By Dave Farber
Startups have a lot of forces working against them. Assembling the right team, battling industry incumbents, and getting exposure for the business can all be daunting hurdles.
That’s not to mention actually financing the business — one of the biggest challenges. Just under 1% of startups are funded by angel investors; a paltry .05% of startups are funded by VCs. And despite the hype, crowdfunding still represents a small percentage of startup funding. In the end, roughly 90% of startups fail. To beat the odds, entrepreneurs must avoid three of the most common mistakes startups make — misunderstanding their market, inadequately vetting their ideas, and using the wrong business model.
Understanding Your Target Market
Too many people try to innovate by looking backward. Unfortunately, how markets have operated in the past and what customers have traditionally purchased tend to be poor indicators for how markets will evolve over time. The Jobs to be Done approach takes a different view. The idea is that people buy products to satisfy certain tasks (or “jobs”) that they’re trying to get done in their lives. As the late Harvard Business School professor Theodore Levitt was known to say, “People don’t want to buy a quarter-inch drill. They want a quarter-inch hole!” Successful startups understand the “why” of customer behavior. They focus on the underlying jobs that customers are trying to get done and the reasons that those jobs are particularly important. The first-time homeowner doesn’t want a drill, or even a hole. She wants to hang the first real piece of art she’s ever purchased because it signals to herself and her partner that they’ve finally made it as real adults.
Consider Décor Aid, a startup in the interior design industry. The industry has historically catered to wealthier clients, pricing itself far too high for the average homeowner. That meant that a huge portion of the market struggled to satisfy some fairly simple jobs when they moved into a new home or apartment. By getting a deep understanding of what those under-satisfied jobs were — and using partnerships and proprietary software to strip costs out of the design process — Décor Aid was able to serve a large customer base that the rest of the industry was neglecting. As the startup has grown, it has continued to use a Jobs-based approach to find profitable, previously-ignored niches to target, such as small businesses moving into a new office or homeowners trying to refresh a single room.
Vetting — and Killing Off — Ideas You Love
One study reported that the most common reason startups fail — cited by 42% of the failed startups polled — is a lack of market need for the product they put out. Many entrepreneurs come to the table with an idea that they’ve thought up after spending years in an industry. There’s something that has nagged them for years. Others have heard from friends that they’re on to something. Despite early interest, these products fail in the market. Painful as it may be, entrepreneurs need to ask tough questions to figure out whether there’s a real market need, whether customers will see their product as the best way to satisfy that need, and whether there’s ultimately a clear path for turning the idea into a viable business.
Testing Your Business Model for Sustainability
Even if you don’t envision bringing in real revenue right away, potential investors are going to want to know up front that you’ve given some thought to your business model and timeline. One of the biggest mistakes I see in this area is entrepreneurs trying to copy models that have worked for other startups without thinking about what model makes the most sense for them. They announce that they’re going to become the Uber of the food industry or that they’re going to create the Tinder-meets-television solution. And maybe that will end up being true, and even a good way to advertise what you offer. But rather than just jumping onto another company’s model, it’s helpful to start off by answering some more fundamental questions. In particular, I like to use a quick litmus test to focus on three big topics: attracting new customers, keeping those customers, and growing the business.
With respect to attracting new customers, it’s important to think not just about whether your solution is the right one, but also about the costs of switching to your offering. What is tying customers to what they use today? Indoor plumbing was a great idea, but it took centuries to catch on, largely because of the need for infrastructure development and the high costs that failure would bring.
The second topic — keeping customers — really goes back to the heart of the Jobs to be Done idea. How are you going to differentiate your product from other solutions on the market? In particular, you’ll want to think about how you can help customers get more jobs done or get jobs done more easily. OXO’s products are hardly new. But by putting more comfortable grips on vegetable peelers and ensuring that you don’t have to bend over to read the lines on your measuring cup, the company has been able to distinguish itself and charge a premium.
Finally, even though it’s early, it’s important to understand how you might be able to grow the business. Think about how your model will need to change as you add more customers and where you might need to invest. Thinking about the long-term can help you prioritize your limited resources so that you’re not investing in things that will need to be replaced a year or two down the road.
Looking at these three considerations will help you better understand your own business and how it needs to evolve. At the same time, it will also show potential investors that you’re prepared to answer their most important questions.