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Napkin Financial Models

Will your idea actually make money?

We’ll guide you through a financial model you can use to understand the financial potential of your startup.

Ryan Hatch:

When launching a new venture, it's important to understand—hey, is this thing gonna make money? Is this gonna get me to where I want to be from a financial perspective? And the thing to ask yourself is, Hey, how, how big do I want this company to be? Do I want it to be a lifestyle business, just kind of you and services and pay it makes you a really good living or do you want this to be a scalable company?

Is this going to be a $10 million company? 20? Do you want this to be like a, you know, a hundred plus million dollar company and that matters. Even before you get to that point, you kind of need to ask yourself, is this gonna, is this gonna make me money? Is this going to be a profitable venture? Could it be a profitable venture?

And so we're going to explore today is looking at a financial model and looking at how do I look at the business from a financial perspective rather quickly, and just check my assumptions. Is there something here? Let's jump into it. There's lots of ways to do financial modeling for a startup. One of the things, especially in products in SaSS or subscription-based companies, the primary metrics are two things, customer acquisition cost, and lifetime value. And we put those two together. It's referred to as unit economics. Hey, am I able to make money on each customer? Is each customer profitable? Not looking at it from a cashflow perspective or, or P and L perspective quite yet. We're just looking at, Hey, could this make money on an individual customer basis?

That's called unit economics. Let's take a look. So unit economics is what we're trying to drive towards right here. And we're going to do is we're going to back out of that and move all the way up to the acquisition side of the business. So here we have a bunch of different funnel stages. Step 1, 2, 3, 4, hopefully getting customers to a magic moment where they're really feeling that, Hey, this product helps them and they're going to be paying you.

So this is just one model. There's lots of different ways to do this, but here's an example. If you're doing paid acquisition, which is typical for more startups, especially early, right? You're not going to be investing in SEO and long game. You're going to be doing quick hits to see what messaging works and how fast you can acquire.

So with paid ads, you're going to have some kind of acquisition costs. It's going to start high, right. And high is relative, depending on who you're targeting what keywords you're using whole bunch of different. So you put the acquisition cost in there for a... For just a, just a click, right?

Just on the paid side, but that's not, it, that's not, it's not over. There's a whole bunch of different activation steps you do as you work customers through whether it's you know, downloading an app or, or pro you know, uploading their information and getting their account set up actually starting a free trial, whatever it is, whatever your onboarding experiences you'd put these as steps.

Get them to a magic moment and each time they're going through a step, you're actually losing people. Right? Okay. At this step 80% of the people that are, that are going from, from that step two actually make it to step three, maybe 90% of the people at step three, make it to the, to the next step. You're going to have fall off at each step.

They just want to kind of account for some of that. But again, these are just assumptions, but you have to start with something, right? What do I think the customer journey is? What are the major inflection points? What do I think if we're able to get it right? What are the, you know, conversion rates across that?

What you're doing is you're building a funnel. You want to get down to what that does. Is it kind of calculates for us then what the actual acquisition cost is. Right. If you're getting a click for 77 cents. But you're losing people along the way. Then it's going to take more than one person to get to a paying customer to get through the end of that funnel.

So when you put all those together with these, in this example, the actual acquisition cost for a paying customer or someone starting a free trial in this case is like almost six bucks. So you can't just look at your paid ads. You have to look at the full funnel. The next thing to consider is. Now it's a really high bar to get your customers to that magic moment of, we talked about up here, it's a really high bar.

If you're able to do that, you can also consider, Hey, is this something that people would share and share and talk about just something they would share with a friend? That would really help your acquisition cost as well. But there's a big assumption here. I'd be pretty conservative upfront about what you think would actually happen.

The goal would be for someone to share the average user shares with one other person. It's probably more like point two five people, one and every four persons maybe going to share. And then the people that actually I see that are they going to download or are they going to right. Start engaging in your funnel?

You can put those two together. And, you know, w what it'll do is it'll reduce your acquisition costs, right? So from 5.94, almost six bucks closer, you know, getting closer to five bucks. So that referral actually decreases your acquisition cost. Again, these are just assumptions, right? And I'd be really conservative upfront, especially with referral because the viral component is actually very hard to achieve.

