Entrepreneur lesson #3: Customer interest is no evidence of buying intent
One of the largest frustrations of startups trying to work with big enterprises is the enormous amount of false positives. Many startup founders have fallen into the trap of getting promising feedback from individuals from large companies and believe that they’re close to getting a deal in place. This positive feedback may continue for a long time, but the actual contract never materializes. There are many reasons why this happens, not the least that orchestrating an actual contract with an outside party is quite an uphill battle in many companies, but it’s a good reminder to make sure that, as a startup founder, you don’t allow your team to chase ghosts.
With some of the researchers I worked with I’ve experienced something similar. Some research results received enormous interest from companies, large and small, on industrial conferences to the point that we had hundreds of people in presentations and tons of positive feedback. When we then decided to commercialize the technology, the initial interest vaporized quickly and it turned out that although people were interested in the idea behind the technology, there was no willingness to actually buy the solution.
One major factor in all this is the notion of socially desirable behavior. When a startup founder talks to a potential customer, this customer tends to provide feedback along the lines of what the founder would like to hear. This is normal human behavior and one of the reasons why societies work well. If we always told everyone we meet exactly what we thought of them, there would be significantly higher levels of conflict and strife in the world. As a founder, though, you need to be cognizant of this and seek to ask questions that minimize the need for others to tell you what they think you’d like to hear.
Within the startup space, there tend to be two schools of thought. The first group is looking to get people to use their offering and to get to a large user base before thinking about monetizing. This group has a point in that you’re looking to minimize friction for adopting the offering, and paying for something that you don’t even know will help you is a significant hurdle for most. Also, if the offering is monetized indirectly, eg through advertising, in-app purchasing or freemium, the focus on growing the user base may well be the best way forward. The challenge is then often to fund the business until the monetization part starts to work.
The second group believes that buying intent and willingness to pay is an integral part of the validation of an innovative offering. That means that during the first stages of even talking to customers about the offering that you haven’t even built yet, you explicitly bring up price and payment terms to get feedback on that, too. Of course, what customers say can very well be, and often is, different from what they do, but their verbal feedback is at least an early signal. When there’s enough positive feedback and you decide to build an MVP, it’s then possible to test customers’ willingness to actually buy the service by offering the MVP for a fee.
Typically, I recommend the startups I work with to focus on the second model, ie verify buying intent as early as possible and, where feasible, based on actual customer behavior. Especially with novel business models in established markets, this may not be the right answer, though. Several startups are exploring models where customers pay with their data. That’s fine, but it does require that you have a solid hypothesis on how you can use that data to monetize elsewhere. And, in general, the more complicated the business model and the larger the number of stakeholders, the harder it will be to build a viable business as more things can go wrong and more hypotheses about your business need to be true.
In the end, we all have limited resources and the goal for any startup should be to test the underlying hypotheses of the business as early and as cheaply as possible to minimize wasting time and money on things that don’t pan out. Killing an idea and pulling the plug is incredibly hard and figuring out when to do so is even harder, but the risk is that you keep wasting resources on a business that isn’t going anywhere. The opportunity cost of that can be enormous as it keeps you from moving on to a next business or pivot that turns out to be more promising.
For a variety of reasons, interest from potential customers is far from the same as buying intent. As an entrepreneur or an intrapreneur, confirming willingness to pay by the stakeholder group that you’re looking to monetize, ie the customer, is critical and generally best done as early as possible. This is advice that’s easily complicated by all kinds of realities surrounding the business, ranging from slow-moving B2B sales cycles to multi-sided markets, but ignoring the reality of a for-profit enterprise (that you need to make money to create a profit) is a surefire way to fail. As the famous business professor, Peter Drucker, said: the purpose of a business is to create a customer!