How To Build a $10M ARR Business with Less Than $1M in Funding
This is a very different startup story of a company who chose not to suck up funding that may or may not pay off. Powtoon is one of the leading platforms for creating short videos and dynamic presentations with an ARR soon approaching $20 million, but in an age when so many startups seek funding first, before they really know how their product will perform, I wanted to share the methodology we used to get to $10 million ARR with less than $1 million in funding.
I hope to share not only the specific tactics we used, but also the mindset that allowed us to establish our business without a big initial investment. (As you read this, please bear in mind that the journey from $10 million to $100 million ARR requires a somewhat different mindset).
Mindset #1 — Rely on Best Practices
For our team, this was a journey into the unknown, and there were so many variables that could go awry at any moment. To reduce the margin for error, we decided to use only best practice methodologies. Our first model was based on a variant of The Lean Startup called Rapid Validation.There were so many variables that could go awry at any moment. To reduce the margin for error, we decided to use only best practice methodologies. Click To Tweet
Mindset #2 — Begin with Validation, Not a Product!
Before you start developing your product and take millions of dollars in investment, you must first validate that the market actually wants your product. That is to say, not only that it needs the product, but actually wants to pay for it. You do this by creating your own version of an MVP (Minimum Viable Product). We called ours a Minimum VALUABLE Product. Is this product valuable enough to actually garner sales?
We created an animated video that described the pain “startup guys and marketers” encounter when creating a video or presentation. They needed a way to create short videos and presentations that don’t cost an arm and a leg or lull people into a deep sleep.
Of course, this video didn’t stand alone. We created a landing page that would host the video, along with a registration box to become a beta tester. We distributed this video in relevant forums and blogs — all the places we knew our potential customers were congregating.
Market Validation Results
We achieved a 30% conversion rate from people that viewed the video and registered on our beta list. This gave us over 1,000 early adopters before the product had even launched.
Over a three-month period, we ran this campaign and ultimately amassed a list of 5,000 potential users waiting for alpha access. These results let us know that, unlike startups who raise millions of dollars and start developing a product that no one really wants, we had tangible interest. A product with a validated demand.
Validating need opened the path to extreme growth. It’s so much easier to ask an investor for seed money of $150,000 when you can show them you have an additional 5,000 potential users waiting for the alpha, based on a just a three-month campaign.
We used this seed investment to actually build our software.It's much easier to ask an investor for seed money of $150,000 when you can show them you have an additional 5,000 potential users waiting for the alpha. Click To Tweet
Mindset #3 — Develop Your Validated MVP into a Product
With that funding, we were able to validate our technology too. We had to make sure that we could actually develop what we promised in the product MVP video.
We started to write the first lines of code and developed an alpha product within two months. We intentionally chose a technology (Flash) that allowed us to push quickly to the market and validate our market-product fit as quick as possible.
Mindset #4 — Celebrate Your Milestones (Build Enthusiasm & Rapport)
Every time you have a reason to celebrate a milestone, make a “party” out of it with a launch campaign. No matter what you do, just make some noise and let your users know about it! This is a great way to communicate with your users and keep them engaged and excited. This also begins to build a rapport with your customers. They come to expect your emails and updates. They see themselves as an extension of the product team, getting updates and providing essential feedback.
I like to call this the “Ikea Effect.” We all know that Ikea furniture is all the same. But that bookshelf you actually put together yourself has special meaning to you. You built it, after all. Frequent launch sequence communication to your tribe can help them feel the same kind of ownership in your product. The more of an Ikea Effect you cultivate, the more you can ask of your customers (see the conditions we set for alpha access below).
Alpha Launch — Back to Best Practices
To launch our product, we used a best practice methodology by Jeff Walker — The Product Launch Formula — as well as other various launch techniques. Always use best practices! Don’t test things you aren’t sure will work, and haven’t been tested before. Today, you can find myriad proven techniques in every discipline, so don’t waste your time and money.
