Category: Startup Tips

Only five years ago, getting into and completing an accelerator program was something special. That was when there were only a handful of Accelerators worldwide and the program, mentorship, and opportunity for follow on funding was huge. Today there are literally thousands of accelerators out there, diluting your experience, unless you go to one of only a handful of programs. Today going through an accelerator does not distinguish your startup. I mentor at a bunch of accelerators and have seen a disturbing trend: A lot of startups are going to multiple accelerators! This is a very bad idea.

Accelerator Hopping

I’ve seen several startups “accelerator hop” or join multiple accelerators. The top reason I have been seeing is that a startup has gone through a regional accelerator in their home country and then wants to use an American accelerator to “enter the US market.” For example, let’s say you are startup CoolCo from Poland and you go through the PNA or Polish National Accelerator. You’ve given up 6% for somewhere between $20k and $75k. After a few months at PNA you “graduate” at Demo Day with some initial traction and a small amount of revenue, but don’t necessarily have much opportunity to raise money in Poland. You know that your core customers are in the United States, so you need to enter the US market. PNA does its best to introduce you to some mentors and connections in the US, but you are pretty much on your own. So you decide to go to another accelerator, in the US, in order to enter the US market.

The problem with this model is two fold. The first is that you get diminishing returns going through a second accelerator. You already spent the time working on the “product market fit” working with mentors and learning the “lean startup.” You should be an expert by now. 🙂 All those mentor meetings, Friday check-ins, demo day pitch practice, will be educational, but a distraction. That is time you could be actually working on your startup, specifically hustling to enter the US market! Ironically joining an American accelerator will slow down your US entry! In addition, the accelerator in the US, while located in the US, is not going to help you break into the US market, just like being an exchange student in Italy won’t make you an Italian citizen. US accelerators do not focus on US market entry, so you are better off hustling and entering the US market on your own.

The second problem comes down to economics. Your second accelerator will take another 6% stake for somewhere between $20k and $75k. So you will have raised approximately $100k for somewhere between 10-12% of your company. Your next step is to try and raise a Seed round and now your have given up too much equity in order to get the seed round.

Another reason I am seeing in the accelerator hopping phenomena is funding. Some startups join one accelerator, can’t raise a seed round after Demo Day, and then join another accelerator, hoping that the second accelerator will introduce them to more investors. They fall in the same equity trap as CoolCo above. The problem is that no accelerator is going to magically change your chances of raising money in three months, only traction and customers will do that. You are better off not wasting the time in another program and spending all of your energy getting customers. Paying customers leads to investment, not multiple accelerators.

The Middle Ground

I understand that once you have graduated an accelerator your startup may not be ready for a seed round. In addition, you miss the focus and push that an accelerator gave you. One possible compromise is to join an incubator program. Incubators usually provide space, business services, and a very light mentorship program without taking any equity. They are typically run by government development funds or other non-profit programs and last between six months and a year. A handful of incubators will also provide access to some non-equity grant money. Incubators are not perfect, but can give you the final push your startup needs before doing a seed round without diluting your equity or wasting your time.

Either way, don’t delay and go out and hustle!

A lot of people misuse the term “MVP” or Minimum Viable Product. To be clear an MVP is not a beta, not a prototype, but rather an experiment designed to test your value proposition’s assumptions by measuring a behavior and learning from the results.

Back in the day, Dropbox did an MVP as just a video and Buffer was just a landing page. Both were experiments to determine if Dropbox or Buffer should even exist. Instead of guessing and building prototypes, they built the simplest of things in order to measure a user’s behavior. Today startups are building functional prototypes and calling them MVPs. They are better off building something they can learn from. Typically the first MVP doesn’t even have to be anything on a device or computer. For example, I once advised a new travel startup that wanted to give you one click access to a daily itinerary based on a map. They assumed that people wanted a map with pin points on it and times to follow. I told them to go to tourist spots and give people real maps with real pin points circled and an analog itinerary to follow. That was an MVP, it was an experiment (map) that measured (how many as a percent of total) a user behavior (did they use the map or not). Let’s take a look at how to build a better MVP.

Getting Started: Customer Segment and Value Proposition

The whole idea of an MVP is to measure an actual result against your expected result to prove or disprove your assumption. In order to do that you need data. The first place to start is to think about is your customer segment; you have to know who your target customers are going to be. Without knowing your exact segment (22-34 year old professional, urban women, single, living alone, earning over $75k), you won’t be able get the correct pool of users to test on.

After you define your customer segment, you define your value proposition. Too many people think that their value proposition is just the solution to the problem they are solving. That is incorrect: your value proposition is the delta between the current solution or workaround to the problem people are currently using and your solution. You measure your value proposition in terms of how much better your solution is compared to the solutions that exist today.

