Startup Journey Log #4: Deconstructing A Bad Startup Idea

Last week, I told you about the new startup idea I had. It was a robot investor app. It would automatically invest in stocks for you based on some trading ideas I discovered.

On the surface it sounds like a great big idea. Something that venture capitalists typically love to invest in. After all, there are two big startups right now that do something like. And both have raised over hundred million dollars from VCs. But when I talked to some investors I knew, they were not impressed.

Before I tell you why, I want to point out something important that might not be obvious. I have raised $10M before from VCs and then sold that business makes me a known quantity. That means that investors will take phone calls from me just to hear what I am up to.

I’m not telling you this to brag. Just because they will take my calls doesn’t mean they will end up giving me money. I know many serial founders that have had trouble raising money on their second or third startups. I just want you to understand something that few first-time entrepreneurs understand.

If you read news headlines about how someone just raised million on just an idea. This is how they did it. Those founders are known quantities. Their company might have just started. But their investor had known the entrepreneur for a while. The entrepreneur knew that the investor had interest before he even started the business.

I can’t take advantage of my position and call them every week with a new idea. So when I called my investors, it wasn’t just any idea that I wanted to pitch them. This was something that I thought was special. I wanted to see if they thought so too.

Their reaction against the idea boiled down to the fact that I had no experience in this field. They had no way to judge whether I had stumbled upon something big that people would want. In the cloud space they know that my opinion makes a difference. In the finance space, there’s no way to tell.

TAKE AWAY #1

Your background and reputation mean more to investors than you might realize. It makes a big difference. Why you started the company matters. Whether you are uniquely suited to building it can make or break whether a startup is investable.

TAKE AWAY #2

I didn’t start programming or building my idea yet. Before I even spent a single line of code prototyping, I wanted to make sure that there were legs behind it.

And so far my idea had no legs.

So I called up one of my personal advisors. He pointed out something so obvious that I couldn’t believe I had missed it myself. He said my instincts were good to check with investors first. But I hadn’t yet verified that people actually wanted this. That people had their hair-on-fire.

Even veteran entrepreneurs forget to do this step. You can get so caught up in your own excitement that you forget to verify that there is an audience for it. So that was the next thing that I had to do, verify this was a hair-on-fire problem for a lot of people.

I spent some time thinking about how to go about doing this. It’s like building a minimal viable product. And in this case, the MVP was not a mobile application. It was with a simple email newsletter.

I paired down my grandiose ideas of raising millions of dollars right off the bat. I decided to figure out if I could build a small audience on a much smaller value proposition. One that would take much less time investment for me to validate.

And if I couldn’t validate it, what then? How could I expect people to invest money with me if I couldn’t even get them to sign up for a newsletter?

I know this sounds ridiculous when you are reading it right now. How stupid Lucas is that he wanted to jump the gun. Remember, I have been making these same mistakes for 10 years now. I should know better by now. But these are the same kind of mistakes that first time entrepreneurs make all the time.

That’s why I wrote a book about it. They think that the key to the next step in their success is just a hire a programmer to build their application. Or to find investors so that they can build a team. First time entrepreneurs make the mistakes that I’m making right now.

So I thought about what would it take to start a simple email newsletter. One that shares the same ideas behind my investment thesis. This made me ask the most important question that a founder can ever ask.

Who exactly is my target audience and what is their hair-on-fire problem?

At first I thought the audience for this start up idea where millennials. People generally between the ages of 20 to 40 years old. People who didn’t trust Wall Street and were just coming into their own money. Whose careers are finally starting to take off. For the first time in their lives they were not living paycheck to paycheck anymore. These people needed to understand how to invest their money.

My reasoning was that Buy-and-Hold investing it’s dynamic enough. It does not hold their interest, and there weren’t any good alternatives to it. Day trading took up too much time and often lost too much money. Everything else was a scam.

So I took out some Facebook and Twitter ads. I threw together a short explainer video. I created a mailing list in MailChimp, and put a few dozen dollars to work.

The results were pitiful.

That shouldn’t be a surprise to my most keen readers. But let me explain to you what went wrong if you don’t already understand.

TAKE AWAY #3

Investing money wasn’t a hair-on-fire problem for millennials. Most of my audience didn’t know the first thing about investing. They didn’t have a brokerage account. They didn’t even know how much money they should invest if they could.

It’s a simple as that. I made a mistake. I came up with what I thought was a great idea. One that every millennial out there could take advantage of. But in reality, only a tiny subset of millennials would be interested in it. And even for them, it is questionable whether their hair was on fire about it.

But I made this mistake before I invested a lot of time or money building it. Before I started thinking about how the product would work or hiring programmers. So even though I am still making many rookie mistakes, at least I am not making that one.

At this point in my journey, I had 3 options. I could give up and try another idea. I could re-target my audience, advertising just the wealthiest millennials (which could be expensive). Or I could figure out a related hair-on-fire problem for the broader millennial audience.

Next week I will tell you which of these three options I picked and how I moved forward. In the meantime feel free to leave your guess in the comments. (Hint: it’s a trick question)