Aug. 21, 2023
How to beat your main competitor
Every startup has the same competitor: Status Quo. Your customers have done things a certain way for many years. Status Quo might seem awful to you, but it's worked for them. It's entrenched. It's accepted. In many cases, it's loved.
Classically, your product needs to be 10x better to beat Status Quo. But what does that really mean? What is 10x better? And 10x better for who? In this episode, we deep dive into the two ways to win vs. Status Quo: (1) finding the weak spot, and (2) if you can't beat them, join them.
04:38 - Before Startup Mode, There's Research Mode
10:06 - How to Beat Status Quo
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So to recap, Hamed starts off by offering, you know, back in 2015, he goes to small, small, medium businesses and he offers them a way to make business payments using Bitcoin. He thinks that's gonna be a good idea because it's gonna make it much faster, much smoother. It's going to be on the blockchain, fully trackable, and, you know, foreign exchange fees will go down. All these sort of benefits that he imagines when he tries to pitch this to business, kind of crickets. I mean, after six months he has like 10 businesses using it, not really paying anything for it. So he does his first pivot and his first pivot, he starts off by just going to those 10 or 15 businesses that are using it and kind of saying, Hey, like what do you like about what I've built? He talks to some industry , industry people and , and investors as well doesn't do extensive research. And so his first shift is pretty small. He goes from Bitcoin enabled payments to normal like fiat payments, but he's still focused on payments himself. So he's competing with PayPal and because of that, he has to offer the system for the , the product for free. Year or two later, he's grown like he has 1500 users, but no one's paying. So when he goes out and tries to raise a series A, he fails, fails completely. So at this point, second pivot is where he, he does it right. We talk a lot about how before startup mode, there's research mode and you either do it explicitly or you pay for it later on. So he, he effectively had to pay the price. He went through and did 700 interviews and after that found out that what users really cared for wasn't the payments themselves sending the money, it was everything around it. And so he ended up shifting towards what he has now, which is an accounts payable, accounts receivable platform that focuses on the automations and the workflows around making payments easier. And that changed everything because all of a sudden he was able to charge, he went from $0 to $30 a month quickly, like in a matter of months. He made that change. And in incredibly 80% of his customers went from free to paid, which is an incredible conversion rate. And then things were really off to the races. I mean, that's when he first got product market fit. He raised a series A shortly thereafter. And since then he's raised a series B and he's well on track for 10 million in a r . Two observations that came to me as I was, you know, re-listening and , and kind of thinking about this episode. But before I touch on that, I want to go off on a quick like tangent. And I want to go on this tangent because I've been thinking a lot about kind of what I'm even doing in these like mini segments or whatever. And one of the things that bothers me, like I kind of have a problem with this whole concept of advice, especially like advice from VCs. And the reason is frankly, most advice is just terrible. And if I talk to founders, one thing I notice , and I remember this myself too, is like, you get so much advice. Everybody wants to tell you how you should act, what you should do, like what the right move is. If you go and talk to 10 VCs or 10 founders for that matter or whatever, you're gonna get like 10 different pieces of advice. And by the way, many of them will say it with complete confidence. Like
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It's gonna be like, this is clearly what you need to do, just go do it. And you could hear that one thing and then you could hear the exact opposite piece of advice given from somebody else, you know, a couple days later with the exact same amount of confidence. So what does that lead me with? Well, I think, and , and by the way, like why is this advice usually so bad? I think because every startup is so unique, everything is so case by case. There's just so many exceptions. Like if you're a, I dunno , point guard in the NBA and you give advice to another point guard in the nba , like that's probably solid. But if you're, you know, you founded a company 10 years ago or maybe you didn't, like many VCs, didn't even found companies and, and you go and you tell a founder what to do about something really specific that they're dealing with without any of the context, I mean, it's probably gonna be wrong. So again, so then that brings me back to this, like what is the point of this? And so what I came to is these are just observations. That's really all I'm doing here. I'm going back through an episode, I'm reading it, I'm thinking about it and I'm just making observations. Charlie Munger has this quote that's like, I observe what works, what doesn't and why really simple. And that's all we're doing here. And so you can, you can take it or leave it, you can decide this applies to you or doesn't apply to you . You have all the context to decide what you wanna act on, what you don't wanna act on. By the way, that's why you're the founder. Like that's why you're the CEO is because nobody else can do that job for you. So you're gonna go out there, you might solicit advice, you might get it even though you don't want it, and you've gotta decide what matters to you and what doesn't. So all I'm doing here is just providing a couple of observations that that I noticed listening to, to the episode. Again, the first one touches on again, this concept that's so important before startup mode. There's research mode. Notice how Amed starts off, he starts off by noticing that Bitcoin is like out there, it's hyped up and he kind of wants to find a way to use that. And so he decides that. He kind of says this sentence that I find is real . He didn't