Let’s say you are solving a problem for buying movie tickets. Several solutions already exist; there are lots of web sites, apps, etc. Maybe your solution involves buying the tickets via SMS. Regardless, you have to think about what the alternatives to your solution are and compare them against that. One is simply buying the ticket at the box office. Here your alternative has value, but not tremendous value. Alternatively, let’s say you are developing a life saving cancer drug. The alternative without your solution could be death. In this case your solution would be incredibly valuable.

The Assumptions That Fuel Your Value Proposition

Underpinning your value proposition are your core assumptions. These are the things that would compel someone to buy your product or service. The job of the MVP is to test those underlying assumptions. The only way to successfully test those assumptions is by making a prediction of the result and comparing the behaviors that you measured up against your predictions. Your predictions should be based in fact, facts that would determine if you have a viable business or not. If you don’t make a prediction, then you will not have a way to determine success or failure of the MVP test.

Let’s say you are building a landing page, Buffer style. Your MVP will be to measure how many people give you their email address after your landing page described your product. You will have to drive traffic to your landing page, most likely by taking out some Facebook or Google AdWords ads. You want to measure the conversion rate of people who clicked on the ad (since you pay for click) to providing their email addresses. For example, if 100 people clicked on the ad and came to your page, but only 4 provided their email address, your conversion rate is 4%. (Not bad actually in e-commerce.)

Should 4% be your target? No. You need to determine your prediction based on facts and your business model. Let’s say you estimate spending $100 on Google AdWords to drive traffic to your MVP. If you have a conversion rate of 4%, it will then cost you $25 to acquire each customer. $25 is your CAC or customer acquisition cost. You need to estimate what your Customer Lifetime Value (CLV), or the amount of profit you expect to get out of each customer over the course of their relationship with you, is. At this stage it will be fairly inaccurate, but you need to ground your assumption in reality. (Future MVPs can test pricing.) Let’s say you make the CLV to be $21, based on a lot of factors in your business model. (I talk more about your CLV and CVC here.)

With a a CLV of $21 and a CAC of $25, you will lose $4 on each new customer you acquire. Or CLV ($21) – CAC ($25) = -$4.

For your MVP test, you will need a higher conversion rate/lower CAC rate in order to make a profit. For the first MVP test make a prediction that the conversion rate will be 5%, bringing your CAC down to $20. Or CLV ($21) – CAC ($20) = $1.

Interpreting The Results

Now with your assumptions based in some business reality, it is time to run the test. Typically the results are one of the three following numbers (remember you are aiming for 5% conversion):

• 0.021%
• 4.28%
• 17%

Let’s take 0.021%. This is an absolute failure, you can safely assume that your assumption is invalidated. Safest thing to do is declare the assumption invalid and go back to your value proposition and rethink it. If you have other assumptions associated with your value proposition, you can do some more MVP tests to determine if the entire value proposition is invalid or not. Chances are you will have to iterate your idea and value proposition some more.

What to do if you are at 4.28%? Technically it is invalid since you need 5% conversion rate in order to make any money. Should you just give up and go home? No. You should try some new UX and new design or different language and run the test again. Don’t run the test without changing anything! If your future tests with minor changes are at or over 5%, then you can declare your assumptions valid and move on to test the next one.

Let’s look at 17%. Woo-hoo, your assumptions are more than valid, you blew away your predictions. Verify that your test was fair and then declare your assumption valid and move on to test the next assumption.

Thats all there is to it! Only by clearly defining what success is and basing those numbers in a business reality is an MVP useful. Anything else is just a beta.

Your competitors are growing 3,000% year on year. Your classmates from university are serial entrepreneurs on their 5th startup. A pop singer is running a venture capital fund in her spare time.

Everyday is full of headlines from the hype cycle. Why is it hype? Because attention is so scarce that the lowest common denominator is not the truth, but anything to get you to click. That 3,000% growth rate is growing from 1 user to 30. The serial entrepreneurs have 4 failed projects that they call startups. The pop singer hired her brother to run the venture capital fund and will lose all the money.

Why is this important? Because the hype cycle makes you feel the need to catch up with your own hype, throwing out useless vanity metrics to grab attention. Which simply perpetuates the cycle.

Does that mean you should stay in a cave, ignoring the outside world, focused only on improving your product? Of course not. You need to engage with the outside world and the hype cycle. If a story is really important for you to understand, dig deeper to ensure that all numbers are supported by reality and all quotes are taken in context. If you want to find out what is really going on behind the scenes, build a network of trusted contacts.

How about your public announcements? Yes, you need to make them interesting to get attention, so have a point of view and be willing to share your successes. But don’t make up facts and stories just to convince others, and yourself, that you are successful.

During the good times, people who focus too much on the hype cycle do well. But, during the bad times, they forget to adapt precisely because they have been fooled by their own hype. Don’t fool others. Don’t fool yourself. Focus on reality, not the hype cycle, and you can make progress through good times and bad.