(2024-06-28) Maurya Stop Wasting Time On Unviable Business Ideas

Ash Maurya: Stop Wasting Time on Unviable Business Ideas. Too many entrepreneurs prematurely rush to launch their product, join an incubator/accelerator, or hit the pitching circuit only to realize months (or years) later that they were chasing too small an idea

At the other end of the spectrum, some entrepreneurs create (or are asked to create) fantastical 5-7 year forecasts, which aren't any better. The problem with these spreadsheets is that they have too many numbers that quietly mask the riskiest assumptions in layers of innocent compounding lies.

This is counter-productive, and there is a better way.

Meet the Rapid Viability Test

The Rapid Viability Test (RVT) utilizes a quick back-of-the-envelope estimation technique devised by physicist Enrico Fermi, famous for making rapid order-of-magnitude estimations with seemingly little available data. (Fermi estimation) (see also Lean Canvas)

As long as your input assumptions aren’t off by an order of magnitude (power of ten), the resulting estimate will be accurate enough to make an educated go or no-go decision.

Step 1: Ballpark your Minimum Success Criteria, Not Your Idea’s Maximum Upside Potential (Goal Sizing)

The Minimum Success Criteria (MSC) is the smallest outcome that would deem your idea a success three years from now.

Start with your MSC, and ask if your idea can achieve your goal.

I recommend using an annual recurring revenue (ARR) goal for your MSC.

Don’t confuse recurring company revenue with recurring product revenue (like SaaS).

*When you think 10x, there are only four levels to the game. Pick one.

• $100k ARR: Roughly enough to quit your day job (indie)
• $1m ARR: A small 3-5 person company
• $10m ARR: A VC backable business
• $100m ARR: A Unicorn or low-margin business*

Step 2: Identify Your Customer Archetype (Customer Sizing)

estimate your annual revenue per customer/account (ARPA) rounded to the nearest power of ten in order to identify your customer (animal) archetype: (fly=$10, mouse=$100 (most B2C), rabbit=$1k, deer=$10k, elephant=$100k, whale=$1M)

Why do we care about customer archetypes? Just as building businesses to a specific size is similarly challenging, acquiring customers of a specific size is similarly challenging.

Identifying your customer archetype helps with rapid estimation and informs your sales and marketing go-to-market strategy.

Step 3: Evaluate Your Beachhead Market (Market Sizing)

The ideal is to achieve your MSC goal with a single beachhead market, so you don't have to cross the chasm before product/market fit. (Crossing the Chasm)

According to various industry benchmarks for SaaS products, 2–10% sign up, 15–50% become subscribers, and 20–40% churn on the first pay period. That’s a 0.6–1.2% customer conversion rate.

Using a Fermi estimate, this is closer to 1% (not 10%). So to acquire X number of customers, you'll roughly need 100x leads.

Applying the Rapid Viability Test to an idea in Less Than Five Minutes

Suppose you have a $100/mo SaaS product targeted at other SaaS companies.

Is this idea worth pursuing?

1. Goal Sizing

Since you want to raise funding eventually, your MSC is at least at level 3:

2. Customer Sizing

Your $100/mo pricing puts your ARPA at $100/mo x 12 months = $1,200 — a rabbit customer archetype.

3. Market Sizing

We use the subway chart to find the intersection of our MSC goal and customer archetype:

To acquire 10,000 SaaS customers, you'll need roughly 1m SaaS leads (100x).

Market test: Are there 1m SaaS companies?

A quick online search will reveal only 30,000 active SaaS companies in 2023.

Conclusion: Given this goal, target customer segment, and price point, this model isn’t viable.

Fixing the Model

I won’t lie to you. The Rapid Viability Test invalidates more models than it validates, but this is still good.

If your model cannot work on paper, it won’t work outside the building.

Refining the Model Further with a Traction Roadmap

A Traction Roadmap charts key traction milestones in your journey from idea to building a repeatable and scalable business model.

This time around, you aren't restricted to power of 10 estimations, and this model uses three additional metrics: customer acquisition, churn, and referral rate assumptions to chart a Traction Roadmap. (AARRR)