The next thing to look at is retention, right? How long are people staying? In SaSS products we often measure that in number of months, so maybe they stay for six months. And then again, this is a bell curve, right? It's a bell curve. And what you're going for is, is the average, of course, you're going to have people stay longer.

You're going to have a lot of people that stay shorter. So put in what you think the average, this is, again, an assumption is going to be for the retention. Then next is revenue. So for revenue perspective, you know, if it's a subscription product, How much are they paying? Is that monthly? How much they paying per year?

And when you put those two together, you kind of get your lifetime for that customer. So if it's forty-nine bucks a month, six months, it's two ninety-nine is lifetime value. If you have any other potential revenue streams, you can put that in here too. Get the total revenue per customer. When you put it all together, it brings us right down to where we started, which is unit economics.

So again, we want to look at, Hey, what's the customer lifetime for this customer? What's the acquisition cost for this customer? Put those two together and we get a ratio. We can talk more about that another time. And that brings us down to customer lifetime value is how much might we be able to make on a per customer basis?

Now this sets us up. Well, to kind of understand, could we maybe if these assumptions are true, could we make money on a per customer basis? Customer lifetime value. If we are, then we can move forward into other things like market sizing, you know how what's the, what's the market cap based on how many potential customers out there, our reach,  how many we can actually acquire through these channels.

That gives us kind of a market cap. And the other thing to look at is a P and L or income statement, which points us to like a breakeven point based on how much we have to spend to get there, what kind of investment will be required. There's lots of different ways to do this. This is an example. What you want to do is kind of model out the business rather quickly and not spend too much time on it, but just kind of get some gut check assumptions.

Hey, if we're able to accomplish this, if this journey were to exist, where were able to get people through here at this cost. And if they were willing to pay and subscribe, and there's lots of assumptions in here all the way, but if we were able to. Would we, or could we be profitable on an individual customer basis at the unit economics level?

And then you can look at scaling it up from a breakeven and scaling up from a market sizing, looking at costing, how long would it take and how much it take to get there, but also sets you up for assumption testing out in the market, right? Can you actually acquire customers for that amount? Will customers actually move through the funnel?

Like you said, And as, as customers start to move through, then you can update your model to reflect reality and see how that's impacting your bottom line.

Other Lessons




Target Market Segments

Create focus so you can go further faster. See how you can decide which customers to go after through opportunity discovery.

Ryan Hatch:

Everyone wants to think that, oh man, this idea is going to sell to everybody. We can just sell to lots of different people. Everyone's going to love it. But there's, there's danger in that. You know, being all things to all people really can't happen. So you're going to need to zoom in. If you're coming from a services background, you know, you in fact can serve lots of different people, right?

Cause when you're in an agency or services model, we're able to sell different things, different packages. You're actually selling different things. And on, on the execution side, if it's services and it's humans, right, humans have a huge, diverse ability to, to adapt and do lots of different things. When you apply a services based sales model to products, it doesn't work.

It completely falls apart. And what'll happen is the sales team. You know, we'll, we'll be pulling the product in a million different directions and a product can't stretch like that. It, it, can't a product can only do one thing really, really well. And so we have to think about selecting a target market segment as, as absolutely critical to how we design a new venture.

When we have a product based business. I'm going to encourage you to get uncomfortably narrow because you actually can't serve everybody. So you're going to have to choose. I know you want to keep your eye options open, but that doesn't work for products for products you're going to have to get specific.

And that means saying no, at least, at least "not now" to some people in your mind and saying yes to a much smaller group of people, but that's going to make a huge difference in making you successful. So let's talk about that and how. So there's many tools that you can use to help you decide where to zoom in and which target customer segment to go after.

One of those tools is an opportunity matrix. Let's take a look. So this is an example where we have opportunity 1, 2, 3, 4, and however many opportunities you're trying to consider chasing. And then we also have this list of criteria on the left side, strategic position. Market size, fastest sales cycle cost structure, feasibility risk.

And we can unpack some of these, but this is a way for you to kind of. Compare and contrast, that's what you're trying to do with, Hey, where should I go? Where should I zoom? Is it more here or here that we want to go play wherever we want to play in the market strategic position. This might include a, do I want to play downstream?

