Although they traditionally eschew marketing research, startup entrepreneurs may be figuring out that new research approaches are surprisingly valuable to their bottom line. Lisa Bertelsen reports from the front lines of the startup world.

Self-proclaimed as “the #1 startup-investor pitch event in New York and Boston,” Ultra Light Startups (ULS) is a matchmaker, bringing tech entrepreneurs and venture capitalists together into the corporate equivalent of speed dating. Their target: 3- to 5-year-old technology companies which are scalable, profitable and entirely self-funded. In other words, no VC or angel money has ever lined their pockets – but these entrepreneurs are trying to change that.

At the meet-ups there are corporate sponsors – heavyweights like Microsoft and Amazon. There are also a handful of venture capitalists, who sit on a panel. The speed dating revolves around the “pitch.” Company founders or principals apply in advance, and the eight most compelling business ideas are chosen to compete for attention and money. The pitch is two minutes, followed by three minutes of Q&A and three minutes of advice from the VCs. Like a date, the pitch has to hit all of the key notes—the concept, the revenue model, the management team, the target customer and the marketplace. The ULS website offers participants a prescription for “winning:” make the pitch understandable, have a compelling idea and (ironically), have your friends show up to load the ballot box. Also intriguing are tips on the website – how to name a startup, for example. Other links provide a how-to guide for drafting positioning statements.[1] If you win, you get an automatic bid to pitch a larger group of investors.

Megan Burton is the Founder and CEO of CoinX, a digital Bitcoin currency exchange. She was the winner at the July Ultra Light event. Like other entrepreneurs, Megan is fixated on getting funding to feed her startup. In the heady 1990s, entrepreneurs burned through money like it was kindling (e.g., Pets.com). Learning lessons from the past (and the ability to build technology faster and cheaper) has made it easier to stretch the dollar. But every startup must still keep its eye on capital outflow. One of the fastest ways to burn through money is to hire more people – so these companies must make sure that their hires count. In the startup community, the prevailing wisdom has been to focus on two or three key roles: 1) people who have a proven track record of bringing successful products to market, 2) people who are going to write code and 3) people who are going to hunt down customers. Conspicuously absent are researchers – formally trained or otherwise.

A lot of start-ups spend insufficient time answering the million dollar question, “What is it that consumers want?” Many envision research coming after the product is developed. The reason, again, is money: How much capital is expended every month (what investors call “burn rate.”) The burn needs to be contained in the early stages of product development, so it is understandable that funding often takes precedence.

Reid Hoffman is the co-founder of LinkedIn, where he recently published an article recounting how he pitched LinkedIn to the venture capital firm Greylock back in 2004.[2] As Hoffman explains in his article, “People frequently think the most fundamental strategy of a startup is its product strategy. In fact, the most fundamental strategy is the financing strategy. If your company runs out of money, your company will die no matter how good your product strategy is. Frequently, the product/service strategy is harder to develop, but the financing strategy should be there first.” Hoffman is now a Partner at Greylock, which funded Facebook, Zynga, Groupon and Airbnb. He is listed as one of Time magazine’s Most Influential Minds in Tech – undeniably someone who knows the path to entrepreneurial success. But is it really impossible to prioritize both? Startup financing and product strategies that are informed by consumer insights?

There was a Time When Research Took a Back Seat to Technology
Maria Giudice is in New York to attend the National Design Awards Gala. She looks like she could easily fit in – a bright violet streak through her hair, wearing clothes that look effortlessly put together, but might have sprung from the boutique of some Brooklyn designer. Giudice used to be Founder and CEO of Hot Studio, an experienced design company which was one of the largest design talent acquisitions ever made by Facebook. Now, she is their Director of Product Design. Giudice knows a lot about user research and startups – counting at least a dozen as her former clients. But for years, Giudice has been the “B List” to her engineering counterparts.

