Why I’m writing this
“I have a cool new idea for an app! How do I get started building it?” I get some form of this question about once a month. It recently came up again over lunch with a friend who owns a small, successful business. “I have an app that we’ve been using at my business for a couple years. I think it could really be valuable to other businesses like mine, so I’ve been talking to a couple of my friends, and I think we’re going to go in together and build the app out so we can sell it as a service to other businesses.”
As we talked, I heard some really encouraging things and some red flags.
- A few other business owners have told him they think it’s a good idea and they would be interested in learning more.
- He already has a prototype that’s a functioning web app, so he wouldn’t be starting from scratch.
- The app saves him a lot of money every month by almost eliminating the time needed for one aspect of his business’s customer service; it also brings in a little revenue of its own.
- He has direct access to a good-sized target market. His particular business is very well respected in his niche, and those who respect him could benefit from this product and would take his call if he wanted to ask them to try it.
- He wants to bring a couple of technical people in as co-founders to start a company and build the app.
- His background is in sales and marketing, but he has little technical expertise (someone else built the current app with his direction and input).
- He’s already pretty busy running his current business day to day. He also owns another totally different business on the side.
After lunch, I told him I would think about his idea and email him with my thoughts. I realized I had a lot more to say about his idea and I put together a long email, hoping to help him avoid some possible pitfalls and set him up with an actionable plan in case he moves forward with his idea.
Then I realized this could really apply more generally to the question in the title of this piece. So I’m posting it here and I’ll refer future requests here as a starting point.
Here’s the email, slightly edited. I swapped out the specific function of the app for a generic term “uses” or “instances” so I don’t give too much information about my friend’s business or his app. I also edited for brevity in some spots.
DISCLAIMER: I’m not a lawyer or an expert on building apps or starting businesses, or co-founding, or equity, or anything like that. If you need an expert or a lawyer, you should go find one 🙂
I looked at the app on your site, and it’s pretty cool! I’m happy to talk about this over lunch some time, but here are my general thoughts. Everything I’m saying here is from the perspective of how to build and grow a business to give yourself a good shot at success. I’m not really looking at it from the perspective of someone who just wants a challenge, or something to do with friends, or is looking for a new project.
Overall bottom line
- Get a rough idea of who you’re going to sell to and what you’re going to charge.
- Go find potential customers and see if they’re really interested. Get a commitment from them that they would pay for your product at a certain price-point. You may also want to put up a “landing page” where other potential customers can sign up for a mailing list and/or pre-order.
- If there’s real interest then start building it either by outsourcing or with a single technical co-founder with experience in this area.
Bottom line: I recommend charging monthly using a tiered model based on number of times they’ll use the app. I don’t know where the prices should land (I’m not sure how much value the app adds – more on how to figure that out below), but something like: “Up to 50 uses a month for $149/month; Up to 100 uses a month for $249; Up to 200 uses a month for $399; Up to 1,000 uses a month for $999; Call for Enterprise pricing”.
You should start thinking about this now. You may change it later, but it’s important to know how this app will actually make you money. Are you just charging customers a monthly fee to use it? If so, does every customer pay the same amount? How do you differentiate between “big” and “small” customers? Or maybe you just take a cut of premium upgrade fees and give the app to customers for free.
How to determine price: The easiest way to do this is just to figure out the value-add for a customer and price accordingly. You mentioned that you used to spend a lot of time every day for this aspect of your customer service. You could do a rough guess on how much time you save (man hours) per month with the app, then figure out what that translates into on a per-use basis for you.
Example: “We complete about 100 instances a month. My employees probably spent about 40 hours a month performing this function manually, and my cost of payroll is about $12 an hour. I don’t save all of that time because the app doesn’t replace all of the manual work, so let’s call it $400 a month in savings.” But this app also increases top line revenue, so you could add, “And we make about $100 a month from upgrades. So we’ll save total value is about $500 per month at my store.” But you have to add value – not break even – for your customers, so let’s cut the cost to the customer in half: $250/month for 100 uses.
This is just a ballpark number that you would use to build other tiers around so you have a pricing plan to show to potential customers. The reason this matters is that the next thing you need to do is…
Marketing and Customer Development
Bottom line: You should find customers before you invest the time and resources in building the product. You want to go out and find a few customers who have the pain point you’re addressing, and who are willing to pay for your solution. If possible, you want some kind of commitment that they’ll be a customer when you launch. I’d say you want at least five customers who say, “Yes, I have this need and I would be willing to pay that amount for a product that addresses this need.”
If you’re serious about building this app, you should start with Marketing and Customer Development. You should start by going out and finding customers who will pay for your product. From what you told me at lunch, this could be easy – but you won’t really know if it’s a viable (meaning – profit-generating with customers ready to buy) business idea until you have commitments from customers to give you money to use the product.