Where, where I'm playing kind of late in the game. Do I want to play more upstream where I can greater influence the stuff downstream of me, whether that's in a customer flow, whether that's in a data stream, there's lots of different ways to look at. Market size, right? How big is your market segment? Are there enough of these people, fastest sales cycle?

How fast can they make a decision? Can they make a buying decision? You know, we've seen some people that are selling either to corporates or sometimes worse in government. And we're talking with an annual budget cycle. It's a long time, right? That reduces cashflow reduces your ability to experiment.

You have to consider a sales cycle time cost structure different costs in different areas or different operations. How does it impact it? And there's lots of different criteria you could use, right? This isn't, this isn't the the end all be all. There's a lot of different other things that we use, but we suggest you consider when comparing and contrast, right?

These are lenses to help you look at these opportunities differently and decide, Hey, where should I go play? Another thing to consider is who is going to adopt this now versus later? This is a. A pyramid created by Steve blank for early adopters. Well, let's all let's walk, let's walk through it. So the first question is, Hey, does this person have the actual problem?

Okay. And the next one is, are they aware they have the problem? Those are two different things, right? With a Keurig coffee maker, right? Me putting, you know, the the coffee grounds into the filter. I didn't even know that was a problem. It wasn't, I wasn't even aware of it. Right. But then you show me something, something else.

And it's like, well, I guess that was a problem. So in that example, I wasn't aware that there was actual problem. I would not have been a good early adopter for Keurig. So the question is, Hey, do, they have the problem? Are they aware that they actually have the problem? And have they actually been looking for a solution, right?

Are they actually in market kind of like comparing and contrasting different alternatives? That's really important. And then even, even more than that, have they stitched together some kind of solution for themselves? Have they hacked together something that gets them to their end state? If they, if they have, they're trying to do that.

They're more likely to try something new to pull you in. And you're more likely to be able to sell to them much faster and get really good feedback. So this is kind of the pyramid for an early adopter on top of that is obviously, Hey, do they, can they acquire a budget? Do they have money to pay for something like this?

Are they just, are they the decision maker? Or do they have to have someone else make that decision? So these are a pyramid of factors to consider when thinking about, Hey, which, which customer segment should I go out? Who should I be selling to first? You might be thinking back to, Hey, I can sell to everybody.

It kind of looks like this. Well, we could sell to everybody. That's a huge, you know, the who, the customer segments. So that's big. Then when you actually start to peel, the onion has to actually start to walk. It kind of looks more like this, right? Well, the, who is, and by who's actually struggling with the problem again, that no, they have the problem that are actively trying to solve the problem.

What are they trying to accomplish? You know, different people are trying to accomplish different things. They're going to use your solution to get to different places. Right? Which of those people are you going to target? Certain people have different levels of experience. Right? You're talking beginners, you're talking advanced, right?

If we're talking about, if we're talking for instance, baseball coaches, you're talking like, like pro-level AAA AA. We're talking to college, talking, travel teams, talking high school, talking little league. There's a whole bunch of experience levels there. It's not just baseball. Right? Same thing with doctors.

It's not just all doctors. Is it primary care as a specialty care? Is it surgery? Is it, ER and then another example is when does that actually occur? When in that flow, do you want to play right? If it playing off the doctor's example again, is it like pre-visit, is it, is it post-visit, pre-surgery post-surgery recovery there's a whole different flow.

So you have to think about, Hey, all these different things. Who am I going after? Where in the flow does it fit? What role do they play? What experience level? So there's a lot of different factors that can play into customer segmentation. When I want to encourage you to do is to contrast, Hey, we could play here.

We could play here. We could play there and use these different lenses to consider, Hey, what are the different ways to evaluate to compare and contrast where we could play, which customers are in the most pain who's trying to solve it? What are the different factors that would help us determine. Who would buy now versus later?

Don't think about, Hey, I'm only going to target this one customer and I guess that's the only space I can ever play. Don't look at it like that. Think about it strategically. Hey who can I go after first, make a lot of progress with, be super successful with, and then grow from there. Right? Who's going to give you, I mean.

If you get these early customers, maybe it's maybe it's the most difficult customer set that's in the most pain. If you can solve for them, maybe you can solve for everybody. Right. You're gonna have to think about who to go after first. What success story does that set you up for? And really decide which target customer segment you're going to go after first. If you go after the wrong customer segment, it's going to impact all the other decisions, right?