say it this way, but I'm sure he thought it. And it's extremely dangerous. Like these words, if you said them to , to yourself, you hear a first time founder say it, they're probably gonna lead to a bad idea. And it's, wouldn't it be cool if, so in this case, like wouldn't it be cool if you could use Bitcoin to make payments? The reason that's so dangerous is because I'm sure you've heard this many times, like start with the the problem, not the solution. So what does that look like? Where when you start with those words, you're starting with the solution, you're starting with the end state and then you could go and try and fit it into a market. And that's just really dangerous because you don't understand the market well enough, you don't understand the customers well enough, you don't have context . And rarely, rarely, rarely does that approach work. So that's how he starts off. He, he then goes through the six month period where he's trying to, you know, get businesses to understand and, and, and the businesses just, they don't get it. Like they weren't interested in it. His, his direct quote is, they had no idea what the hell this thing called Bitcoin was like, that's how off he was off the mark. He was with his first approach. And so then he makes, you know, his first pivot and, and I'm going through this, the , the details, because this is so common that when you start off with a solution, you try and sell that into the market. Once you realize it doesn't work, you then say, okay, fine, I need to talk to customers, right? Like that's the broad advice. So then you go and talk to customers, but you're still starting too narrow. It's not real research. And that's what, that's the mistake he makes as well. He goes and he says, okay, I've got like 10 to 15 users, let's talk to them and let's ask them not high level questions about what their day is like, what their problems are in general. Let's ask them what they like about my solution so far. So you're starting from your solution and working backwards still, even though you've realized for six months that it doesn't work. But he does it. And so what he says is, okay, they, they do like this kind of easy payments, so they just hate Bitcoin. So let's get rid of Bitcoin, let's stick with payments infrastructure and help them make payments. And so now what happens is they're like competing with PayPal that puts them into a corner where they're forced to offer it for free. So then they go like, I think two years or so offering this stuff for free, getting users getting traction but not getting any revenue . Um, and he by the way, specifically regrets this. Let me, let me just find the quote I asked him, right? So I asked him, I said, did you like do broader research? Did you just talk to your customers? And he's like, we relied a lot on investor feedback and the initial set of customers that we had of the small business owners that we work with. However, if I were to go back and think about launching the next business idea, I would definitely do that. That being talked to a much broader set of potential customers, which by the way he does later on, you'll see. So anyways, he goes out and he tries to raise a series A, he gets shut down because you know the traction is not real. There's tons of attention. And so then he says, we had maybe another six or seven months of cash left and we would've had to shut down if we didn't do something drastic. Finally, I think he learns the lesson that before startup mode, there's research mode and he realizes that payments is not the business. Automations and workflows are the key. How does he realize that? Because he goes and does 700 interviews, that's the quantum, I mean maybe it's 300 or 400 or whatever, but we're talking about hundreds of interviews. That's real research. If you've talked to like 10 or 20 customers and you think to yourself, I don't need this stuff. Cause like I already get my customers, I've done the research, you haven't, if you haven't spoken to over a hundred potential customers, you haven't done real research. So he finally goes, he does the work, he realizes that payments isn't the key, it's everything else around it. He launches that product. And by the way, when he launches this product, he doesn't really change that much. That was another thing that we dug deep on . Did you build a whole new product? No, he didn't. He had all these things already. It was just changing the messaging, changing the positioning so that it resonated much more with the end customer and put him in a position where he could actually charge. Because if he was gonna get compared to PayPal, well PayPal is free. There was just nowhere you could charge for it. But if all of a sudden he's not about payments himself , he's about everything else in his case about accounts receivable, accounts payable, managing all your payments, workflows, automations, well that software worth paying for. And he said, we were forecasting that maybe 30% of the customers would stick around, but over 82% of customers converted in October of 2019 to subscription pricing. So he goes from charging zero to $30 a month and he gets over 80% of customers to convert. That's what happens when you real research. That's what happens when you understand real customer problems. The final quote I'll share from from him on this topic is, the MVP mindset is fantastic. Once you have a thesis and that thesis has been proven, you feel very strongly about that thesis. But if you haven't done that homework, then you're just going to build something that nobody wants. The other thing that came to mind that I thought was really interesting, you know at what point he's talking about, he's talking about checks, like he's talking about the status quo and he says, you know, in payments, like the status quo is checks. You take this piece of paper, you write a thing on it and you put it in the mail. He's like, that was pretty good. Like frankly, for most people. And it made me think of something which is that when , when you start out , like when I started Gym track , the first thing you do, you're told about competition, right? Like you wanna make sure you understand the competitive landscape and who your competitors competitors are and how you stack against them and all that