot of that, that actually the amazing thing, the cost of all this technology has just has just gone down right. $500 TV now is like, W you couldn't, you couldn't even imagine a million dollar TV, you know, not that long ago.

Um, so one of the things that to realize is that the cost of building has gone down and a lot of things have come out that actually allow you to build, um, even functioning stuff. Um, Pretty pretty amazingly cheap. And what we talk about no-code tools and getting, getting into platforms like that, that allow you to get out the door and make something real and kind of bring it to life and breathe life into it without having to have like a dedicated team working on it for, you know, nine months to make it real.

So I think there's a ton more options now, um, that didn't exist before. Agreed. 

Rob Kaminski: I think for me, I look at something like this, I think of course it's fact, but then I asked the question of like, what's that amount, how much money? And in the context of raising not enough to raise, like my mind goes sub 5,000 sub $10,000 to buy, you know, maybe a maker pad subscription, a premium subscription to a no-code tool of your choice.

Some marketing dollars to test. And then, you know, you think Zapier and all the other things that are out there to stitch something together and even all the free platforms that are out there. And so to me, it's fact, but it it's so close to zero. That to me, it leads fiction for a lot of early startup entrepreneurs.

And to go a little bit beyond that, I think you brought up build and why. Which I think is a really important aspect of this conversation here. Uh, and then you use the phrase production ready when I think production ready. I think scale, I think more than a thousand, 10,000 users, which, you know, go talk to your developers, like that's what they do, right?

They want to build the most secure, scalable piece of software. That's going to work day in, day out when it comes to build, when you're getting early customers. Even in that scenario, I brought up, you're building for. A handful. It only has to work for a handful of people to get started. And whether that's one to five, it's certainly less than 50 or a hundred.

And that's where this space of no code and stitching things together really delivers a really solid, almost premium field solution for something that you can do on your own for such a little bit amount of money. And so I lean, I lean very hacky and there that early phase. To even see whether it's worthwhile to put the time and effort into, oh, I do need to build for production and get some sense of scale.

I, I just see that as a, a later question that can be addressed and not something that needs, uh, you know, aggressive planning upfront. 

Ryan Hatch: There's a lot on the, on the investors. You, you know, different investors have different takes, right? So some investors. Are going to just, Hey, we'll put 300 K just on you.

Cause we believe in you as, as a, as, as a person, you're going to figure it out and was. There's a lot of investors that are comfortable doing that. There's a lot of investors that actually, um, want to see something working that wants to see risk reduced that wants to see traction that want to see customers in your product and want to see engagement in it.

And the questions you start asking yourself as, gee, how do I get, how do I get that as quick as possible? Uh, you know, without raising money. Cause the further you can get along this line, uh, in, in not only. Selling it, but also also serving your first customers and hopefully getting some success stories out of there and having some positive reviews and, um, that's gonna go a long way with a lot of investors.

Um, so I think 

you better do you remember? We had a chat with John Zeratsky and he calls it, he calls it the spark. There needs to be some spark early on to even have a conversation with the investor. And so I'm glad you brought that up of like who's investing because. I think institutional investors, they're just gonna, they think past results and how do I yield future earnings?

And so they're literally looking for what have you done with little resources that with the idea being, if I give you more resources, can 10 X that. And so this, this whole idea, this chicken and the egg thing is like, if you have zero spark and nothing to shit, like zero for zero, you've done nothing of.

There's not even like a thesis to invest in you upon, even if it's not financial, right. Simply getting eyeballs on something. Sometimes it's enough to say, oh my goodness, for, with a thousand dollars, but got X amount of viewers to this thing, like, that's impressive. Like what would he do if I gave him a hundred grand?

Like, those are the kinds of things that maybe start to tee up the funding stuff, but you need, you know, when it comes to this. So it sounds like we're pretty aligned. You should scrap something together first, then kind of try and get to a spark before, you know, the true visionary fund. My idea and thinking of unicorns early on.

I just, I don't think that's reality. I think we hear that. We hear that with founders. Who've done it before because their story is different. Hey, look, I'm trying something new. I haven't done anything yet, but remember my last one, you know, into that past history equation to get investors excited that I think kind of changes.

Yeah, 

I'll end this one, uh, on my side, you know, but we're talking about it. It really comes down to, okay. It gives us going to come down to hustle. You're going to need to show investors. If you go raise money, you're going to need to show investors that you have, what it takes, that you can punch this stuff through that you're resourceful to Rob, to your point, that might look like taking some friends and family money and working magic with it and getting as far as possible.