You're going to build a different product depending on which customer segment you go after you're going do different marketing. It's gonna affect all these downstream decisions. So be conscious of where you zoom in.

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Customer Research Methods

Learn the best approach to doing customer research. What kinds of questions do you ask? How should you ask them?

The insights you collect will give you clarity on what to do next with your product and marketing efforts.

Ryan Hatch:

When launching a new company, we kind of think of it like, Hey, the businesses at the center, the practice at the center, it's all about the business and the product. And the customers are kind of like on the outside of that. And I would challenge that viewpoint. I would actually invert that picture. I think it's actually the customer on the inside is the center and the market and the product and the business actually have to pivot around what the customer's needs actually.

So there's a word for that. We actually have some nomenclature for that. We would call it problem space and solution space. So before we dive right into the solution, right into building our suggestion is let's pause for a moment and let's actually unpack the customer, their, their life, what they're actually going through and, and dive into that.

There's a pattern for this. It's called design thinking. And you'll see here, here in the visual, there'll be actually have two diamonds just as I was saying, we have the solution space on the right and we have the problem space on the left and you'll come in and you'll say, well, I already know my customers.

I know the problem. And while that might be true, often what happens is we understand the problem in a general way. We have a general problem statement, but we need to get to, to actually solution correctly or solution, or very, very well. Is get to a specific problem. So how do we approach research? How do we go from a generic problem statement to a specific problem statement?

There are two categories of research. One is primary research. This is super valuable. This is what where we're talking to actual customers, unpacking how they feel, where they're struggling and, and their daily lives. We're really getting deep with customers. The other type of research is secondary research. This is also valuable in different ways.

This is traditional market research, looking at market report stats, Excel sheets, top-down Forrester reports, Gardner reports, trying to size the market in a way, or, or get some trend lines on where things might be headed. But, but the secondary research really isn't helpful to get down to actual specific problems.

What we need to do is talk to real customers and unpack their real, real life stories. And so we're going to suggest using primary research. Talking to customers is so valuable. It cannot be understated. You can see here talking with these people and seeing their faces. Having them tell their story where they're struggling, where they're succeeding, what's going on in their lives is so, so important.

We feel so strongly that the insights you can get from 10 interviews, vastly outweighs 10,000 people answering 10 questions on a survey. Some people would say, oh, let's do a survey. Yes. If we could get a thousand people to answer these 20 questions, we will for sure know what to do. Why? Because it will be statistically significant.

We can just put it in Excel. We can chart it and plot it and say, Hey, most people want this feature or that. Right. We believe surveys are valuable at certain stages and to answer certain types of questions, they're also extremely hard to do well, extremely hard to do well. Often what you think you're asking is not what they think you're asking.

And the problem with that is bad data in bad data out. We feel that bad data is actually worse than no data at all. We believe, getting 10 interviews and getting that rich storytelling on where, where my problem is, what my actual daily life is, how I'm pulling certain products in at certain times what the challenges are in, in all of that, we believe 10 really deep, well done interviews is way more valuable, way more insightful than doing a survey with a thousand people for 20 questions.

So you might ask what does a good customer interview? Well, it really depends on what you're trying to learn in this case. What we're talking about is a problem space and unpacking their daily life, what they're struggling with. And we'll talk in a minute about some great questions you can use, but talking about the problem space means that we're not talking about ourselves.

We're only talking about real behavior past behavior, because past behavior is reliable, but people say they'll do in the future is not reliable. So we're not going to talk about the future. We're not going to talk about what they would do, what they might do, what they could do. We're not going to talk about your solution.

We're only going to talk about past behavior and what their current problems and challenges are. The best customer interviews revolve around stories. You can see here, the people in the picture are just talking. They're just going, they're retelling and replaying these moments, these moments that made them happy in some cases, and they're laughing some cases, it made them sad and they're frustrated and they're retelling the pain.

So we're going to make sure that we unpack the stories in customers' lives. Now, if you don't have any customers, that's okay. We're using the word customer interview. We're using that term broadly. These are potential customers. They could be in your target audience someday, right? They don't have to be customers.

Now you don't have to have a product at all to do these interviews. This is just unpacking their stories and getting them to storytell and talk about where their challenges are and where they're struggling. So what questions can I use to really dive into these customer stories? There are so many. What I'm going to do is give you some to help you go in the right direction.

