Case Studies
Fail fast – e-commerce browser extension startup
“How can you fail fast?” I asked Lisa.
Lisa, a graduate student at the Harvard Kennedy School, had booked a meeting with me to discuss next steps regarding a startup she’s pursuing. The concept is: an internet browser extension that tells retail grocery customers the amount of emissions they’re offsetting by choosing lower-emissions products such as tofu instead of beef.
Lisa appeared nonplussed. After all, I was here to help her succeed, not help her fail.
“You have a good business case for your the browser extension,” I said, “or, it SEEMS good. But what relatively low-effort things can you do to make sure that if this is going to fail, it fails fast?”
I told her the story of Tony Hsieh, the founder of online shoe-store Zappos. Before Hsieh even purchased a single shoe, he built the website and tried to sell shoes. In other words, he sold a product before he owned it. He wanted to assess demand before committing his limited cash to a stock of shoes.
Similarly, I suggested to Lisa, we should come up with some actionable steps to determine how her startup could fail fast. There was no point in building an entire browser extension if there wouldn’t be demand for it.
So Lisa and I identified some next steps, which Lisa will put into action.
Create financial projections — dating app startup
Rita, a sophomore at Stanford studying economics, engaged my services me to discuss the business side of a dating app she wanted to build. Unlike other dating apps, this app was designed to get users off the dating app by enabling them to meet quickly with others in their vicinity.
For example, if a girl walked into a bar, she could turn on the app, look at her phone, and see all the other guys in the bar who had the app activated . This would signal that they were willing to date. Such knowledge would enable a girl to confidently approach a guy. The app, if successful, would benefit from strong network effects.
Rita had a bare-bones business plan. “Do you have any financial projections?” I asked.
“No,” she replied, “none of the people I’ve talked to here at Stanford have recommended that yet. Honestly, I don’t even know where I’d start. None of my economics classes have taught me that.”
“Not only will potential investors will likely be interested in financial projections,” I said, “but thinking about how you can monetize the product will help you build a business, rather than only an app.
“They will mostly be a guess at this point,” I continued, “but it’s important to think about it and see how viable the idea really is.”
I talked Rita through the basics of how to create financial projections, as she took notes. Her financial projections will likely be the subject of our next meeting.
Size your market — cilantro-free salsa startup
“Did you know that 15% of people hate cilantro?” Ellie asked me. “It’s genetic.”
As someone who is also not a cilantro fan, I was intrigued by Ellie’s startup idea: create a cilantro-free brand of salsa.
But, as someone who was also familiar with the Fail Fast principle from above, I realized it was important to determine the total potential market size.
Could such a product even be viable?
I suspected that perhaps Ellie wasn’t the first person to have the idea for cilantro-free salsa. But I had also never seen, or heard of, the product.
I suspected that maybe the market couldn’t support the idea. So I conducted a quick-and-dirty market sizing analysis.
As any entrepreneur knows:
- Profit = Revenue – Cost
- Revenue = Price x Volume
- Revenue x Margin = Profit
Volume: Assuming that Ellie’s 15% number was correct, and that her main market would be people in the US, I estimated that the total theoretical market was 15% of 330 million, or 50 million people in the US.
Assuming that about 5% of those were children who did not eat any type of salsa, that left 47.5 million people who ate salsa but disliked cilantro. So we had a total maximum US market of about 47.5 million people.
Assuming that 50% of those people actually liked salsa of any kind (and that they’d choose cilantro-free salsa, as they don’t like cilantro), that left us with about 22 million salsa-eaters in the US. Assume that each of those people buys one jar per two months. That’s 6 jars per year per person. So approximately 132 million jars of salsa would be sold per year.
Alternatively, IBIS World estimates that the total market for salsa in the US under $1 billion. If 15% of that were to be cilantro-free, the total market would be $150 million. That’s not very big.
Price: Salsa in Cambridge, Massachusetts, where Ellie currently lives, sells for around $3.50 to 6.50 per jar. Because we’re trying to establish viability, if we use the top price, and the idea still is not viable, we know we’ve “failed fast.”
Assuming the entire $150 million was individual jars sold at $6.50, we calculate that the entire theoretic market for cilantro-free salsa in the US is about 23 million units. This is about 1/5th as small as our 132 million jars per salsa per year from above.
Assume that the average gross margin on salsa is close to the packaged food industry average of 30%. Total gross margin in the entire cilantro-free market would be $45 million.
But it is extremely unlikely (to the point of impossible) that a single producer could capture that entire share.
If Ellie could capture 5% of the market, (assuming the market even exists), she’d be ahead of most entrants. That means her potential reachable market has a gross profit potential of $2.25 million per year.
That is simply far too small to justify the investment, and risk, that would be required to move the concept of cilantro-free salsa from mind to dinner plate.
So it looks like she’ll stick to cilantro-free salsa for personal consumption.
Strategic Startup Advisors 