The Story Of Bob And Alice: How Great Ideas Fail And How To Avoid It
Let me tell you a story. It’s a story about Bob and Alice, both entrepreneurs and startup founders. They’re both in their mid-twenties and can be regarded as professional successes in their startup careers.
Both Bob and Alice decide to launch an App Store business, two companies based on two separate smartphone apps. Bob uses a different launch strategy than Alice, and they measure their results after the launch. Who has the most successful launch?
The Unicorn: Bob’s My Recipe App
Bob is not new to the startup game and knows a lot of investors. One of his friends connects him to an investor, named Charles, and the two agree to meet. Bob prepares a stunning pitch deck (a fancy word for “PowerPoint presentation”) to give the investor a quick overview of his business.
He’s got it all figured out: the app, named My Recipe App, will send its customers a healthy dinner recipe every weekday for $ 15, paid as a monthly subscription. It’s distribution channels include food blogs, local collaborations with restaurant chefs and an online advertisement campaign.
Bob has a team of passionate individuals, including two app developers, an app designer and a growth hacker. The recipes will be bought in through a distributor, who provides for no up-front cost and a revenue share of 5%.
Bob estimates they can reach 100.000 individuals, who are interested in food, in a period of 3 months. If one percent sticks, they’ll have 1.000 initial customers and a basic monthly cashflow of $ 15.000. Bob estimates this is enough to keep one developer and one marketer on the payroll, after the launch.
All Bob needs is an investment of $ 100.000 to build and launch the app, and keep the company afloat for 6 months. The investor agrees to invest the money, for a 30% equity stake in the company. He still has to see whether the plan is going to work out, but given his portfolio of about 15 investments he’s certain one of them will be a winner in the coming years.
On paper, Bob is now founder and Chief Executive Officer of a company that’s worth $ 335.000 and has more than $ 100.000 in projected yearly revenue, with a salary his peers can only dream of. To celebrate, Bob orders Thai take-out and calls it a day. Not bad, right?
The Grasshopper: Alice’s Fitness App
Alice is almost entirely new to the startup world. She worked for a successful startup before and launched her own side hustle selling specialty tea leaves via her blog. She quit her job and sold the tea blog for $ 10.000 to focus fully on her new app startup, My Fitness App.
Alice is a bit nervous about launching her own app company and set aside enough money to pay rent and food. She put the money from the sale of the tea blog into a savings account, and decides only to access that money in case of emergencies. If she runs out of money, she’ll go back to her old job or find a new one.
Alice is extremely motivated to make this new company work, after all, it’s her own money on the line. The thrill also excites her: it’s awesome to jump out of bed in the morning, getting to work on a business that’s truly your own.
The first thing Alice does is go to the gym. Perhaps that’s a weird thing to do when you’re a company CEO, but she figures her best chance of succeeding starts with emerging herself in the world of her customers. Alice asks a few people at the gym: “Can I follow you around for an hour to see how you track your workouts?”
Alice tracks all sets and repetitions for her future customers, and writes down a few remarks about the process:
- It’s annoying to carry a paper notepad and pen around in the gym
- Most men and woman who work out sweat, and that’s not good for paper
- Drawn paper spreadsheets get messy and chaotic real quick
- Some people already use an app, called My Sports Pal
Next, Alice tells the following to the men and woman she helped track their sets and reps: “Give me $ 25 a month, and I’ll come here twice a week to track your fitness workout sets and reps for you. Moreover, I’ll send you a monthly statement with your progress.”
She deliberately prices the service high, almost a little too high, to force the potential customers to make a conscious decision about the value of her service instead of letting them agree just because her service is cheap. If a customer declines, she tries to find out why, and if a customer agrees, she tries to find out what level of service they expect.
Alice is incredibly tired. She woke up at 7 AM, got to the gym by nine, and now it’s almost twelve hours later. When she is about to leave the gym, one of the personal trainers approaches her: “I see you’re walking around selling a service to people. You can’t do that here, company policy, but I appreciate the initiative. Can we make a deal?”
Alice suggests two kinds of deals, and the trainer says he’ll think about it.
- Alice is allowed to sell her services to the customers of the gym, and gives the gym a 50% revenue share. In return, she gets access to the gym customer’s contact information.
- Alice won’t sell to the customers directly, but the gym hires her services in bulk to distribute among its personal training customers.
Back home Alice consolidates her findings. She also does a bit of research on that competitors app, My Sports Pal, and attempts to find what improvements she can make on their app. She tasks herself with trying out My Sports Pal next time she’s at the gym.
