Just about 48 hours ago, two Thiel Fellows — a Yale undergrad on leave-of-absence and a recent ASU grad — launched a site that they hope will change the way startups listen to the market. The site, called 404market, aims to eliminate (or at least seriously diminish) the risk of startups developing products people won’t use, by allowing its users to express monetary demand for products and services that are wanted but don’t exist.
The model works like this: if somebody has an idea for something they really want , they post a “404” expressing that wish, and they also make an “offer” expressing how much they would pay for that thing. Once the 404 is posted, other 404market users can view the 404 and make their own bids on the product or service to express demand to potential suppliers. Once enough demand ($$$) has been aggregated, somebody with the ability to provide that product or service will agree to supply it. After customers have committed money to buy the product or service immediately upon its completion, 404market will monitor the transaction to ensure that the product is satisfactorily made according to the criteria specified by the customers-to-be, and by the end of the transaction, supply has arisen to meet the demand, the suppliers have made some money, and everyone is happy. The types of products and services on the site vary immensely — some people are looking for mobile apps or custom-made software for PC/Mac, while Paul Gu, the Yalie co-founder, is already in the negotiation process with Ivy Noodle to have them add Steamed Juicy Pork Buns to their menu, given sufficient demand.
The Price of an Idea, the Price of a Market
What is the market price of an idea? If you were to try to sell an idea, and nothing else, how much money would you be able to put in your pocket at the end of the day? Paul Graham, co-founder of Y Combinator and all-around startup guru, makes a convincing argument that oftentimes an idea for a startup alone, if not worthless, is not far from it.
A lot of would-be startup founders think the key to the whole process is the initial idea, and from that point all you have to do is execute. Venture capitalists know better. If you go to VC firms with a brilliant idea that you’ll tell them about if they sign a nondisclosure agreement, most will tell you to get lost. That shows how much a mere idea is worth. The market price is less than the inconvenience of signing an NDA. (source)
But what about the price of a market? If you could give somebody not only an idea, but also a market ready to adopt the product that comes from that idea — a market that will pay money for the product the moment it is created, with a predetermined and pre-disclosed bottom line for sales volume and price — how much would that be worth? Certainly not zero, but it’s hard to say much beyond that. That’s why I’m very curious to see how 404market turns out. There are, of course, other companies that operate under a related model, where a critical mass of customers is needed to tip a deal — two obvious examples that come to mind are Groupon and Kickstarter — but these still operate in specific domains (in this case, group discounts and group project-funding), and are not, in their simplest form, markets for pure demand.
Customer Development and Business Model Generation
One methodology espoused by many entrepreneurs today, which is very much in line with the idea of listening to the market and identifying demand before creating supply, is adherence to the model of customer development. Customer development, a term coined by author and retired serial entrepreneur Steve Blank, is seen as the cure for the ailment that he believes most startups die from: they build a product that nobody wants to buy. He’s written a full book on the topic, called The Four Steps to the Epiphany, so if you want to learn about customer development in real depth you should read it, but for now I’ll give you a brief run-down.
1) The product development model is broken
The emphasis in this model is on the first ship. Marketing and sales money is spent early on, and the product is perfected and branded before it’s released. This opens up the possibility of a huge problem: if customers aren’t into the product, by the time it’s shipped, it’s too late. Money is burned, and future iterations of the product are costly.
2) Customer development is the solution
Instead of focusing on product development as the main driving force of the startup, focus on building a customer base. Using these four steps (customer discovery, customer validation, customer creation, and finally company building), company is able to iterate quickly and cheaply, adapt to proven demand from potential customers, offset sales and marketing costs until later in the game, and, perhaps most importantly, if the startup is going to fail, it will fail quickly.
This past summer, I had the opportunity to sit in on a talk that was co-led by Steve Blank and Alexander Osterwalder. Alexander offers a complementary methodology to Steve’s customer development: Business Model Generation. Again, there is a full book on the topic, but the key takeaway is the chart seen again and again throughout the book, which helps entrepreneurs break down their business model piece by piece. You can see how answering the questions implicit in this chart would be made immensely easier using Steve Blank’s approach of customer development; without listening to the market, the information in this chart would be little more than guesswork:
Take special note of the fields “Value Proposition”, “Customer Segments”, “Revenue Streams”, and “Customer Relationships”. It’s hard to imagine how these could be completed accurately without a very deep understanding of the potential customer base, their needs, and, most importantly, their willingness to pay for your product. If the answers don’t lead to encouraging revenue projections, perhaps it’s time to try building a different product.
At the end of the day, without customers, there is no business. No matter how much venture capital you can raise, no matter how smart your team is, no matter how brilliant your product’s design, the startup will fail without customers willing to pay money for its product. That’s why it’s best to test the waters early on, by listening to customers and finding proven demand for a product or service. Maybe this could be done through surveys and focus groups, or showing wireframes sketched in a notebook to random people in a cafe; maybe it could be done through 404market. But one thing is certain: the customer is always right.