(2023-04-16) Cohen Excuse Me Is There A Problem

Jason Cohen: Excuse me, is there a problem? Many startups fail despite identifying a real problem and building a product that solves that problem.

solving a problem is—perhaps surprisingly—not nearly enough to build a successful company

The path from “The Problem” to “Viable Business Model”

The main challenge facing a new startup is that so many different things have to go right for it to succeed. A subset of those things is the path “Problem” to “Viable Business Model.”

1% conversion: Impression → Visitor

1% conversion: Visitor → Paid

Therefore: 10,000 Impressions → 1 paying customer

1,000 paying customers is the minimum1 needed for a sustainable, small company. It will take about two years2, 10M marketing impressions, and luck.

If you’re selling directly to consumers (B2C), there needs to be 10M who have the problem.

A lot of great ideas attack problems that just aren’t actual problems, at least not for more than a small handful of people, and therefore fail to yield a successful company

Can you be successful anyway? Yes, there’s an exception to every rule

Self-Aware: Do they know & care they have the problem?

often the answer is “shockingly no.”

I’ve given the example of website security, which I know4 is a real problem plaguing millions of websites whose owners think “those mean hackers won’t attack lil’ ol’ me; I’m nobody!” False. Hackers indeed don’t care about lil’ ol’ you, but they do want to gain control of your lil’ ol’ server

“Security” is a case of ignorance, but the other version of this challenge is when the customer knows they have the problem, but genuinely does not care. This could be because this problem is the ninth-most-important priority on their list

Can you be successful anyway? Yes, there’s an exception to every rule. Some founders are not only the first-and-best sales-person, but also natural evangelists. More, they’re on a mission to educate the world about their passion

Lucrative: Do they have substantial budget to solve this problem?

At Capital Factory, there’s a constant stream of kids coming out of college with a startup that “sells ______ to college students.”

The deal-breaker is that college kids have no money, and don’t spend what little money they have on SaaS products

You might think a large company will definitely allocate budget for a known problem, but here again the answer is often in the negative. Budgets are applied to the top few most-important (compelling) problems of the year.

Large companies have internal teams that are already tasked with the problem, which might means there’s no additional budget for outside solutions. Those teams often fight against outside tools, because they makes their jobs obsolete, or at least converts them into vendor-managers instead of innovators. You want to target companies who outsource this particular problem to outside vendors.

Once you get over the hurdle of there being a budget at all, is the budget large enough? I’m always shocked how little people will pay for productivity applications like to-do lists and note-taking

In general, consumers don’t like paying for stuff, hence the multi-trillion-dollar success of having people “pay” with attention (advertisement) and data (privacy). This is why I think self-funded companies in particular should target businesses (B2B) as customers.

Liquid: Are they willing and able to buy right now?

This can be for legal reasons, like being locked into a long-term contract or government fiat. This can be for convenience, as in the Workday example which at WP Engine caused us to cancel several other SaaS products because “now it’s all in one system, which we’re paying for anyway, so this is simpler and safer to manage.”

Notice that all these forces have nothing to do with your product or its price

A final way that customers might not be able to buy right now, is when the product is needed at a specific moment in time, but not before or after that moment

Eager: Do they want to buy from you, specifically?

The first hurdle is trust: Do they trust not only that the product works, but that your company will be around for many years to come

The second hurdle is differentiation. This doesn’t just mean “you have something unique.” You might have a feature that no one else has, but if only 10% of the market cares about that feature, that’s not enough.

Enduring: Will they still be paying (or paying-it-forward) a year from now?

I cannot count the number of indie developers who grow to $15k MRR and start slowing down because their cancellation rate is 7% per month. (churn vs retention)

With $15k MRR, adding $2k/mo of new customers—a healthy 15% per month growth rate—a 7% cancellation rate means already half of that growth is negated by customers leaving. The company barely got started and already its growth is being decimated. At that rate, only one year later, having grown to about $27k MRR, the company has stopped growing completely

This example was for a recurring-revenue business, but the same principle is true for one-time revenue businesses. One-time revenue businesses still require repeat revenue, in two ways:
Customers buying again.
Happy customers telling other people to become customers.

Evaluating startup viability

we can evaluate the viability of this path with the following model (see original for scoring rubric)

Answer with regard to a specific target market, which means a specific type of buyer solving a specific problem with a product that has made specific trade-offs, at a specific price.

Now you multiply. Why multiply? Because this is a series of “ands”—there needs to be customers with the problem and they have budget and they are buying today and so on. The effects compound.

*This is dangerously close to a silly quiz or rubric, so we have to be careful to use the final score as guidance rather than precise analysis. Still, different choices of target market, target customer, and product trade-offs can result in dramatically different results.

As usual, having to think through the answers and trade-offs is most of the value of the exercise, even more than the final score.*

Note how our research is simplistic, but because we only have to be accurate to a power of ten, the answers are easy anyway

let’s try it, using WP Engine

Let’s try it again with an indie startup: ConvertKit

Score = 2,500,000 / 625,000 = 4, so it qualifies as a scale-up, and indeed that’s what happened.

Score = 1,250,000 / 625,000 = 2. This is a good business model, possibly even a scale-up, and indeed ConvertKit grew quickly as a bootstrapped company

Finally, let’s take the case of selling security software to consumers

Score = 25,000 / 625,000 = 0.04. This is not a good business model.

*But there’s hope…

What to do with a negative answer*

What if the security company targets high-net-worth individuals instead of “everyone?”

What if the security company targets mid-sized businesses?

In general, targeting a niche often results in a better business model

Or, finally, your business idea might simply not be viable.