stuff. And so naturally you go on, you know, Google or whatever and you start searching and you find other players that are doing something similar. So in our case, like we were selling product to kind of tech to gyms around workout tracking. So we found other innovative startups that were doing something similar and that's what we focused on as competition. The thing is, those are not the main competitors because when you go into the market and you start talking to customers, you realize most of them have never heard of any of your competitors. None of the tiny startups, unless there's a massive incumbent that's already kind of sold to all your potential customers. The reality is they haven't heard of these kind of fledgling startups or even the ones that are like on Tech crunch and have raised a bunch of money, their penetration is still really small. The biggest competitor that you have in the early days almost always is actually status quo. That's who you're fighting, if you want to think of it that way, right? Like it's you versus status quo and you've gotta beat status quo. And so in the case of Pluto, like what he ends up doing at first, he's confused, right ? He thinks is his competitor's PayPal? It's actually not, because both these businesses are using not just PayPal, but they're using wires, they're using checks, they're using e-transfer, they're using things in status quo. And I think you really have two choices. Choice one is you can fight status quo, and if you're gonna fight it, you gotta find its weak spot, which I'll chat about in a minute. The other way is you can just lean into status quo, be like, you know what? Status quo is good enough. Like it's not that terrible. Most people don't hate it, so let's use that. And that's what he did like in his case and talked about. He just said, okay, like people are fine with payments, payments isn't even a problem , let's build things around it, right? Like so people are gonna use wires, they're gonna use checks, they're gonna use whatever they use. Great. Let me leverage that and build everything around status quo. So that's what he did. That's one approach. The other approach is find the week spot . So what does this look like? Let's take another example, right? So think , think for example of Airbnb, right? Everybody knows this, that's why I'm using it. If you think about Airbnb today, like you stay in usually in like an entire home and it's direct competitor to hotels. In the early days, status quo was hotels. And frankly it worked almost all the time. So if you would've told some , like when Brian Chesky in the early days would tell people about Airbnb, most people's reactions were like, whatcha talking about ? Like I just stay at a hotel and it's great. I don't understand why I would stay in some random person's house. How does he break status quo, right? What's the weak spot? What he realizes , I think it's by happenstance frankly, but ultimately he realizes that when there's a conference or a really big event, all of the hotels around that event get booked. They get sold out. And at that point in time, in that location, status quo goes from being totally good enough to just not working. Like it's terrible. And that's where Airbnb gets its first initial traction. Status quo is weak. That's the other way to look at it. So at the time when there's a conference or an event, the status quo doesn't work, status quo has a weakness and you can exploit it. And so he says, okay, now let's kind of offer up and, and just market around that event. So we offer up Airbnb and that's the first time that people start really trying it, right? Because they're almost forced into it. They're like, status quo doesn't work for me. What else is available? Oh, everybody's available, fine, whatever. I'll try it out. And they realize it's not that bad. So that's like niche, like super niche market number one, right? But they find a weakness in status quo. The next layer from there, the next part where status quo is kind of weak, is on price. So hotels generally are just not that cheap. And so for the people that are price sensitive, status quo is also just not that great, right? That's another weakness for the people that like where budget isn't that big of an issue, paying a hundred or $200 a night is not an issue. Status quo is amazing. So you , you go to them and you tell 'em about Airbnb and they're like, what are you talking about? Just not, not a thing I'm interested at all. Not a problem I have. But if all of a sudden you go to people where a hundred dollars a lot of money and you offer them something for like 50% or even 20% of that, 20 bucks, 30 bucks, 40 bucks a night, that's eye-opening. Again, you found a weakness in status quo. That's what they, that's what they did, right? And again, today it's about booking entire homes. People buy apartments just to do Airbnb. Back then it was all about staying in some stranger's home, right? It was about the extra bedroom and that the reason is like the extra bedroom was an actual solid competitor to the weak part of the status quo. Status quo is hotels. The weak part of status quo was the fact that they're pretty expensive. And so one extra room, one extra bed in a home. Sure. Like if you think about it, having a full hotel room is much better than having a
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Bed in somebody's home. But for the person, the part of the market that was super price sensitive, hotels were not a great option. They were a poor status quo. And so all of a sudden MBB made sense. And so this is the thing you've gotta think about. It's like to the extent that you're in a generally, you know, in a relatively new market, or at least a market that has no incumbents, this happens a lot of times when, for example, you're selling something that's like digitizing something that's otherwise done on paper. This was a classic one, and you're fighting status quo. Think about what, what parts, what segments of the market is status quo not serving well, right? What's the weak spot of status quo? If your enemy status quo, you've gotta find how to defeat it. And this is David v Goliath, right? Like you've gotta find the weakness and you've gotta exploit it.
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