When should you invest capital into your business?
Do it when you know you’re gonna be able to sell your product for more than you’ve paid for it.
This sounds like advice that falls in the same boat as ‘Buy Low Sell High’ - infallibly correct but also completely useless.
But the lesson to learn here, much like with ‘buy low sell high’, is in value. How do you evaluate your idea? How do you determine how much your product is going to be worth?
Don’t ask friends and family.
Don’t ask anyone you know personally or anyone who cares about. Definitely don’t ask your mother unless she’s an expert in the industry you’re targeting. And even then, don’t ask only her.
Your friends and family like you (presumably) and don’t want to hurt your feelings. They will not offer concrete criticisms even though, at this stage, this is what you need.
There is no substitute for customer money.
Nothing will ever validate your idea more than money from your customers. Well. Obviously. But you don’t have a product so you can’t get any money from them… right?
It depends on what you’re building. If you’re building a hardware consumer product, it’s not unreasonable to invest some time and money in a kickstarter video to see how much interest and moolah you can generate.
If you can get your customers to pay you to build someone thing before you started building it, that’s a really good positive indicator.
There are some substitutes for customer money.
So say you don’t have a business that’s conducive to being put on kickstarter for early validation. Perhaps you’re working on something that’s in the B2B software space.
We can use some other metrics as proxies for customer money. One example is a Letter of Intent (LOI). A LOI is a non-binding agreement between two parties that agree to do business if certain conditions are met. For example, an LOI for a jewelry app, may contain things like: “If your company builds capability to render jewelry on customers faces and hands using augmented reality, we’ll purchase it for $10K”. These are non-binding agreements used to indicate demand from customers and hence make a reasonable proxy for their cash.
How many do you need? Like customers and money, the more the merrier. Try for at least 3 or 4 depending on the investment required on your end. LOIs are non binding and not all of the ones you get will convert so it’s good to have a few from a few different sources.
The problem with LOIs is that they’re sometimes built on personal relationships and are generally more useful for larger products - companies may be much more willing to put in the effort of making one for a $50K annual subscription and a $50 monthly subscription.
The other way you could test cold customers is to spend some money building and implementing a professional looking website complete with a “Pay Now” button. The idea is to make yourself look like an established, successful product that already does what you’re hoping it will do.
The “Pay” button doesn’t need to do anything. You can take it to a 404 page or show users a message saying that there’s an error. The idea of this experiment is to determine how many of the people who land on the website are compelled enough to pay. You can then see how many people you can drive to the website with a $100 investment in google ads. If maybe 2 to 4 % of visitors ‘convert’ then that’s a pretty good sign.
It may feel weird to bring users to an incomplete website. It is weird. Get over it. It’s an effective way to determine whether people are willing to pay what you’re trying to build and it will make you a better product manager. You can use a fake name if that makes you feel any better. And if you end up slightly disappointing a few customers who wanted the product, who cares? If they want it enough, they’ll come back.
What to do after you decide to build your product out?
Reach out to Byldd. Byldd uses automation to reduce the time and cost of software development by 90%. We can help you build your product in a rapid and cost-effective way and also give advice on how to prioritize your product roadmap.
Ayush is a full stack engineer and the founder and CEO of Byldd. He spent that last few years as the lead engineer in an ERA startup and has helped build and sell several businesses in the past.
Byldd is a software development team for entrepreneurs that uses automation to reduce the time and cost of software development.