And there are tools available now to be able to, to make that kind of progress. I will also say that it depends. Right. Which is going to be the answer on every one of these, these things, because, you know, if you're in a capital intensive kind of environment, if you have, you know, maybe you have huge, you know, hardware purchase, you know, minimum requirements from a manufacturer to do some hardware prototyping and you need, um, some, some minimum dollar amount.

Okay. Maybe, maybe you do need more capital to make, to make that initial, initial run. Um, that's possible. I know that in heart, in the hardware landscape, like the lead times longer, like it's a slower feedback loop. Um, but then you think about, okay, I can, I can counter that and just say Kickstarter there's there's, there's all these prototypes, you know, being sold and pre-sold, um, in a pretty, pretty significant way there, although you get into stuff.

No code that we're talking about is not going to be a fit for the highly regulated environments. It's not going to be a fit for FinTech stock going to be a fit for, um, you know, we have to do, you know, know your customer, you have to do banking, regulation stuff. You have to do, you know, medic medical field, HIPAA compliance stuff.

I mean, uh, it's possible, but that's probably where you hit the, the boundaries of some of those things. Um, And then, you know, the fun one I found out recently was for capital intensive requirements. Um, if you're, you know, um, trying to create new way to get to space or something crazy like that, um, then yeah, you're going to need to do in investors before, before, uh, prototyping.

Rob Kaminski: So if you're not. You should consider self-funding or going to friends and family. This is 

Ryan Hatch: high. Otherwise you shouldn't, you should hustle. Do we answer this 

Rob Kaminski: one? I think, I think so. Let's, let's blow past this or we can come back to it if we get some questions. Uh, so here's the, here's the next one here.

Funding affords your business expertise and resources for growth. So this is the argument for, I guess, for funding being, Hey, you'll, you'll get things that you don't, you can't get access to. Today without funding, you 

Ryan Hatch: go first on this one 

Rob Kaminski: or I'll go first. This one here, I look at it. And I look at just kind of the way it's written as well.

And I think absolutely this is fact, but I don't think it matters for startups. And here's what, here's, what I mean is yes, money and VCs will help you with resources for growth, with capital being a big part of that connections. From most of the work that we do with startups, oftentimes it's not even the growth that they're ready for, meaning money too early into a startup.

We know how dangerous that could be. I know you're going to hit on it. And, and for me, uh, forge your business expertise and reasons for growth. Yes. But who cares? Most startups aren't in a growth phase. Like that might not be money you want to reach for because you're still, you know, the goal there is discovering product markets.

And that's the one thing when it comes to institutional investors, especially there they are good at investments in 10 X and diversifying their portfolio. They're not the operators that are good at finding product market fit. They're the ones that, oh, you have it. Great. Let me help you scale. And so that's why it's fact for me, but for startups and when it comes to raising, I don't raise money to get growth resources.

If my startup doesn't need growth resources. That's how I think about this one. 

Ryan Hatch: Yeah, I think it's right. You know, it's, I don't know. It's probably a bad, bad analogy. I'm just winging here, but it's kind of like,

Uh, a kid like what's the, what's the human lifecycle. Like what you, what you're going to feed an infant is going to be significantly different than, than what you feed then like fan, wouldn't it be great. We'll have all these, like, Twix bars, candy bars, all these amazing things. And then we'll play with Legos.

It's magic. It's amazing life together, but it's like, yes. And you're not ready for that. I think that what you eat as an 

Rob Kaminski: adult,

Ryan Hatch: it's just how Louie and man, it's perfect sneaking my kids candy. But one of the things that Rob you and I heard, um, in one of our last conversations on exploring product was with. Zinger line at gross university am. One of the things we talked about was, you know, most startups fail and if he categorized, uh, failure causes of failure, and one of the biggest ones was spending money too fast, too.

Right. And raising, raising too much money too early, hiring and expanding your team too early. And so he actually talked about restraint being one of the biggest, um, you know, factors in a startup, being able to be successful is stay small. Don't try to pour the fuel on your you're not ready for that. Um, and so, you know, raising money to earlier, putting, putting more fuel on the fire too early can actually.

Could actually kill your startup and you need, you need to, you need to stay small and to get, to get things, to make sure things are working before you try to, uh, to move a lot faster. 

