When Instagram was acquired by Facebook for $1 billion, it only had 13 employees. With a $19 billion acquisition, a team of 55 was running WhatsApp. Through technology, startups can build a scalable and repeatable business model that makes it possible to serve millions of users and customers with a small team.
The truth is, only a fraction of startups reach this scalability stage and it can take years. Data shows startups need about 3 times longer to validate the market than they expected. Underestimation tends to push founders to scale prematurely, which happens to be one of the main reasons behind startup failure.
In business, scaling is synonymous with hiring. According to Small Business Trends, on average, teams grow three times faster and raise 30% more money than solo founders. You could build your team since day one or start by making sure you have a business before committing resources to a product people don’t need. Here are three quick milestones you can reach before making the first hire.
1. Problem/Solution Fit
You reach problem/solution fit when you know the problem you need to solve and have enough evidence to believe your proposed solution will solve this problem. For this, you don’t need a product. What you need is to talk to future customers and run experiments to validate your app idea quantitatively. Here are two simple stages to reaching problem/solution fit.
Start by discovering/validating the problem. The first round of customer interviews should reveal whether your hypothesized problem is among customers’ top challenges. Those conversations aim at learning the severeness of the problem and urgency of customers’ needs for a solution. To transition to the next stage, it’s important to also learn the advantages and disadvantages of customers’ existing solutions.
With a validated problem, the second stage should focus on the validity and viability of the proposed solution. Before the second round of customer interviews, you need to prepare two things. First, create a solution demo whether it is through product designs or a clickable prototype. Second, prepare an irresistible early-bird offer.
The reasoning behind preparing a visual presentation of the product with an offer is to quantitatively measure if your customers really have a problem and they’re confident your solution will solve it. Unlike Yes and No, commitments through pre-orders or a signed contract provide you with a definite validation answer.
Closing at least 40% of your interviewees signals problem/solution fit. This validation benchmark can vary depending on pricing, industry, and target segment (businesses or consumers). Use your intuition in your conclusion about the potential of your startup.
Testing and finding problem/solution fit can take just a few weeks. Reaching this milestone allows you to create a clear roadmap for your team to execute on with a higher probability of startup success.
2. Validate Revenue Model
Will your startup make money is what the two problem/solution fit stages will help you answer. How will your startup make money is the question you need to answer and validate at this stage. The good news is, problem/solution fit is 80% of the work. Proving the fit with an irresistible offer signals early-stage revenue model validation.
First, study competitors’ revenue model. Second, listen to what your interviewees have to say about competitor pricing. Third, in addition to seeking problem/solution fit, use your irresistible offer to test your revenue model. You know you have validated your hypothesis if people commit to your offer and agree with your company’s revenue model.
3. Clear Customer Acquisition Strategy
In just 5 years, the cost of acquiring a new customer has increased by over 50%. As such, while many acquisition channels and strategies can seem effective for your startup, it’s important to make sure that your customer acquisition cost through the chosen channel(s) is lower than the expected lifetime value of the customer.
Figuring out your customer acquisition strategy starts with your customer interviews. Just like revenue models, searching for and validating problem/solution fit also helps you define your ideal buyer and how to find and attract them.
In conclusion, finding problem/solution fit, validating a revenue model and defining a customer acquisition strategy is like creating a business plan before hiring a team to help you with execution. The common theme for all three is talking to customers.