This is what Alice notes down, as the results for that day:
- She found 3 reasons why using pen and paper is annoying and sub-optimal for recording workout sets and reps
- She sold 4 “fitness tracking services” for $ 25 each, which she considers a $ 100 investment in her business
- She made a deal with the gym itself, to either get access to their customerbase or let them buy in bulk from her
Who Launches The Better App?
Now you know the story of Bob and Alice. How does it continue? Summarizing, you could say that:
- Bob follows the Unicorn approach to starting a business. His business is valued by how many users it can attract, and determines success using forward projections. It’s a good way to build a business, but it’s risky. The investor runs the risk of losing his money when My Recipe App fails. Bob relies on a great amount of stakeholders: his team, the investor, and the distributor.
- Alice follows the Grasshopper approach to starting a business. Her business is valued by how much money it makes in a certain amount of time. She determines her success by the amount of deals she can make, be it sales or partnerships. Alice also gathers tangible evidence for her business: issues, possible deals, competitors, reactions from people, etc. Alice only relies on herself as long as she can, and she doesn’t run a big financial risk.
But… Alice doesn’t have an app! And… Bob has no customers? They will never live up to the expectations they have of their businesses! Let’s continue the story…
Why Should You Validate Your Business?
The story makes a clear distiction between the strategies of Bob and Alice. Bob projects his future gains, while Alice attempts to make gains now and bases her future business on that experience.
In other words, Alice validates her business before she invests in it. Business Validation sounds very boring, so let’s spice it up a bit:
“You better check yourself, before you wreck yourself” ~ IceCube
One of the easiest ways to validate your business is to launch before you build. Instead of building a product and then attempting to find customers for it, you first find your customers and then build a product for them.
This is not about deceiving your customers by promising them a product that doesn’t exist yet, but instead about measuring how interested prospect customers are in your product or service. You shouldn’t overpromise and underdeliver.
“If you build it, they will come”
Alice could have built the My Fitness App before setting one foot in a gym, but that would have thwarted her attempt to validate the business. Instead of promising the full app, she worked with a replacement product that solves the same problem: How can you most easily and efficiently measure your workout progress while working out?
The medium doesn’t really matter here. In fact, it’s easier to validate a simple product that doesn’t involve complex technology. You can always re-enact or play out a tool that solves a problem.
If you’re building an information-based app (like the My Recipe App) you can distribute that information via the simplest means possible: email. Send recipes via email, by hand. You don’t need an app for that!
So why should you validate your business? Three reasons:
- It’s less risky
- It’s scalable
- It doesn’t require a lot of capital
It could take you 6 months to build an app, before you can be in business. A typical app costs between $ 50.000 and $ 500.000 to build, especially if it relies on advanced technology.
Before you’ve launched your product, you’re completely in the dark when it comes to its validity: Do your future customers actually want what you’re building? Perhaps you need to pivot your product after it launches; make a major overhaul. Once an app is built, you can’t make big changes without a considerable time investment.
For a validated business, it’s different. The risk is virtually the same as any business, validated or not, except that you place this risk very close to the launch.
Instead of waiting out the time it takes to build, you launch and measure immediately. Working like this is very scalable: you can launch two business in a week, and when both fail you’ve only lost 40 hours of productive time instead of 6 months (960 hours). Moreover, you can find free channels to publish your product in, like going to the gym and talking to people.
Perhaps you’ll want to try out paid advertising to get super fast feedback on your product. You can run a quick and effective Facebook Ad campaign for less than $ 100.
An often heard argument against business validation is this: “I need capital to grow, I can’t build my million dollar company on the whimsy foundation of $ 100.” It is true that you need capital to grow a company, especially when you’re going for fast growth. A self-funded company has to wait for money to come in before they can invest it themselves. At times it is quicker to work with investment capital.
Before you can grow, you need to know in which direction you want to grow. There’s nothing more whimsical than putting your ladder against the wrong wall, climbing it, only to find out at the top you put your ladder against the wrong wall. Even if you want to build your business with investors, make sure you validate and launch first.
Money Isn’t The Only Thing You Can Invest
Most aspiring app makers I meet with don’t work with capital investment or investors. Their business start as a side hustle and it grows from there.
Perhaps you’re in a similar situation, reader.
Should you validate your business if you’re working in evenings and weekends, next to your day job? Perhaps you have a co-founder, or you work solo. You have an app idea and you’re building it, but you haven’t really validated the business itself yet.