Rob Kaminski: Yeah. Yeah, Craig, I mean, he had, he was a wealth of knowledge on that for how he approached the whole discussion for him was really around product market fit.

And how do you, how do you identify metrics for that? And I think that's, what's at the core of even this, this one here is. Experimentation, right. The moment you get funding, um, that that's probably beyond pre-seed, you know, seed a little bit, but even the moment you get seed funding, the expectations are there for growth.

And we've all been in situations when that happens, where, when there's expectations. You kind of move into this, how do we make what's in front of us? The best thing, which on its surface seems, oh, that's good. Like that's harmless, but the mindset, when you're pre-product market fit, isn't how do we make this thing the best it's how do we make this the best for the customers?

And that's a subtle difference in there that just brings an experimentation mindset, um, almost like value over Polish and there's real risk of taking on. Come home on this one there's risks. Like we said, taking on money when you're not ready to grow. Um, what are your thoughts right now? Let's say you, you are, you're one of those entrepreneurs that has the tenacity and ability to sell, and you have early stage founders offering you money.

When you, when you know, you're not a product market fit, do you. How do you, how would you approach that? Um, is that money who would deter, you know, what versus everything we're saying is, is there a way to make that work 

Ryan Hatch: it's better to take money when you don't need it, rather than coming back in desperation.

So there's, there's, you know, there's definitely points points there. I really think it depends on how well aligned you are with the investor. Hmm. You know, I think the wrong investors can make your life probably miserable. Uh, right. And what I mean by that is some investors are going to be okay. Was you figuring it out and really, and be learning, be like a really key thing that you took to work towards?

I think a lot of investors are more in the. Let's just let's execute mode and unless you're probably a lot of them, a lot of them aren't ready for that yet. Um, I think the danger is if you look at, Hey, the VC success metrics. Okay. Um, you know, primary metric. Well, I don't, I don't get paid back as, as a VC until, until you exit.

Right. And. And you can't exit until you, until you get assert, you know, till the next round. Is that like the next logical conclusion, which means. If I'm, if I'm a VC I'm measured, you know, the only success metric, one of the primary ones is what percent of my portfolio got raised their next round. And so it's always like once you start raising, it puts you on this path to like, I need to raise my next.

And it's and it's well, shoot, I better put a really good song and dance together to raise the next one. And if you're not ready, it could be more song and dance than, than real. It can be more smoke, smoke screens. And we've, we've heard about trying to grow too fast too soon when you're not ready for it.

As opposed to like, you know, just think of niche markets, it's better to actually get that niche market working really well. Get get something kind of going in that niche and then try to expand a 10 to 10 other things just to sell that next sex, sell that next, uh, uh, fund fundraise. Um, and then once you do that, you have, you probably doubled and tripled your number of employees.

And now you're spending less time on the actual business and figuring out the market and getting it to accurate product to actually work you're spending more time like managing and, and, um, That's a whole, that's a whole different ball game. So I think that funding yes is super important. And it does allow you these things, but you need to be conscious of who who's the investor who's coming in.

Am I really aligned with them? And you know, that that fundraising is a big time sink. Just think about it, right. You're going to raise for six months. You're going to spend six months of storytelling. It's a full-time job. If you're good. You know, I think some people. Sadly, I think some founders just look at fundraising as validation, right?

It's like, oh, they believe in me, you know? Right. And some people kind of get in the, you know, the, they just get, they just get on the pitch wagon and they just ride that forever. And the real validation is. As great as it says it is, is to say, Hey, this, this firm's invested in me. It's it's way better to have, you know, these customers buying from me.

Um, so where's your time best spent is as well. Right? How do you, how do you, how do you balance? When is, when is the right time as totally contextual? When's the right time to go sell my customers. When's the right time to actually go rate, go raise that round. 

Rob Kaminski: The relationship you bring up with the investor.

I think. I think it's a super interesting topic in itself because those aren't relationships that a lot of entrepreneurs like have at the beginning. So there's almost this like limited supply. And so when someone does bite, like can, you can get yourself caught into a bad situation, um, with an investor that isn't aligned to your vision, um, and giving you the right leeway to experiment.

And, you know, we talk a lot about setting expectations and I know you brought this up. Can you, and this is tough to do with an investor because it, in a lot of ways it can feel like they're holding the reigns with all the capital, but being pretty aggressive to let them know that you're really on a, an experimentation path.