So you’ll call up some of your contacts in your own niche and ask them if you can get their feedback on a product idea you’ve been thinking of bringing to market. Show them a demo or some mockups to get their input and gauge their interest. Then ask them if they’re a customer at their estimated price-point, and ask if you can keep in touch with them via email as you move forward with the project. You want to leave the meeting with two things: 1. Some kind of commitment that they’re a customer around the price you anticipate charging them (this could range from a verbal commitment to a pre-order); 2. Some way to keep in touch with them (email, phone, etc.).
If you’re able to get five commitments or so, you’ve got a good thing going and you should think about developing the app. But first, you might want to set up a “landing page” – a one-page website with a little brochure about what you’re building, and where potential customers can sign up for a mailing list to keep up with your progress. You could market this page and continue soliciting signups as you build the app so that you have a nice mailing list to reach out to when you are ready to launch (or do a Beta or whatever). Marketing will be an ongoing activity as you develop the app, and it’s best to start early.
Bottom line: In your case, I would recommend either 0 or 1 co-founders. Since your available time to work on this is limited, it seems like you’d be best off getting one technical co-founder to manage app development (including outsourcing if you want to save time by spending more money).
Now I’m finally getting to co-founders! You’ve gotten to this step because you’ve figured out a potential revenue model for your product, and you’ve found a number of potential customers who said they would buy your product at some price. So it’s time to figure out how to bring this to market given your constraints. In your case, it seems that your constraints are primarily your available time to invest in building another business, and technical expertise. (Your strengths are that you are very comfortable running a business, and you’re an experienced Sales and Marketing guy.)
I think you should have a really, really strong business reason for bringing on co-founders. For example, if I decided to start a business tomorrow, I would be capable of owning the technical aspects of the business (technology, writing code, testing, etc.), and a lot of the business operations (cash flow, whether to hire, etc.), but I am pretty green when it comes to Marketing. If I were bringing in a co-founder, I think my blindspot is Sales and Marketing, so I would try to find someone who is very strong there. But I wouldn’t go after multiple people with that skillset – just one.
Be careful bringing on co-founders – they’re very expensive and difficult to get rid of if they don’t work out. If you give someone 25% and they work a few months and then get bored and moved to Indiana, they’re still a co-founder with 25% and that would be really unfortunate. [Digression, which I didn’t include in the email itself: You can do some smart things around vesting periods that mitigate this, but their ownership stake is only a small part as they’ll also be influencing the actual operations of the business, possibly slowing it down or derailing it, or just generally getting in the way.]
It sounds like you had a good idea, and talked to some friends, and they thought it was a good idea, so you’re all thinking of co-founding together. But you already have the idea and you had a prototype built. And, if you’ve gone through this progression the way I wrote it, you’ve already gone out yourself and found people willing to pay for your product. What you need now is technical expertise. I think it’s reasonable to find a technical co-founder, but I don’t think it’s necessary (or even useful) to have multiple technical co-founders. The difficulty in managing the business increases exponentially with more co-founders–the more you have, the harder it is to make decisions, and the more likely someone will just free-ride on your work.
Things I would look for in a technical co-founder for your idea (these aren’t all mandatory)
- Has some level of business experience – after all, you’re co-founding a business. You want your partner(s) to know something about what that means.
- Experience building web applications.
- Experience with billing and payment integration into applications (you’ll be taking money and he’ll be responsible for making the app do that).
- Experience with multi-tenant web applications (“multi-tenant” just means that the app can be used independently by multiple businesses without them seeing what the other businesses are doing).
- Experience managing technical resources. Odds are you’ll need to outsource some of the work (although a really strong technical founder could at least build the prototype and Minimum Viable Product).
You could also do this without a technical co-founder, but it would be tough. What you would need to do is find a web app developer who could build the app as a contractor or something like that. This could be problematic for a few reasons:
- It might be tough for you to manage a contractor given that you aren’t experienced with app development. It’s not impossible that this could work (after all, you have a prototype), but it could be tough.
- Proficient web app developers are in very high demand right now, and could be both difficult to find and expensive to hire.
- If you want to move quickly at all, it would probably be better if your technical lead was really invested in making this product work and bringing it to market. Contractors charge by the hour and would be pretty happy to just plod along at a reasonable rate. A co-founder with equity would want to start generating revenue quickly in order to get paid.
I’m not trying to discourage you here – I know it may seem that way. I’m trying to help you maximize your chances of succeeding without running yourself into the ground. I’ve heard this methodology described over and over again, and I wish I had approached TaskBook this way.
Some resources you may find helpful
- Most of the “get customers and signups first” stuff I am talking about is based on Nathan Barry’s book, Authority.
- Startup For The Rest of Us is an excellent podcast on startups. I’ve listened to about 60 episodes and I’m moving through them as quickly as possible. You could scan the list of episode names for relevant topics (co-founders, customer development, etc.).
- Amy Hoy’s blog is a great resource for bootstrappers. In particular, How do you create a product people want to buy? might be helpful to you right now.
- Product People is a really great interview podcast where Justin Jackson asks entrepreneurs about their products and businesses. It’s a really informative, and really easy listen.