“Ten or twenty years ago, people became so enamored with what they were building that they would create a cool technology and figure out the customer later,” says Giudice. But now, technology is commoditized and it is ubiquitous. The differentiator has become the user experience.” And to design a user experience, you obviously need to understand whom you’re building for – which is where market research comes in. Unfortunately, that usually doesn’t happen.

The problem of understanding what consumers want is a familiar story. In 2006, Paul Graham wrote an article titled, “The 18 Mistakes That Kill Startups.” Interestingly, Graham comes from the funding side of the equation. A programmer and venture capitalist, Graham co-founded Y Combinator, a seed capital firm. “The reason we tell founders not to worry about the business model initially is that making something that people want is so much harder,” he wrote. “I don’t know why it’s so hard to make something people want. It seems like it should be straightforward. But you can tell it must be hard by how few startups do it. The companies that win are the ones that put users first…and yet some startup founders still think it’s irresponsible not to focus on the business model from the beginning.”[3]

The meetup at Ultra Light Startups continues. Listening to some of the entrepreneurs, the focus seems to be on the financing strategy – or their engineering team. One proudly claims that he’s spending ¾ of his funding on technology, with the remainder going to business development. Market or design research is nowhere to be seen – and it shows. The pitches continue and the critiques become more withering. At one point during the evening, another investor shakes his head, “Everyone’s got this slide. What is differentiating you from 10 other companies?” The exchanges between some of the entrepreneurs and investors become awkward. From time to time, the audience chuckles. But one wonders whether these budding entrepreneurs would have made the very same missteps.

According to some people in the business, the lack of consumer and market insight is hardly surprising. Bethany Smith is a product development strategist who has been working in the tech industry for the past 20 years. Using pictures to create high-fidelity prototypes, she has helped develop over 50 technology-related products and services – half of which were for startups. Smith is a success story – if only partially. In 2008, her work helped a financial services company raise $20M, and in 2012, she helped another client get acquired. “I use design and research as strategic tools to help clients put a stake in the ground. But it’s really hard to convince entrepreneurs to do the research before bringing their product to market. Forcing that thinking up front is very uncomfortable,” she explains. “It hurts to be told something isn’t going to work – that you don’t know your audience. I believe that the sooner you do that, the faster you can fix the product and not waste money. But a lot of entrepreneurs don’t experience it that way. Many would much rather wait and pay later. My conclusion – it is very difficult to sell research to startups.”

Giudice tells a similar story. “Startups used to think they didn’t need designers in the mix, so they’d load the decks with engineers. Engineers are there to build—they love making something work. Designers focus on having empathy with users. If you don’t include designers in the mix, then you have to rely on the ‘vision person,’ who is really focused on monetizing. Market researchers—you see them even less than designers. I’ve seen so many pitches where startups don’t even consider research for insight, unless it is something like market sizing,” says Giudice. “To startups, working with researchers can feel like a heavy blow to the process. In their eyes, market research doesn’t deliver anything to the product. Maybe they’ll do secondary research, but they will very rarely hire a researcher to understand the market. They don’t consider it because they think it is expensive and, in their minds, it doesn’t show up in the end product. The person leading the startup thinks that it is their job and they don’t want to pay someone to do their job.”

“An entrepreneur recently asked me what he would get from research,” adds Smith. “A report? It felt more like an accusation. ‘I need something to give to the engineers so they can keep moving. Not a report with stats and charts that we have to decipher!’”

So it seems that part of the problem is making the data usable and creating the perception of value. Product strategists like Smith and Giudice are searching for answers to basic research questions: Who is your target audience? What are their needs? How do these people make decisions? Who is your competition and how are you going to differentiate yourself in the marketplace? Finding answers to these questions seems not only logical, but necessary. But it is a tough battle. In addition to the ever-present specter of burn rate, entrepreneurs are grasping at timelines. So they take on huge amounts of risk in exchange for speed. “These days, startups have to be small and scrappy,” explains Giudice. They have to develop a hypothesis, build and test a product in literally 8 weeks. ‘I’ll guess I’ll do the research later,’ they say. They rush to market – and in that rush, they create products that are not differentiated. That’s part of the reason why you see so many startups fail. So they’re making bets. The risk, of course, is that they could be wrong.”