And that's easier said than done. I think of, you know, Michael Siebel talks about it at Y Combinator of your investors and what they ask and tell you to do. It's it's advice and he puts it this way. You're an adult. You have the ability to buy. And I love his flip on that because I think there's this feeling of, I know they're my investors, arguably now a co-founder on my board.

I have to do what they say or else it's your business at the end of the day. And so I, I think you're the relationship piece you brought up, uh, is key for this, and it's not validation. Your customers will validate whether you're on the customer presentation. All right. I think we beat this one in, in a good way.

Um, let's go into to the next one here. All right. It's better to have a 20% piece of a unicorn than a hundred percent of a small company. So again, another argument, I suppose. For funding and going big for shooting for rocket rockets, often the space. Where's your mind go with this one, right? Okay. 

Ryan Hatch: I just read this and it's like, yes, this is.

Right. If this were true, if this couldn't be true, I'd pick this right. If I get 12, 20% of a billion is better than a hundred percent of nothing, but

Rob Kaminski: that number is bigger than this number is where your mind goes. So yes, this is what I heard in 

Ryan Hatch: that. Sure. Yes. That sounds, that sounds like, that sounds great. Take me for the ride. Right. But there's a whole bunch of assumptions baked in here, right? Like, um, what are the chances of you becoming a unit? You know, the, the hard thing is that, um, most startups don't get funded.

Um, and of those that do get funded, they follow a power law distribution, you know, it's like extreme Parado, you know, the 80 20 rule, but like extreme. So it's like only 1% of the funded startups actually become unicorns. So the actual chances of, of, of getting that lottery ticket, um, is. 

Rob Kaminski: Can you build it on, what is it?

The three to 5% of startups actually get funding. So it's like three to 5%. Get it. And then other three to 5%, you said 1% actually become unicorns. Yeah. So 

Ryan Hatch: it's, it's, it's on that order of magnitude right there. You know, I'm not saying the stats exact, but I think the question you to ask yourself is what type of business do I want to have?

Um, There are plenty of good businesses out there that do, you know, 10, 20 million. Um, and you can own a whole, whole lot of that. Um, you know, and we've even heard, Rob we've even heard, um, guys that have been down this road and like raise tons of money and been on the unicorn path and. There's a whole bunch of problems.

Um, they're not equipped for that ride. They get replaced, they lose control. Um, right there, there's, there's a whole bunch of things going on. Um, you know, the vision isn't isn't. But he thought he would be. And then he comes back to the end. And he's like, if, if I was talking to myself eight years ago, I would've told myself maybe 20 million is just fine.

Maybe I don't need a, uh, a bill, you know, a piece of billion dollars. And so you gotta, I think it depends on what type of business you want to have. Yeah. 

Rob Kaminski: I think it's super, it's it hits, it hits home to me specifically because in a lot of ways you're talking about fun and passion. The moment you take on money is the moment.

Well, this isn't a hobby anymore, right? Like, and you can almost, and I've seen this in my career, you know, working at startups like the, the self-made founder turns into, like, they have to move into that CEO sort of corporate feeling role. And it changes things. It changes the way companies operate, um, the responsibilities that they have.

And I think that's what you're hitting on when like go down the line, is that the right choice? And so, so maybe, maybe financially, but we know there there's things that are just more important than, than the big number at the end of the day. And I've talked to founders that they get to that point. Like, man, I, I, they all say the same thing I miss the early days I miss the days.

Somewhere between zero and the first few million in revenue and not the ones where they're pushing and scraping to try and get to a hundred million in revenue. Those are the crappiest days. Cause they're not, they're doing it with the wrong intentions. Um, so that, that really hits home. All right, we've got a question coming in here.

Uh, this is a good one. So questions around good customer research, um, and no product so better to do customer research or no product to raise funds. Um, if yes, how would good customer research look like for you? Um, I have a thought on this one, right. And I can jump in and then maybe you can, you can follow me here.

Um, so customer research, like I'll speak a little for rhino front. Yes, yes. And yes. Again, like you gotta be doing customer research, spend as much time with your customers as you can early on. Um, I think the question in here goes to, you know, do you do customer research and then build your product or do you do it in lieu of having a product?

I, my viewpoint is customer research never really ends. I think it may be shifts from customer research, into customer development, where you're onboarding users and running a little bit more of the nuances of how your product's going to fill the value. Um, and then the piece, as it relates to funding here is even the best customer research.