Now you already know that there's a general problem area that you're going to be exploring with these people. First of all, start off with context. Hey, where are you from? What do you do just to get to know them a little bit, a little bit of context is really, really helpful place to start. It's always really important to make them feel comfortable.

I always try to let the person know, "Hey, there's no wrong answers here. We're just going to unpack and talk about your story. And if you ever get uncomfortable, let me know." To really start  unpacking their story,one of the best questions and prompts you can do for them is say, When was the last time XYZ.

When was the last time this happened? What was the last time you had this problem? Right? Cause you know, you have a general problem statement. You want to start there, give them something to anchor, to, to latch onto and they will bring you back. And then you can use some, some words to, to elicit some clarity from them to kind of refresh their memory, kind of re jog them.

And you can ask things like, Hey, how long ago was that? Was that last week was that last month? Was that a weekday or weekend? Was that spring, summer or fall? Who was with you? Where were you? You're trying to jog their memory. Once they start talking about their story, let them go, let them go in a bunch of different directions.

It's okay for it to be messy. You don't have to follow a script exactly. Go where the emotion is. Go, where the pain is go, where their desires are. And then be curious, Hey, why'd you do this? Right. Ask them. Um, I don't understand. I'm confused. You said this, but now you're saying this really get curious and unpack their story and get them to clarify for you.

What's really going on. And then talk about the context. When does that happen? How often then talking about the impact of that, what, who is that hurting? What's the repercussions of that? Why is that a problem? Why is that so important to get solved? Who is that impacting in the business and. Trying to understand, well, Hey, how have you tried, if that's really a problem, how have you tried to solve that?

Which solutions did you consider? Well, I considered considered this and this and this, and I chose that. Well, why you choose that solution? How do you compare and contrast which one to choose? That's really valuable. When you get to understand the trade-offs between these solutions, you can also get into channels.

Hey, how'd you hear about this one and this one and this one? Well, my friend told me, oh, I heard about this through this magazine or, or whatever. Those are really important to understand how they're making decisions, how they're navigating the market space, because you have to realize that your product is probably going to be solution number four, right.

And to win there, you have to understand how they're selecting solutions. One, two, and three. Today. You also want to understand. What are they heading towards? Hey, what are you trying to accomplish here? If this problem were solved, what would it enable you to do? Right? You want to understand where they're coming from?

The pain they're trying to avoid, move away from. You're trying to understand how they navigate their way through that. And it really trying to understand what they're trying to achieve, what their, where they're trying to go, how they're being measured, what numbers they have to. Once you have those forces together, then you can really get to a specific problem and say, Hey, the competitors are really, they're really not fitting here.

There's an opportunity here for us. And you have messaging for the pain they're going through what they're trying to achieve and how you can win in the market. When you do a number of these interviews, you're going to want to put them all together. So how do I gather my insights? How do I collect all this stuff?

There are getting such great content out of these interviews. What we do is we actually take notes live. You can see day one, we did two interviews. And during those interviews, we are live note taking. Boom, boom, boom, boom, boom, boom, boom. And we're getting categories. You can think of some of these categories where, what they're trying to move away from what they're trying to move towards, how they're comparing and contrasting these solutions.

Those are all categories. And we have many more, depending on the exact interview and what the context is, but we're taking those notes live. Every card has a place to live. And we do that multiple times. You can see we're doing multiple interviews a day, day one, two interviews, day three, day two and three, three interviews each day for doing another one.

Right. We're getting here nine interviews in four days and we're learning so much. What this allows you to do. When you take notes in this way, it allows you to start putting them all together and coming into those insights and really deciding on, Hey, there's themes here. There's patterns here. And that's what you're going to need to go from a generic problem to a specific problem that you can take to market.

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Demand Testing

What people say they'll do and what people actually do are usually never the same.

Find out if people will actually buy your solution or if you need to pivot into better opportunities. Learn the ways you can collect evidence and test the demand of your solution idea.

Andrew Verboncouer:

So today I want to talk about testing customer behavior and trying to figure out if there's demand for your idea. So, as we look back to what Ryan talked about, we figured out who our customer would be. We also brought that forward and went and tried to interview our customers and see are they the right people that we should target based on who we thought would, would value this?