Giudice knows that risk all too well. When she was running her own company, startups were a significant part of their client base. They saw the gamut – from entrepreneurs who had an idea with no funding plan, to those who won seed funding. But in most instances, neither had the money to support design or market research. “So we picked the ones that we believed in,” Giudice recalls, “and we took equity in them. That way, we were able to do the design and research that we felt was necessary. Essentially, we helped companies build scenarios to understand their audience and marketplace. Then, we asked ourselves, ‘What are the outstanding questions we don’t know? OK—let’s go out and find answers to that.’ The difference is, instead of conducting research for eight weeks and then saying, ‘Here comes your research report,’ (thudding her hand on the table for emphasis), it becomes eight weeks of constant insight generation. We’re doing surveys, ethnography, secondary research – and all this is informing the product development lifecycle in real-time.”

Meanwhile, some startups are doing their research organically – in less formulaic ways. Matthew Witheiler is a Principal at Flybridge Capital Partners, a VC firm that focuses on seed and early-stage technology investing. Witheiler was a panelist at the Ultra Light Startups event. “One of the most successful things startups do is share indiscriminately,” he explains. “They talk to as many people as possible about the problem. Unsuccessful entrepreneurs fall into the trap of not sharing. ‘This is my secret idea,’ they seem to say. But the people who are able to execute the best are those who get as much feedback from people as possible – potential customers, potential partners. They then use that to find out if what they’re building makes sense from a business perspective. It is a lot more beneficial to get that feedback early on, rather than talk to a few people or no people at all because you’re afraid it is a bad idea.”

Are they conducting formalized research? No. Are they screening participants? Not necessarily. Are they going to multiple markets? Probably not. But what these entrepreneurs are doing is better than nothing – and from their vantage point, it often makes more sense than working with a market researcher.

“People are worried about burning through cash,” says Smith. “They get a chunk of change in exchange for a commitment – and the deadlines get crazier and crazier. The last time I convinced an entrepreneur to hire a consultant, that consultant told us it would take 12 weeks. In the startup world, that is way too long and it costs way too much money. But we did it anyway,” she says, with a grimace. “We did workshops, we developed personas, we did research – everyone liked it initially, and then they grew weary. Finally, we ended up bypassing them entirely.”

This is an old tune that market researchers have been hearing for as long as I can remember – clients want information faster and cheaper. Software developers build incrementally and very quickly, so they can be fast, flexible and responsive to change. But that can be hard for researchers, who are guided by protocols and sampling plans. “Consultants usually aren’t taught that way,” admits Smith. “I certainly wasn’t. You have to get everything picture-perfect in a PowerPoint deck so you can ‘Wow!’ them. But a lot of times, that just doesn’t work. If you insist on that, a lot of times, you’ll just never get hired.”

Research Finds its way Into the Startup Community
Although the pace is unlikely to slow down for startups, market research is adapting to the high-tech industry. Donovan Bass works at Jawbone, a company that specializes in wearable technology. Alex Moffit is an intern who worked with him last summer. They are examples of how the field is evolving – the new generation of information workers who must conduct market research to do their jobs, regardless of what those job functions might be. While Bass is a trained market researcher who heads up the quantitative team, Moffit is a UX designer and project manager who also conducts qualitative and quantitative research. In established companies, the research function is clearly defined and, often, it is specialized. But in startups, research is just one piece of a multidisciplinary skill set. “I’m 29,” Bass says. “People my age and younger – we are used to doing the research and needing the data to support our decisions. We have grown up using Google, and are used to getting more data points. Everyone at my company needs to support their idea with research – prove to the product manager, VP or the CEO that their idea is worth investing in. We have a saying at work,” he says pointedly. “’In God we trust. Everyone else must bring data.’ Today you need to understand consumers, market trends and your competitors. The better you can predict those things, the more reliable you sound to investors. So we have to get smarter about how we design products and where we place those bets. For startups, research is really part of that maturation process.”