Like let's say you found a real market opportunity in terms of size, you know, maybe a need as well, whether you're getting quotes or talk to them. Even that is kind of meaningless without action. And that action is the form of the spark that we talked about early on of like getting the first few like, oh yeah, that's it.

I want it. And there's, there's a part of building in there. So I think that's where product comes in because to me, I mean, you've, I've seen great market research presentations, but if there's no action, like the invest, like you can't invest in a market. Just the market, right? Like you have to have like a strategic wedge, your product or your business, and your point of view to take advantage of that market.

And I think you need some form of product. So that's where my mind goes on this one. Ryan, I'd be curious where you're totally a hundred 

Ryan Hatch: percent in here. You know, I think there's part of us that want to be right. Hmm. That afraid of being wrong, if it right. So we want to get all the research just perfect.

And oh yeah, this is exactly how it's going to go. But, and Robert, I will tell you, like, we, you know, We love customer discovery. We live and breathe that where we get we nerd out on this stuff. But at the end of the day, that's, it's not good enough to just stay in the problem space you need to get in this.

You need to start hustling and you need to get out there and start pitching and you need to make it much more real than just. You know, data points or market sizing or, you know, that, that, that stuff's great, but it's not, it's not going to go the distance. I don't think with, with rosters, 

Rob Kaminski: can you paint a high level picture to this?

One of like this? I see the second part of the question here is around like good customer research. Um, and, and I think the context that I might wrap around this, and the question is like, w how might you approach research at, at a very high level where you don't have a product, you maybe have this lens, maybe you found that.

The data metrics that say, Hey, I think there's a market opportunity here. What does good customer research look like to you from that standpoint? We're the first few things you might do. 

Ryan Hatch: Oh gosh, this is such a loaded question. Right? Like there's so many different ways of, of, of, of learning. And then what we talked about is like, man startups.

It's fun. It's super hard, but it's, it's all about learning because all the time, the, the, the questions you need to do, you need to answer are different every single day. Um, but it's really about answering a series of questions. And we think about what are some of those early questions we try to, we try to, we try to get to, I mean, Rob, the main major ones we got to is like, mm.

Is this really a problem for people? Um, are they trying to solve a problem? Are they trying to solve it today? How are those, how are those current solutions inadequate? You know, where are they getting stuck? Um, where's the bottleneck in the flow, right? That kinda like lead you to that. Yeah, there was something here, people there's just something missing and then you come, it's you coming back with?

Some kind of thought on what it could be. It's, it's your job as the, as the innovator to, to visualize for them what the future could look like. Right. And start getting them excited about it and start pitching that. Um, does anyone want to go on that journey with you? Is, is it, is it worth it what's, what's it worth to them?

You're starting to get into business value of, you know, is that where they want to go? Is that really their top priority or really? That'd be nice, but. Not a big deal. You know, how often does it happen? Does it happen every, you know, three times a day or does it happen once a quarter? Right? These are all questions we would kind of look for to see.

Is there something there and then casting that vision, bringing, uh, some designs. Would you be interested in this, in co-creating with me, this future together, would that help you? Um, and then, and then we test for commitment. So, you know, there's a commitment ladder. There's a bunch of different ways to test for that.

Um, but at the end of the day, it's like, Hey, will you not, would you be willing to pay for this? We don't like, would you questions? Because you're just, it's not a real commitment. There's no consequence for saying yeah, I would or not. Right. There's no, there's no consequence. Well, let's see. Right. Like, let's sign a letter of intent, some kind of, um, some kind of commitment from them to show this thing can be real.

Um, then you have a story, then you have a story arc that, you know, you've got five customers, 10 customers signed up. They really want to go on this journey with me. Here's where they're struggling. Now. They've given me all this time. They've agreed to buy it. Now you have something. Um, yeah, so let's kinda high-level level.

Rob Kaminski: That was kind of an awesome answer to a loaded question. I think if I were to recap, it's kind of working back through the lenses of, is there a problem? Did they know they have it, are they trying to solve it? And then working your way to how valuable is it as you work with them to solve it, like creating that void and then will they pull out their wallet for it.

Right. And kind of stepping through those boxes. Um, you also brought up story, which hits home to me in this context of raise funding or go to first revenue because those roughly five phases that we just went through in term inform of those questions. If you solve that for one customer that arc, you talked about that story.

