When you are considering starting a B2B software company, there are many layers of risk to consider and address. Team risk, market risk, technology risk, and execution risk to name a few. Some of these are risks you can minimize or eliminate as you advance in your startup journey.
An early risk to address is your core product idea and its inherent market risk. Before you start a company, raise significant seed funding, or start building a product, you and your potential co-founders will need to test your ideas. While this sounds like an obvious first step, most teams grossly overestimate the market demand for their startup idea. They end up having to pivot or shut down because there is just not enough market pull for the product they have built. Andy Rachleff, the co-founder of Benchmark and a Master Practitioner at Unusual Academy, likens this to sailing an expensive yacht with no wind. A dinghy in a storm goes further.
When we asked our community, it turned out that many aspiring founders recognize this challenge.
Here’s what my partner Jyoti Bansal says about testing your B2B startup idea:
“Validating your startup idea and its market risk is not about your product. It’s about quantifying the customer’s problem.”
At Unusual, we look for founder authenticity when we invest—why do you understand this customer problem better than 99% of the world? As founders, there are only two ways to get authentic insight: you have either already been the customer yourself and had to solve this problem or you have gone through a rigorous validation process to shape your vision.
Based on the nature of the problem you are going after, the bar for “validation” can be quite different. Are you creating a category or disrupting an existing one? Is your solution going to require a lot of effort to adopt or will it be easy for your customers to test? This complexity and subjectivity is what makes validating your idea extremely hard.
In a good validation process, there are four sets of activities you can undertake:
Most founders do at least one, if not all. Below we go into each of them in more detail to help you understand both how to seek validation and then communicate it to everyone around you.
There are three critical questions you can research even before you start reaching out to have conversations with potential customers:
1. What exactly is the customer problem and how “hair on fire” is it?
You can never judge whether a problem is acute by asking your customer if it is so. Everyone wants to eat healthy and exercise everyday. Everyone wants great teeth. We would all agree that these are critical priorities for us. Yet, many of us do not work out or floss everyday.
The best indicator of a B2B hair on fire problem is that some companies are already spending money to solve it in one of three different ways:
Most successful founders build conviction through authenticity—i.e. they are themselves the first customers of their products. For instance, Slack emerged from an internal IRC that the team had developed while originally working on a gaming idea. Webflow emerged from Vlad and Sergie’s experiences as freelance web developers trying to automate repetitive change requests.
If you haven’t already been your customer, you must build authenticity by finding and understanding these customers. To test for true demand, look for a signal that companies are already investing in addressing the problems via engineering team blogs on in-house solutions, agencies building expensive solutions, or customers posting poor reviews of incumbent solutions.
As my partner John Vrionis says:
“If it’s truly a hair on fire problem, someone somewhere is throwing money at it already.”
2. Are the people hacking together solutions leaders in their space?
If there is no incumbent software solution for the problem you are going after, then it is imperative that you find some companies trying to build a solution themselves or throwing expensive people at the problem. Ideally, these companies should be leaders in their space—brands and logos that all your other customers are going to look up to and follow. For example, if you are thinking about a problem around content streaming, how does Netflix solve that problem today? If it’s around UX, what does the Spotify team do to solve this?
This is the primary reason why founder networks matter so much in B2B startups. In this post on how many fast growing B2B Startups found their first 10 customers by Lenny Rachitsky, you will see that access to these early adopters and evangelists was a significant driver of success for them.
This situation also implies that you will be in category creation mode as a startup. If you are creating a new category, you will find that you are attacking a largely unsolved problem, which also implies a small, immediately addressable market. That’s attractive only if the problem represents a rapidly growing trend and the few people who have solved it already represent leaders who are early adopters of a future status quo.
3. Is your product idea differentiated and defensible?
If there are already incumbent solutions that companies are spending their budget on, the good news is that you have a real and large problem to tackle. The bad news is that you need to have some hard-to-copy differentiation in your product/technology/GTM motion or all three to compete in a crowded landscape. And even though there is a problem, you still need validation that customers are truly unhappy with the existing solutions—leaving a window of opportunity for you to attack and build a beachhead.
My friend Gibson Biddle has written this great article on how Netflix approached product defensibility and their DHM model that has many applicable lessons for enterprise founders as well. Hamilton Helmer’s “7 Powers” is a great book that covers the core concepts of business defensibility. Thinking through where your startup idea could have opportunities to differentiate will help you shape your future decisions, including the co-founders you choose to collaborate with. We will be writing more about building defensible products and moats for your startup early in upcoming modules of Field Guide chapters.