The investor community is also using data to better their odds. Knowing that design and user researcher can be the difference between a successful and a failed startup, VC giant Kleiner Perkins has developed a fellowship program to introduce the best “design, engineering and product people” to their portfolio companies. Says one fellow, Jocelyn Lui, “It’s clear to me that Kleiner is making a conscious effort to bring design and research into the forefront.”

“I’d say there’s definitely an emphasis on both the investor side and the entrepreneur side in getting customer feedback quickly,” says Amy Chang. A former Google executive, Chang is an advisor to seven startups in Silicon Valley and has recently founded her own startup. “The challenge for the startup community is that we need to think 1-2 years out ahead of what people want, because it takes time to build a product, and during that time the market will undoubtedly shift. So we need to make big bets. But if the problem that we’re solving for isn’t something that people care about, we have a much bigger problem.”

Despite these hurdles – limited capital, accelerated timelines, entrepreneurs who don’t understand the value of research (or have a distaste for using the word) – research is staking a claim in startup territory. Before flying back to San Francisco, Giudice is being interviewed by Fortune magazine about the release of her latest book, “Rise of the DEO: Leadership by Design.” The timing is appropriate, as it happens to coincide with Fast Company’s 10th annual Innovation by Design issue, which looks at the growing influence of design in business strategy. Leafing through the pages, I read about Procter & Gamble, which took a multidisciplinary team of 10 employees and told them they had 10 weeks to resuscitate the Herbal Essences brand. What did they do? The product team hit the streets and talked to consumers – and then they built ideas and prototypes, tore some of it apart and started all over again. Procter & Gamble couldn’t be further from anyone’s idea of a startup. But it appears, from stories like these, that they are taking some of the same nimble and fast approaches to problem solving.

Maybe it’s this new way of thinking that will get market researchers a front-row seat at the startup table – doing what P&G and countless others have done. Today, startups fund new product ideas through crowdsourcing. In parallel, some of our colleagues are using social media to harness consumer activism and insights. I know of one researcher who paid passengers’ cab fares in exchange for 10-minute interviews. He spent the day with the driver, picked up fares and moderated with a video camera from the front seat. Another researcher used iPads and a central facility to field a large quant survey and moderate 15 triads – all within eight hours. Then there was the company that polled its customers to determine whether they should shift production overseas. How? They simply invited shoppers to vote with their wallets. They could pay extra for products that were made domestically, or save money by purchasing the offshore equivalent.

Those who have successfully made inroads with startups have embraced change – a new way of thinking and working in real-time, continuing to build upon guerrilla research tactics, educating entrepreneurs about the value of research and convincing them that the time they invest will be well spent. “The real goal of a researcher in a startup company is to move further and further upstream,” explains Bass, “not just test after the product is in the marketplace, but at the concept stage. And to do that, you need to teach people the value of the research and how they can become part of the research process.”

I think back to the Ultra Light meet up, which now reads like a cautionary tale. It is the end of the evening. Nearly all of the founders have made their two-minute pitches. Each has talked about their audiences, their products and how they are different. But the narratives seem to blend together like one long, run-on sentence. At times, they are nearly incomprehensible. “I didn’t get it,” says one VC, flatly. “I understand the space pretty well and I have invested in companies, but I just didn’t get it.” He looks to the panelist to his left. “I didn’t get it either,” the other shrugs. Slightly dejected, the young man drops his head. “Thank you for your feedback.”

Footnotes:

[1]ultralightstartups.com/how-to/name-a-startup

[2]  What I Wish I Knew Before Pitching LinkedIn to VCs, October 15, 2013. www.linkedin.com/today/post/article/20131015161834-1213-what-i-wish-i-knew-before-pitching-linkedin-to-vcs

[3] Paul Graham, “The 18 Mistakes That Kill Startups” (October 2006). www.paulgraham.com/startupmistakes.html