You can go tell it to customer too, and they're either going to opt into it or not, and, you know, sale or no sale. And then I also think like that narrative arc that's part of the first thing you would put into your investor story. Now there's other parts of the story that you have to fill in, but at the core of what would a VC or someone investing your business is going to look for.

Can you get a customer to pull out their wallet. And so it's almost like you get a customer to find their problem, solve it for them, or they'll get pay you money for it. And the investor just wants to know. Okay, great. You can do that. How many times can you do that? And that's where maybe some of the secondary research comes in, you know, a little bit about conviction and your ability to execute and that sort of thing.

But, uh, thanks for, for, uh, answering that one. Right? I think that was a great response. Yeah. 

Ryan Hatch: All right. Cool. One more on this one more, one more, one more on this is

for some types of, you know, concepts or ideas. Um, they're very future oriented that they wouldn't be. Yeah, the market's not ready today. You know, there's some investors, you know, a lot of investors, but not all of them, um, want to be, you know, you've heard this term probably skating to the puck, right.

Really future oriented and kind of inventing the future. Um, when time to market is really, really critical. Um, for instance, this, this new NFT space crypto space is all very. You know, we're not sure how these things are gonna manifest yet, but we know that there, that there is a decentralized reality ahead of us in, in like web three.

Um, that's something that probably know. You know, investible, just to show up with an idea and go, um, we we've, we've seen that we've seen investors, you know, that specific like market space, they know that they want to go create it, and they're not sure who's going to be the winner. Um, but they want it, 

Rob Kaminski: I think, in terms of the person to do that, right.

Like I think visionary. And so even in this conversation, right. If you're that, if you're working on an idea like that, that you just brought up where the market timing isn't, is it right? But it's close or at least that's your argument is that it's close and there's no way to really test that demand. The void gets filled with almost energy and confidence and charisma the founder in some ways.

And if that's not you, right. Cause again, ideas, easy execution. And in this state, in this case execution on an idea, that's not really executable yet. You, you got to fill it with something. And so I think that's really an interesting point. You bring up Brian where, you know, if I think of the first time founder with revolutionary idea, it's like, that's great.

But if you can't figure out steps a, B and C, like, and you can't hold together, ABCD, EMF with pure. Storytelling. It's probably not a good entrepreneur idea fit, which is something we don't talk about maybe enough, but it kind of triggered me when you, when you brought that up. I think that's a really good point.

All right, let's move on here. I think there's a, I think this is the last one here. Uh, you need funds to be able to find and scale product market fit.

Give me a lot of ways. I look at this one. Yeah, my F my first shot at this one, it's actually very similar to the first I think, um, I split this one right down the middle. So the word scale, we already beat the crap out of that. Yes. Facts. You need funds to scale product market. In most scenarios, at least to be a rocket ship company, finding product market fit.

I think, you know, this is kind of a, maybe the conversation is different from tools to build as it is tools to test demand and maybe work through those first questions that we talked about. And so with this one sort of hits home on for me is customer research and customer development. Those things are pretty cheap.

Those things are really. Other than time is probably the most expensive part of that, but time and effort interacting with customers, um, and scrapping together, your approach to finding out whether they do have the problem and are working to find a solution and are willing to pay for it. Because that, to me is the, the finding piece with a little bit of build on the end.

Um, and so for me, Limited funds. Do you need some funds? Sure. Uh, but I think it folds back into that few thousand. I mean, you can do it for free if you're super scrappy and lean, but few thousand dollars, um, on an annual basis to be able to do some pretty powerful things. When it comes to finding product market fit, I should caveat this, assuming you're not doing a deep technology that needs high-end developers, you're not operating in healthcare.

Um, and perhaps even not operating in an area where the market timing isn't there, as we just talked about, what do you think about this one? Right. 

Ryan Hatch: Yeah. I think the answer to this is, uh, yes. How I think it depends a lot on a couple of things. One is. You know, what, what do you mean by product market fit?

You know, not this isn't, unfortunately this isn't like cut and dry definition. There's different interpretations of this. I think one of the things that we talk about Rob a lot is like, you know, startups are not a short journey. You better be, you better be willing to be in this for the long. Um, you know, five, seven years and a lot of companies, you don't know if you're going to make it or not, until, you know, it's going to take 18, 18 months a lot of times just to figure out if you're, if you, if this is gonna even survive.

