For startups, acquiring the first 100 customers can be an uphill battle. Many entrepreneurs believe they must build a fully functional product to validate market adoption. However, there is an alternative and effective approach – obtaining signed letters of intent. These letters can prove to investors that your solution sells. In this step-by-step guide, we will explore how signed letters of intent can be a game-changer for startups, allowing them to gain traction and secure investors without developing a product at all.
Love The Problem, Not Your Solution
Before diving into the world of signed letters of intent, it’s crucial to embrace the philosophy of “Love The Problem, Not Your Solution,” as eloquently put by Ash Maurya. To create a product that resonates with the target audience, one must deeply understand the problem they are trying to solve. The process begins with conducting a lot of interviews to identify a genuine market issue. These interviews not only validate assumptions but also provide invaluable insights that lead to the development of a solution people truly need.
Step 1: Formulate Your Assumptions
The first step in understanding the problem is to formulate assumptions. These assumptions act as a guide for conducting problem discovery interviews. By answering specific questions you can lay the groundwork for meaningful interviews.
Formulate your assumptions by answering these questions:
- Who do I think is my target audience?
- Where do I think I can find the target audience?
- What do I think is the problem of the target audience?
- When do I think that this problem occurs?
- Where do I think the problem occurs?
- At which moment in time do I think the problem occurs?
- How do I think they solve the problem now?
- How much time and money do I think it costs to solve the problem now?
Step 2: Problem Discovery Interviews
Problem discovery interviews are the heart of understanding the market’s pain points. Get outside of the building and start interviewing potential customers that fit the criteria from your assumptions. Interviews simply require time and expertise, rather than financial input, which is why they prove to be so valuable. Before you start, think about how much time you have, and then start structuring the interviews like this:
- Introduction (2 minutes)
- Segmentation (2-5 minutes): this is where you check if you talk to the right person
- The core of the interview (5-20 minutes): this is where you ask questions regarding your assumptions
- Wrapping up (2-5 minutes)
Part of wrapping up is asking if you forgot any questions to ask, if you can contact him/her again later, and if they can hook you up with other ‘potential customers’.
An indispensable read for all aspiring entrepreneurs who want to do interviews is “The Mom Test.” This book’s cover succinctly captures its essence: “How to talk to customers and learn if your business is a good idea when everyone is lying to you.” During customer interviews, various factors can lead to interviewees not being entirely truthful with the interviewer. Some of these reasons include pre-existing friendships between the two parties, the interviewee’s desire to please the interviewer, distraction on the interviewee’s part, or simply the difficulty in accurately predicting future actions.
Because of the many reasons listed above, when interviewing a potential target customer, try to do the following:
- Do not talk about your idea – instead, focus on the person’s life and the problems they have. If you want to talk about the idea, then do so only at the end of the interview.
- Make your questions as specific as possible, but do not lead the person to the answers. Ask about the past and how the person has behaved instead of painting an image of the future.
- Speak less and listen more. Entrepreneurial people are often passionate about what they’re doing, but in the customer interview you should let the interviewee talk. It’s not the place for selling or advertising your idea. The goal is to gather as much quality data about the person’s life as possible.
The Mom Test outlines how a customer interview can be done well or poorly. In a bad interview, you ask questions that will guide the user to answer in the way you want by already giving part of the answer. For example, “are you interested in a cookbook for your iPad?”
In a good interview, you instead ask very specific questions that do not limit the answer. For example, “how do you use your iPad?” or “how do you find recipes when cooking?”. When conducting problem discovery interviews, you will get a closer look at whether the problem you are assuming is real.
Pick 4-5 questions from this list:
- What’s the hardest part of your day?
- Tell me a story about [area of interest]?
- What are some unmet needs you have in the context off …? Why is that?
- What product do you wish you had that doesn’t exist yet? Why?
- What tasks take up the most time in your day?
- What tasks take up the most time when dealing with [area of interest]?
- How do you do [process/area of interest] today?
- What do you think of the costs of [area of interest]? Why?
- What do you think of the quality of [area of interest/output]? Why?
- What do you think of the time it takes regarding [area of interest]? Why?
- Could you walk us through your workflow?
- How did you discover [product/process]?
- Did you consider different solutions? Why?
- What did the consideration step look like?
- How did you compare different solutions for …?
- Who is involved in deciding between different ….?
- How does decision making work?
- What tools and services do you use?
- What are you doing to improve [area of interest]?
- What keeps you awake at night? Why?
