I have started to notice some common themes of my advice to them.
1. Building a mobile app is easy compared to acquiring customers to use it. It is not easy to build a brand or get noticed when you are looking at over 700,000 apps available in the Apple or Google Play app stores. If you build it, they may not come. According to research firm Distimo, only 80 apps generated more than $1 million in revenue during the fourth quarter and only 2% of the top 250 publishers for iPhone apps in the App Store are newcomers.
2. Thinking big is great to put a big market size in front of investors, but it's not how you acquire customers. Many start-ups need to define and focus on target segments upfront to acquire customers to prove out the value of their business to investors. Investors always want to be shown that people actually want to use your product, even if revenue isn't there yet. Here's a common scenario I hear all the time in the music category: "Everyone likes music, so our market is everyone in the world." But not everyone wants your music app and its features. A few weeks ago on Shark Tank, an entrepreneur had invented a "hoodie pillow" (yep, a hoodie sewn on a pillow) and said the market was huge. "There are 300 million Americans this is applicable to. Anybody with a head that sleeps." While she did get an investment from a shark, I'm not so sure 300 million was her target market. For some products or services targeted at the business market, I encourage start-ups to pick a few verticals to focus on that will find your offering the most compelling.
3. Don't underestimate the competition. When I ask start-ups how are they different than Brand X or Brand Y in their space, I often here "yeah, but they're not quite like us because..." But in customers' minds, they may be content with the current solution or don't fully realize the value-add of your offering enough to switch. No one is exactly like you...maybe, but what is the status quo people are using now before you came along? Don't discount substitutes either. It is human nature to be lazy and complacent. People need a compelling reason to switch, and when they do, it better be easy. That brings up a corollary to #3: Make sure you understand any switching costs for customers. On the flip side, start-ups also need to think of how to erect their own barriers to switching once they acquire a customer.
4. Social media is not an acquisition strategy. A lot of consumer start-ups think seeding their app or website on Facebook and getting some buzz and traffic (and downloads, if you're an app) initially will be the key to acquiring consumers. Yeah, you may get a few thousand users to check it out, but it's another thing to get them to continue to use the app or to eventually pay for it! For example, not all photo apps (and there are tons of them) make it big like Instagram. And let's not forget the lesson learned from Zynga who initially hitched its wagon on Facebook for growth.
5. Crack open Excel and build a decent revenue model. Building a well laid out revenue model in Excel that let's you immediately see the impact of various assumptions is a must. For those with a subscription model, you should at least capture monthly fee times number of paying customers. For those with an ad-supported model (God help you!), you should have an estimate for monthly traffic and CPM. And then there's the in vogue "fremium" model. This will require you to make an assumption on percentage of users who convert to a paying customer.
I hope this helps start-ups sharpen their pencils a little more before pitching investors.
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