Um, so I think that, that we there's different types of fit. Okay. And there's different types. There's different stage gates. That kind of like a mental model that Rob and I have, uh, and the headway team. And we talk about. We've actually just talked about some of them and that customer research question, you know, market opportunity, market size has the actual problem, you know, Actually willing to pay to solve it.

You know, some commitment there on the solution. Um, the next one, these different gates, right? These different gates. Next one is like, okay, can you deliver value? Can you deliver on the promise? You just, you just sold three pilots, three pilot programs, and now you have to go deliver on it, man. So, you know, can you deliver on it?

Can you deliver on the promise? Um, it's possible. You might not be able to it's possible the data you thought you could get, how, how you thought it would work. What you had access to, it's possible that you actually won't be able to deliver and make the customer happy, or their expectations were, were, were not aligned with what you thought.

Um, so, uh, these are some stage gates. Then once you have like value delivering value to the first couple set of customers for us, that's a huge indicator that. On the right track, right? You've got success stories. Now. What makes all the next sales sale? 2, 3, 4, 5 to 10 way easier. And now you start to move into this repeatable thing.

Okay. How do I acquire the next 10? How do I hire the next 10? You know, and you're going to be moving probably into, into more automations at that point. And if that then right there starts like that, probably right. There is the difference between. I think it's a major to me, that's a major, um, demarcation on these different phases.

So if you get three customers really happy with what you're doing and you're delivering value, now you start this long. That's great. That would ask the, the. You know, the founders listening, where are you? Are you before that point or after that point? Because I think that point is a big difference. And if you're at that point, I think Zen starts the long road.

Um, it's exciting, but it's a long road and that product market fit. Um, you know, if we're talking about, um, it being a retention game and engagement game and. You know, cohort after cohort, you know, week after week, actually improving that experience to get people to stay longer. You're, you know, you're talking about, you started talking about unit economics and you know, how, how, um, how engaged are they?

Am I able to reproduce that value now a at a larger scale. And I think when you're at that point, there is a point when you probably do need funding to build a team around that, to make sure. You know, there's 18, 18 months. Um, I don't know what, you know, it depends on the individual founders and, and the, the markets they're in.

Um, but I think that before that point, before that point where we've actually got customers paying for something and excited about and getting value out of something to me that if we're talking about that side of things, I think you could do it with almost no funding. 

Rob Kaminski: Very little as you were walking through.

So this triggered a couple of things for me. That's super interesting is this definition of product market fit, where my mind goes with. This is a question for a lot of startups and ideas is every startup. Should every startup be a rocket ship? Which I don't think is a question we ask enough. I think it's built in.

And part of the reason I think, I think it's built in I'm even thinking of how I was taught to pull together pitch decks, building financial models. I remember it's a reverse engineering exercise of, Hey, you don't know the future, but go three to five years out and work your way down the hockey stick to get to today.

Like you're all you almost with any idea you are starting. Almost ideal product market fit scale. And I think it's really detrimental. I think with that in mind, I think there's a lot of good businesses out there that you can get to product market fit. I almost think it is like product market fit with an asterix B meaning it's a good business.

Is it a scalable business. When we talk about product market fit, when investors talk about it, they talk about it as, oh, you found this thing that can go be repeated a million times. Not every business is like that. And I think there's this tendency to sort of stretch your assumptions of how successful and how big things are going to be, because we're sort of taught that early on.

And I think that gets people into a lot of trouble. And the thing is if you raise money off of. That hockey stick reality, you painted then becomes the target, right? It's fun and easy to say, oh, look how much it could go versus here's how much we're expected to grow. And that to me is I think, where we're funny or funny where money gets people into a lot of trouble.

When they think about their startup being big versus the kind of multiple fits that you talked about, where there is, there are fits. I think what are their sustainable businesses or even profitable business. That aren't fits for VC backed rocket ships. Um, and so this is interesting one. Now you come back to maybe, you know, I know we've talked about a lot today, but the, it depends question, and I think there's this almost layer of humility that's required when you're building a business.

When you're thinking about funding to really step back and see like, where are you and where could you realistically get to? Because sometimes we don't, uh, we don't add that realistic tag to it as much as maybe we should. 

Ryan Hatch: Yeah. And you almost think about for those types of businesses, you're talking about those, you know, $20 million businesses, even $50 million businesses, whatever that aren't going to be, you know, billion, billion dollar things, or even, you know, $300 million things.