We pushed the alpha version to our existing user base with a mini-launch. We sent an email announcing the launch of a closed alpha with a maximum of 200 users. To become an alpha user, one had to comply with a few criteria:
1) Create a meaningful Powtoon to be used in a professional setting
2) Have at least 500 friends on Facebook, and be willing to invite at least five friends
3) Dedicate one hour to speak to us over the phone
The results were amazing! We created such a buzz, and drove so many users that we were totally inundated with requests to get into the alpha launch. This mini-launch created scarcity and a sense of participation with our customers, who were in effect building the product together with our product team.
Enthusiasm made them feel like part of the team. Rapport allowed us to learn about the needs of our users and build a product they wanted.
Mindset #5 — Don’t Forget PR & Virality
In the beta launch, we needed to involve PR and submitted to various journalist in the tech community. The story we pitched was about a new and exciting product with a limited invitation to be part of the closed beta release for the first 500 users.
This was the right moment to engage major publications, since we knew our product was validated and built upon real customers in the market. That made the article enticing to publishers, but it also meant we could make good on our promises. Essentially, we launched the closed beta product with an article on TechCrunch. That alone brought us 30K sign ups.
Traditional PR is important, but there’s another kind of PR that is more illusive (and more valuable) — virality. If you can create a product that’s truly viral — i.e. spread from peer to peer through organic channels — you have one of the most valuable marketing engines on earth. We tried to include as many viral easter eggs as we could. For instance, we included a Powtoon branded watermark on every video. But we had no idea which viral “egg” would “hatch.”
The TechCrunch article was a great kick start for our product launch. It created a buzz and interest around the brand. But only time would tell if our viral efforts had been a success. When we saw quite a few Powtoon videos created and published on YouTube and Facebook with our logo on it, we began to see the viral effect, earning free organic traffic above and beyond our PR and marketing efforts.
Mindset #6 — Begin with Validation, Not a Price!
Our next step was to validate that people actually want to pay for the product, and not just use it for free. To accomplish this, we ran a campaign with the goal of positioning Powtoon as a great solution against the expensive animation studios, and invited our users to help us determine our pricing model.
We created a three-step email sequence. The first drop was to conduct a pricing survey, asking: “What is the value of animation?” “How much would you pay per animation?” and “Which pricing model do you prefer?”
We learned from our users that an explainer video can cost a lot, starting from $3,000 per 60 seconds of video. We knew we could charge a lot less, and still be profitable. We found a price-point that would work based on what our customers were telling us, and we also had a price anchor – something to compare our pricing to – that also came directly from our users in the wild.
In response to the survey, we created a few pieces of content to serve in the next email drop:
1) A case study: “Who and How Clients Use Powtoon”
2) A value justification: “Are You Kidding Me? $3,000 for What?!”
3) Customer Feedback Feedback: “How YOU Created Powtoon’s Pricing Model”
The last part of the campaign was to send our users a “One Time Offer” for buying a yearly Powtoon subscription plan at a massive discount:
4) One Time Offer for Powtoon Beta Users ONLY — 78% OFF!
Price Validation Results
During that week we managed to sell $80,000 of yearly plans! That was an incredible success. That helped us move to the next level without taking extra funding.We learned from our users that an explainer video cost a lot, starting from $3K per 60 seconds of video. We knew we could charge a lot less, and still be profitable. Click To Tweet
Mindset #7 — Wash, Rinse, Repeat
Rapid Validation allowed us to move from an idea to a revenue-generating product in just a few months; which positioned us to have product-market fit from the beginning. Each step we’ve taken since then has simply been a replay of this approach. For each new feature, new target market, new product, or new campaign, we always apply this validation approach to ensure that we’re never too far away from something the market is actually demanding, and that we can actually deliver.
Thank you to Daniel Zaturansky for contributing this piece. Give us a shout out on Twitter @leanstartup and let us know what you thought of this blog!