It’s important to understand time is an investment itself. Time is the scarcest commodity: we all have it, but we can only spend it once. You can think of time as a bank account that will run dry over time, or as a bank account that gets a transfer of $ 86.400 every day at midnight.
When you work on your own, on your app business, it can feel like you’ve got nothing to lose. You would only read, play games, spend time with your family, go hiking, etcetera, instead of working on your app in the weekends, right? Spending time on your business means spending less time on other, equally valuable activities.
How Much Money Do You Make?
Let’s look at it from a money perspective. How much money do you make in a year, at a regular job? Working on a business that isn’t working, for an entire year, will make you lose that money. It’s money you never had, of course, but it’s also money you will never have.
Let’s exaggerate the money perspective. How much money can you make with a successful App Store business. $ 10.000 a month? A million a year? You’ve seen other entrepreneurs do it, it’s possible, so you can do it too. Unless you think these entrepreneurs have a special trait, or opportunity, or skill you don’t have.
Even if that’s true, which it isn’t, you should always strive to increase your chances of success the best you can. That’s a no brainer: no one starts a business wanting to decrease the chance of success.
Validating your business increases the chance of success, and decreases the loss of investment. You can start a business in a matter of days, fail in a matter of days, but at least now you know this doesn’t work. You can try again, and fail better.
A long-term failure is less scary in the short run, but it’s a thousand times worse to fail over the course of a year than to fail over the course of a couple of days.
What Happens To Bob And Alice?
Let’s get back to the story. Bob worked with an investor and future projections, and Alice self-funded her business and worked with tangible evidence and experience.
Bob’s business didn’t take off. The production of the app had its struggles. One of the developers dropped out just before the launch of the app, so he had to find a quick replacement. The growth hacker didn’t live up to Bob’s expectations and failed to deliver the paid advertising campaign.
All of this could be accounted for, and it wasn’t the real problem. Bob couldn’t have known his developer would drop out, and of course he misjudged the growth hacker, but you can only go so far in hiring people. In the end, he managed to get the app out in time and they restarted the ad campaign successfully with a more experienced marketer.
What Bob didn’t account for was the lukewarm response from the restaurant chefs. They’d rather have people eat at their restaurants, than work together with a dinner-at-home recipe app! Also, the response from customers was less enthousiastic than expected.
It turns out most customers had more problems with having the right ingredients to cook at home, than coming up with recipe ideas. Moreover, a few dozen recipe apps already existed and the My Recipe App wasn’t differentiating enough. The food blogs featured their apps and were happy with it, but there were just too much competitors.
Ultimately, the business failed. It limped on for a few months until the investment money ran out. They managed to get a fair bit of customers in, but not enough to continue the service. The investor wasn’t too happy, but overall is investment portfolio performed positive. Bob turned out to be the one heartbroken and deceived by his own optimism.
Business validation would not have mitigated all of these risks, but it would have moved a few of them to right after the launch, would Bob have validated his business. He could have surveyed supermarket shoppers or gone door-to-door to ask people about their dinnertime experience. Moreover, he could have productively invested the $ 100.000 in a product that works!
Alice’s business is a major success, even to this very day. The gym she surveyed at became her biggest partner. She made a deal with them: the gym would front the development cost of the app in exchange for unlimited distribution of the app among its members for a period of 2 years.
Instead of using the money to build the app, she got a technical co-founder on board who built the app for a 50% equity stake in the company. The app lived up to its promises and the gym and its customers are still very happy with it.
Alice used the money to advertise the app and get more customers who weren’t affiliated with one single gym branch. Also, she formed more strategic partnerships with gym franchises all over the country. Instead of trying to get one single customer, she got hundreds in bulk through the gyms for a discounted price.
She negated the risk of relying on one single type of distributor by growing her individual customer base, and branching out into yoga and pilates studios.
To this day Alice hasn’t touched her $ 10.000 emergency fund, and has more than 2.000 customers bringing in a monthly revenue of $ 30.000 of which she pays herself and her co-founder a minimal salary. The rest she invests back into her business.
Do you want to be Bob or Alice?
This blog article is the first in a series on How To Launch A Killer App Before Building It. Bob and Alice set the stage for your App Store business, and they’ll show you how you can build your own – perfectly validated – app-based business. Stay tuned!
If you build it, they won’t come, and you better check yourself before you wreck yourself. You think you can be a Unicorn, but the truth is… Unicorns don’t exist.
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