- What could be done to improve your experience with [process/role]? Why
- What’s the hardest part about being a [demographic/role]? Why?
- What are your biggest/most important professional responsibilities/goals
- What are the most important goals of your project/team?
- What are your biggest/most important personal responsibilities/goals?
- What part of your role is the most tiresome/tedious/etc?
- Do you make any money from [area of interest]?
- Can you talk me through on how you handled [problem]?
Step 3: Problem Validation Interviews
If the interviewee acknowledges the problem, you can go to the next phase: problem validation. Here, you talk specifically about their complaints if they are aware of their problem.
Pick 4-5 questions from this list:
- What did you keep from solving [problem]?
- Do you find it hard to [process/problem]?
- What is the current status regarding [area of interest]?
- How do you feel about the current status regarding [area of interest]?
- Do colleagues/friends think you do a bad, good or awesome job regarding fixing [problem]? Why?
- How important is [value you’re delivering] to you?
- Can you me about the last time you [process you’re improving]?
- How motivated are you to solve/improve [problem/process]?
- If you had a solution to this problem, what would it mean to you/how would it affect you?
Step 4: Product Discovery Interviews
If the interviews reveal that less than 50 percent of the target audience recognizes the problem, it’s time to pivot and redefine. However, if more than 50 percent acknowledge the problem, entrepreneurs can proceed with product discovery interviews. These interviews help entrepreneurs learn about existing solutions and gain insights into what their ideal solution should look like. Armed with this knowledge, they can create a simple yet effective initial solution that addresses the target audience’s needs.
Pick 4-5 questions from this list:
- What do you think could be done to help you with [problem]?
- What kind of workarounds did you try? When was the last time?
- Tell me about the last time you managed to work around [problem].
- What would your ideal solution to this problem look like?
- What did you do to improve the [area of interest]?
- If you could wave a magic wand and instantly have any imaginable solution to this problem, what would it look like?
- What’s the hardest part about [process you’re improving]?
- What are you currently doing to solve this problem/get this value?
- Have you tried using [competitor product]? What did you like/dislike about it?
- What do you like and dislike about [competing product or solution]?
Step 5: Pitching Your Solution
With a solid understanding of the problem and the existing alternatives, it’s time to think of your own solution and pitch it to potential customers. Pitching your solution helps you to learn what to improve. Surprisingly, entrepreneurs don’t need to have a fully developed product at this stage. By leveraging the knowledge gained from interviews, they can start asking for money and obtain signed letters of intent from potential customers. Structure your pitch as follows:
- The problem: Clearly state the problem you’ve identified. Explain the amount of money and time lost due to the problem.
- The promise: Show the specific promise you’re making to your target audience (the so-called value proposition). Highlight the difference between your solution and existing alternatives. Ensure the promise revolves around the benefits your technology offers to avoid discussions about technical feasibility.
- The solution: Explain precisely what your solution is. Emphasize how your solution is different from what they currently have. Focus only on the practical added value of your solution, not technical functionalities.
- The price: Paying a price is perceived as physical pain by people. Clearly show that your solution is a greater pain reliever. Ideally, your product should be worth more than the price. Initially, ask for a price that is approximately twice as high as the target audience desires. This allows room for a price reduction later if needed, as raising the price is more challenging.
If the customer is satisfied with your pitch, let them sign the letter of intent.
The Components of a Letter of Intent
A letter of intent is a concise document that outlines the solution and terms of the agreement. It typically includes:
- Party A provides solution X to solve problem Y for Party B.
- Solution X consists of functionalities 1, 2, and 3.
- When solution X is delivered, Party B pays amount X.
- Solution X will be delivered by Party A within X months.
Scaling with Market Proof
Once multiple signed letters of intent are obtained, entrepreneurs can create a landing page and start advertising to scale the sales of their solution. This approach allows startups to grow rapidly without the need for a fully developed product. Market proof, in the form of signed letters and online pre-orders, demonstrates to potential investors the desirability of your solution. Dropbox, for example, did this with a video on their landing page. It helped them gain traction tremendously in a short time without having to built a product.
Securing the first 100 customers may seem daunting for startups, but the power of signed letters of intent offers an alternative path to success. By focusing on understanding the problem, conducting insightful and unbiased interviews, and pitching a solution that addresses genuine market needs, entrepreneurs can attract customers and investors alike. The journey to conquering the market begins with a profound connection to the target audience and a willingness to adapt and learn along the way.