It’s important to note there is a massive chasm between “unhappy” and “want to change”— a chasm in which most startups fall and die a quick death. So how do you understand which bucket your target customers fall in when you interview them? Read on.
A lot has been written about the craft of the “customer development” process to validate ideas and if there are only two books you read on the topic, I would highly recommend:
There are four important lessons to take away from these books and other similar advice offered by successful founders:
1. Get out of the building and listen to your customers
Meet your customers in their context. Find reasons to talk to relevant strangers and ask open questions about their life and work. Attend a conference or virtual meetup your target customers go to. Join a meetup and see what they discuss most passionately. Only relying on warm introductions will get you rosy feedback.
2. Focus on their problems, not your ideas
Pitching your idea is the worst way to understand whether your customer would buy your product. Instead, ask about what their biggest problems are. What prevents them from building their business, growing their career, or enjoying their day-to-day? How much do you need to nudge them for someone to even bring up the problem you care about? Start asking why it matters when you start getting close.
3. Dig for facts, not feelings and hypotheticals
This is the hardest lesson of all. To validate your idea you need to stay skeptical and interrogate your customer. Don’t settle for “X is painful.” Ask for specifics. For example, instead of is X painful, ask what are you doing about it? If this is so time consuming, why haven’t you done something to make it better? If this lack of visibility is holding your business back, what have you done to get visibility? If nothing, why? Instead of, “Do you ever do X,” ask “When was the last time you did X and why?” Stay skeptical of your idea until your customer convinces you otherwise.
4. Segment customers based on motivation
At the end of the day, all software is bought because it either helps people make more revenue, save costs, or manage risk. Why is your customer motivated to solve this problem? Can they articulate what it would do for them personally? For their team? For the company overall? What would it do for a specific business metric they are measured on?
The most important takeaway from customer conversations is this: Focus on hard facts over feelings. The latter can help later with telling your story and designing the product, but only the former can build conviction in your idea.
Here’s an unfortunate cultural problem. Most people do not want to call your baby ugly. When you tell them you are working on a problem or starting a company, they want to encourage you.
Every founder I have ever talked to has said that their discovery conversations are going well and that customers “seem excited” about the problem they are working on. And yet, less than 1% of them become big companies. Less than 20% of them have real market demand.
So how can you measure how well your conversations are going? Define actions that people you are interviewing must take to show their enthusiasm or demand. Sales teams call these “asks.” Every sales manager asks their rep, “What were our asks and how did your champion respond to them?” Here are examples of asks you can make to see if someone is truly interested in your idea:
Once you make such asks, measure exactly how many people you talk to follow up and take some sort of action. Those are the only customers who truly found your pitch compelling. Everyone else was likely being polite and supportive. Harsh, but better to know this early versus after you have hired 10 employees.
Conversion rates from conversation to action
As soon as you start measuring action, you will immediately question what’s good enough and this is where things get messier. The answer is extremely contextual, so I would offer two simplified pareto principle patterns to consider based on my observations from over the last decade of great B2B startups built:
Once you have validated that you have a hair on fire problem with a clear customer persona and a good conversion rate to active interest, you have one last question remaining: How big is my market and customer pain?
We often see founders using analyst reports to indicate the size of their market. I personally have a negative reaction to this. With any market sizing exercise, you are dealing with hypotheticals. At the very least, these hypotheticals should help everyone learn something about the ideal customer profile and how to reach them. When you paste in a number from an analyst report, it teaches the room nothing. Here’s a better framework (with an example template) to showcase your assumptions and target customer using TAM, SAM and Tailwinds:
TAM - Total Available Market
SAM - Serviceable Addressable Market
Tailwinds - Market Growth Rate
Not all good markets are big to begin with. If they are not already massive, they need to be growing rapidly. Find indicators of this growth rate:
When communicating your customer problem and addressable market to investors, use a combination of anecdotes, facts, and quantitative estimates. If you are creating a category, emphasize the buyer you will be creating the category around and why this buyer matters— are they increasing in influence and scope of responsibility? Why is it going to be easy for them to create a budget for this new type of software?
If you are disrupting an existing market, focus on the size of your incumbent’s business, their margins and your exact opportunity for disruption. Is their product too expensive and difficult to implement for a big portion of the market? How is your early target buyer different from theirs?
Here (and you can also download below) is a slide template that can serve you as an example where we use the product design market as a hypothetical vertical to communicate pain and market size with anecdotes and data.
Sample slides illustrating buyer and market size for a new product design platform