Did we uncover the right problems? Are we using the language that they would ultimately use? Using the decisions you've made around your target segments and the customers you're looking to serve and going from this general market opportunity into the primary research world, where you're getting real stories from customers, you're understanding the struggles that they have understanding how you can help them when the next step from here.

The next part in your journey is really taking all of that information. All of that insight. And figuring out how do you create a value proposition around it and how do you go and actually test demand? So one important thing to note is that what people say they'll do and what they do are two different things.

And so in your primary research, this is where a lot of founders get stuck. This is where they stop. They, they maybe do some problem discovery inside of that interview and ultimately are so excited about the vision they have for how they might change that. Or the product they might bring their solution, their app, whatever it might be.

They're so excited about it, that they usually bring it up in those interviews and try to say, Hey, since you're struggling with this and they try to use that opportunity to sell, even though they haven't really crafted a value prop yet. And this is where we see a lot of people in a lot of founders stop, where they ask people, would you buy this?

Hey, I know you're struggling with that, but what if I could solve that? Would you, and that kind of feels like the next evolution, the next step in the process. And it is. But when you do that and when you stop there and customers say, yeah, trusted you haven't really thought or worked through pricing at that point.

You haven't crafted an offer that takes all of these problems and all of their perspectives and tries to push that forward into a solution. And you say we're solving it because acts here's the benefits. Here's the outcomes that you're going to get from this. Here's the price point. And that's definitely an important part, but make sure that you follow through on this journey.

And don't stop at, hey,I have a bunch of people that said they would, our goal is in building businesses and building ventures is trying to test true demand and tranquil to actually validate or build evidence that somebody is willing to pay for this. And so, as I mentioned what people say they'll do and what they actually do are two different things.

So our job on this journey is to figure out how do we go from, would they buy to, will they buy and how do we bring them along that funnel?. So there's usually three ways to test them. Or, or three common ways that obviously there's, there's segments of this that go deeper, but the first one is money. So if we can get an exchange or a letter of intent or a purchase order, or someone's credit card for a future purchase, we can understand that they have really high intent to buy and follow through.

And that's something that you'll want to know as a business founder that Hey, people are actually willing to pony up and you've seen this in different ways through wait lists. You've seen this, I'm sure you maybe you've signed up for them. I'll bet you see this all the time. The other one is. So is somebody willing to go beyond that initial discovery call with you that, that primary research, those interviews, somebody willing to go beyond that and give you their time to tell you even more nuance for how how they're solving their problem today.

Why they can't? The other one that you're looking at is reputation, and this is true for. And this is true for B2C companies. This is true for B2B companies where you're trying to see is, is this problem valuable enough for someone to solve? Do they know other people that would be interested in a potential solution and will they actually put their name on the line?

And so you see all of these three things converge a lot on landing pages where you might have a pre-order she's Kickstarter's really successful with physical products and even digital products. Time and reputation. That's all part of it where you there's this referral loop to try and figure out is somebody motivated enough to solve it, that they would pay for it that they would give their time or that they would put their name on the line and, you know, send an email, have a conversation with someone at work around getting them in too..

So as we look at bringing someone through and testing behavior, we like to refer to this pirate model of startup metrics made by Dave McClure from 500 Startups. And one thing that you'll note here is that the awareness is greyed out. This is an important for early stage ventures, because nobody's going to know you by name, unless you have previous exits your you know, have previous companies that you've started.

No, one's gonna really know the next evolution or the next, the next product idea that you're pursuing. And so we focus on the bottom part of this funnel. And when you look at it this, we have acquisition. So can we acquire someone's interest on a landing page, their sign up, can we activate them? And this goes beyond this demand testing into how you actually deliver for customers where activation is getting someone's profile filled out, getting it actually implemented into someone's business.

Retention is making sure that we're creating this habit loop and really creating the behavior. We want to ultimately bring users closer to the value that, that we can serve and we can deliver to them. The next one is a referral and revenue, but when we look at early stage ventures we often want to try and demand test earlier than that.

You know, we don't want to wait until the end to figure out if somebody would pay for this. So oftentimes we'll. When we launch these demand test campaigns for new ventures, we're looking at bringing up revenue and bringing up referral into part of that top, top of funnel. And so we're really trying to test what's here in acquisition.