Um, what's the. On the funding aspect, right? Like, is, is there a, is there a funding gap? Uh, maybe, maybe, maybe angels can fill the gap. I mean, is there, is there a funding gap where, um, the type of business you want to create? You know, if you're not going to sell it, if you want to run it, like, there's this interesting space here.

Um,

We have seen kind of these different models come up, but I still think there might be something missing there. You're you're, 

Rob Kaminski: you're talking about creative fundraising to a degree. And what I hear is, is it is a profit based, right? Is it? And you know, you can find some of those out in the wild, but they're, they're not prevalent.

They're not big things. Um, I still think a lot of the institutional VCs are out. Swinging their hammer looking for home runs and the idea of a safe bet. Oh, I get a little revenues and royalties off this. Maybe isn't a play for a lot of investors, but what I kind of hear you saying is maybe it should be for some of those businesses, but then if you have the awareness of that's what it is.

Um, I think that's the hard part. All right. So, so Ryan, we we've been battling this question raised don't raise, I think. It's kind of funny. We've been riding the fence here for 48 minutes, but maybe tilting to one side of whether you should raise or not talking through the different phases. Um, what do you think folks should take away today?

Listening? You know, if they have a startup or they've started to raise or they started to build their product, what do you, what do you think is the big, if you were to sum it up in one or two things. 

Ryan Hatch: I think that a lot of people think the first thing they need to go do is one builds a product and to go get, go and get funding.

And I think one of the things we, we talk a lot about is there's the opportunity. Now, if you're, if you're a hustler, if you're someone who can make things happen. And I think that's, that's a really, um, important skill for a founder. The, the investors are going to expect you to be further and further along.

I think the I'm sure investors are making idea stage investments, but it's going to be better for you on your valuation. It's going to give you open, opening up to more options. It's going to give you, you know, the, the. You won't need to raise as much money. All of those things, if you actually start with the chicken and you actually, uh, start with selling the customers first and doing that storytelling and co-creating wisdom to really make sure that you're aligned, uh, with the market, because one of the things we've seen is that most, most startups fail.

'cause they got the market wrong and what, what, what they thought was in their head. Isn't what actually what the market needed. And you don't want to fund the wrong thing. Right. Cause investors are going to think that, that that's what they're investigate. If you change it, it's just, you know, it makes it hard on everybody.

So we, we projects. Yeah. So. In summary. I would say if I were a founder today, I'd be looking, you know, in a, in a typical like SAS type environment or digital tech type, uh, product. Um, I'd be looking at no code. I'd be looking at working closely with the customers and, and co-creating with them and to get to revenue and deliver value in a way.

Allows you to get success, stories out, put some cash in your pocket and figure out is this going to be, is this thing can be real. You're going to have, you're going to have all those stories in the world at that point. Uh, and you know, you'll be holding all the cards. 

Rob Kaminski: I think that, I think it's perfect spot on.

I like where you lean. The only thing I'd add for folks. And I think our mindset is we're all about learning here at headway. And I think if you are curious about. Have a few conversations, talk to founders, who've done it. Start talking to VCs, but maybe not to raise, you'd be amazed at what you can learn just by hearing the language and how they talk and the things that might be required.

See if it even would come close to making sense for you, knowing that you probably have to have a few hundred of those conversations to actually have a successful race, which was a bit of 

Ryan Hatch: fun. This is great. I'll say one thing we also seen is that, um, Founders will go into accelerators and they'll actually start bouncing one accelerator to the next accelerator, the next accelerate.

And like, and, and then they come to us and we're like, they never talk to you about this stuff. Like the first questions we're having the very first times where we're actually pushing back on the idea and trying to really frame it. Wow. I wasted all that time going through these, you know, accelerators and, and it's really about, do you need that validation or actually start doing the real hard work on, on selling, not selling to, uh, to get into another program.

Um, but really selling to customers. I think that's where a lot of the value points for us 

Rob Kaminski: customers, the epicenter. Right. You know, we, we talked about, like you said, the activities for raising, they pull you away from where you should be feeling. Creating and delivering value to your customers with the idea that they'll return the favor with cash and revenue.

So, um, awesome. I think that kind of covers this topic. I would be really curious if there's any extra questions. Um, we'd always be open to do followups. Uh, if you're new to exploring product or headway, check us out, uh, on YouTube or we're putting content out pretty regularly there. We've had some great conversations in the past that kind of folded into.

Even this discussion today, we brought up a few of them and thanks for joining. 

Ryan Hatch: Thanks everyone.


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