We're trying to to test, if we can acquire someone's interest, will they sign up for a newsletter? A will they sign up for, you know, early access? The revenue part of that is for when you really test, if someone will buy. And so the way that you can do this is by integrating Stripe Sam cart any myriad of tools that allow you to collect someone's payment information now to build them later all really high signals.

The other one that we want to test in this phase is. And so when you're thinking about crafting your offer, crafting your landing page and doing demand testing, we're trying to figure out one, can we acquire someone's interest? And that usually looks in the form of ads, which we'll we'll look at now.

That's headline copy. That's the images that's, that's what the body copy says in the app. Can you resonate and reach your customers to where they see that on Facebook or they see that on on one of their platforms and they click. And that's a good indicator of this top of funnel activity where you're saying, Hey, this problem resonates, or this solution resonates depending on how you're, how you're phrasing it.

And as you go beyond that, as I mentioned on the landing page, your landing page is bringing to life all of the different. Ideas, the problems, the benefits, all of the things that you're gathering from those primary interviews, where your customers are almost writing the copy for you. They're telling you their perspectives are telling you why they can't solve it today.

And what you're trying to do is craft a solution that brings forward or craft an offer that brings forward a solution where your clearly positioned to solve that problem. So, as we look at. You know, some examples here of demand gen testing campaigns that we've run, you know, it's about going to, to the market and channel testing and trying to figure out can we acquire someone's interest to go from here's an ad on a, on a network to they're on our landing page.

And once they're on our landing, Can we get them to convert how many people bounce right away. You're trying to measure the interest in, and essentially your funnel activity before you go and build your product. And this is really important because if you were to go build your product first, you would have no insight into the buying cycle.

How people thought about your offer, the messaging. Are you talking about it the right way? And that's really risky. And so when you're thinking about building your venture, whether that's building a business. For you, that's something that you're going to bootstrap in our lifestyle. You want to get to revenue quick.

And if you think about the other side of that, which is VC funding, you want to get to revenue quick because you want to make sure that you're building traction that builds good business. Your business is going to be worth more. Investors are going to invest more and you're going to keep more of the slice of the pie if you focus on getting customer and revenue traction early on.

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Rapid Prototyping

Prototypes allow you to reduce risk and fail faster so you can gain more confidence in what to do next. Learn how you can quickly get your solution concepts in front of customers for feedback before you invest capital into building a product.

Andrew Verboncouer:

With your startup risk builds over time. And one of our core tenants at headway that we believe in reducing risk by running these behavioral experiments with the market and trying to figure out how do we take what customers said they would do and bring that forward and, and understand how we can build a business to support those people.

What's going to get them to actually take it out. So when you do that, you can learn quick and reduced risk, and it's always going to build, you're never going to eliminate all of the risks that you have in your startup or in your business. New factors are always going to enter in different solutions for customers, different competitors in the market space.

In one of the ways you can do that is by using different formats and different types of prototyping to try and take what your customers said, interpret that into some sort of solution or proposed solution that you can bring. And understand where this solution might live in, you know, in their mind. What are the other things like as you've taken all of the feedback and all the insights you've gathered from your primary research and you get a solution in front of them, what are the things that come up.

Oh, it does that thing. Ah, that's not super useful to me, but what about this, right? How do you start to discover and uncover some of those edge cases where you're really identifying unmet needs or things that are really cumbersome or take a lot of time where you can start to elevate your solution and understand those educators?

This is an adaptation of the build measure, learn cycle in the lean startup. We use experiment because we're not always building products. We're creating interviews question series landing pages, prototypes. We might be creating proof of concepts or ultimately a full functioning MVP that delivers end to end.

But we're always looping through this and we're going, and we're saying, what do we need to learn today? And what's the best way for us to learn that? Out of all the different feathers in our cap, all different things in our tool belt, what are the best ways for us to go and learn that from the market?

Is that just a line of questioning where we can, we can go to customers and have a conversation. Is that creating a landing page? Like we talked about where we're actually trying to bring them forward into an offering into a future where we get them to act. Are we trying to go learn exactly what should make or or what shouldn't be in our prototype.

You know, as we think about the first version of a product, where to customers put those things in their mind, and as we move forward into the next steps of behavior and that activation proof of concepts, MVP, but we're always looping through this. We're always trying to reduce our risk.

Prototypes are tools that help you communicate your ideas.

The value you can provide and can help you learn. And that's so important because they help you tell a story and they give you some visuals to really explain your idea, rather than you saying you know, having a big buildup, you can get something in front of somebody a proposed solution, a couple of screen flows an idea that you have that you can show them and really start to get feedback and build more understanding with people rather than just.

What if it does this right. And that's as I mentioned, those edge cases will start to come out as they look at your product and say, oh, this is really cool. What if it did this? Or, Hey, does it solve for this edge case, or I'm really struggling with that. It would be great if it did, why? Right. And you start to go under underneath a lot of the problems you saw before and get to these very specific, a minute problems that you can really define.

And that's going to elevate you. And really show your understanding for the target market and for the customers you're serving better than the competitor. Prototypes, help you tell that story and you something tangible to build, understanding with the customers. You're looking to see. And that's because in any conversation there's always really four conversations that happen.

And there's what you said, there's what you thought you said, there's what they heard and what they thought they heard. And so using something tangible, using something that really aligns your understanding together will help to bridge that gap where you're talking about the same thing you're talking about, solving it the same way.

You're starting to bring it from how might we solve this to what are all the details surrounding this that are going to help us create the the best solution? And you can learn best with prototypes, just like you can the research instead of looking at market trends and looking at secondary research, you go and talk to the actual people you're looking to serve prototypes can help you by getting those same prototypes in front of the users you talked to before.

So in a lot of cases, that's going back to customers. You, you talk to and, and potential customers and prospects you talk to early on. To really dig into the problem and kind of come into this world where you're doing more of a solution interview, and you might do a little bit of a problem and solution interview where you're getting this in front of users when you're prototyping.

Kind of three ways to think about it. And there's, there's definitely edge cases in between, and there's different mix mixes and matches of these, but sketches and wire frames. These are things that you can get out very quickly. These are the things that you can sketch on a piece of paper and try to bring this idea, this vision that you have into something real, something tangible that you can get in front of people and have a conversation around.

The next type is clickable prototypes. These are most often the high fidelity things you see on landing pages. And there are things that you can use to communicate, not just a single idea, but a workflow and how things might work together. The next one is know in low code.

So these are things like even connecting Zapier with Google sheets and a way to kind of concierge your your value to your customer. These are things like Adalo even low code tools that help you design in browser, but then export to code and really prototype really quickly. So we believe in continuously validating the products by answering a series of questions and prototypes come in different phases.

When you're trying to answer those questions, these are tools that you can use to try and give you what you need to to move your startup forward and to really reduce that risk that we talked about. But here, as we look at. Sketches and wire frames early on, they'll help you, you know define your target segment.

They'll, they'll help you understand if people have a specific problem is you're having conversations with them. You're going to be able to get this in front of them and, and get a good feel for how they're going to respond to it. Prototypes can also help you do that, but maybe too high fidelity for people to give you true feedback.

So you might want to focus on. Problem discovery type questions rather than solution questions early on. When you're trying to figure out, am I talking to the right person? Do they have this problem? And that's why most often you're going to want to do some sort of joint interview where you're digging into the problem.

You're building some context for their specific experience, and then you're introducing the solution versus just a solution. So that's something to keep in mind and you see here when you're using prototypes, these clickable prototypes, they can help you understand demand to a certain point. You can use a prototype and we have many times where we're not driving someone from a website, but we're doing it in person.

We're walking them through a prototype. We're trying to get them to buy on the spot. And so if you're doing like a demo you're selling B2B or B2C, you're trying to get commitment on just a prototype. And not just something that's, that's functioning. You can see also here there's this overlap between no code, low code.

So tools like Webflow, Bubble,, things that help you build your website can also help you deliver that value and understand, Hey, will this person give me the right information? Will they fill out their profile when they come back? All of those things you can start to build, but there's a limit in prototyping on what you can do.

No code and low code tools will help you. Extend the life of your prototyping. So if you start with a tool like Bubble or Adalo, you can actually fully deliver the value to your customer. So if you start with those keep that in mind that you want to have to change context. You have to change platforms and you'll be able to continue delivering value and building upon that as you're learning with the market.

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You Don't Need Developers to Launch Your Startup

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