Hi there -
Here is this week's "1 principle, 2 strategies, and 3 actionable tactics" for running lean…
1 Universal Principle
“Before you ask ‘Can I build this?’ you need to ask ‘Should I build this?’”
Steve had what seemed like a brilliant idea: a Virtual Reality platform that made it easy to create immersive VR apps with no expensive equipment or complex 3D modeling skills.
He spent weeks researching competitors and talking to developers. Everyone seemed excited. So he quit his job and spent 6 months building.
Then he decided to raise $500,000 to speed things up.
That’s when his former mentor, Mary, asked him one question: Steve, before you risk half a million dollars, can you show me the math that proves this will work as a business?
The 5-minute test that followed saved Steve from what would have been a $500,000 mistake.
I learned this lesson the hard way. With CloudFire, my photo-sharing product for parents, I spent 9 months and $47,000 building what I thought was a winner. I had 500 paying customers and great reviews.
Until my investor friend pulled out a napkin and did a 5-minute calculation that destroyed my business model. He showed me that even in the best-case scenario, my model mathematically could not hit the growth targets needed for sustainable growth.
Here’s the expensive reality: 90% of founders waste 6-18 months building products nobody wants because they skip one simple test.
2 Underlying Strategies at Play
I. Use Fermi estimation to test viability before building.
The Rapid Viability Test is based on Fermi estimation - the same technique that physicists use to make accurate calculations with limited data. You don’t need perfect numbers, just accuracy within an order of magnitude.
The test has three steps:
- Goal sizing (your minimum success criteria in 3 years),
- Customer sizing (annual revenue per customer), and
- Market sizing (calculating how many customers you need and verifying your market can support that number).
Why 3 years?
That’s usually enough time to hit product/market fit with any idea, and you can make better growth plans from there. Most founders target 5-10 year goals, which results in fictional thinking in startups.
II. Pricing determines your customers and market viability.
Here’s how Mary walked Steve through the test: Steve wanted to charge software developers $50/month for his VR platform. At $600/year per customer (rounded to $1,000 for simple math), he’d need 10,000 customers to hit his $10 million minimum success criteria for investor attention.
The problem?
Online research revealed only 2,200 companies and developers in this space. Even assuming 10X market growth to 22,000 developers, typical $50/month products convert at 1-3%, meaning Steve would need 300,000 to 1 million leads.
But then Steve asked the right question: “What if I could charge 10 or 100 times more?”
That’s when he pivoted to architects who pay $1,000+ for basic 3D renderings. At $5,000 per project and 10 projects per year, that’s $50,000 per customer annually.
Same technology, same product - but now Steve only needs 200 architectural firms instead of 10,000 developers.
Keep in mind that this is still a hypothesis Steve would need to test, but at least he won't be wasting his time testing a model that is flawed from the start.
3 Actionable Tactics
I. Define your minimum success criteria for 3 years.
Stop thinking about 5-10 year goals. Ask yourself: What’s the smallest outcome that would make your startup worth 3 years of your life?
If you’re planning to raise VC funding, your minimum success criteria is set by investors - typically requiring $10+ million annual revenue to earn their attention.
If not, you're the sole investor in your business, and you still need to set a goal.
II. Calculate your annual revenue per customer early.
Don’t defer pricing decisions. Your pricing model determines your customers and market viability. Use Fermi estimation - round to simple numbers for quick math. Steve’s $600/year became $1,000/year for easier calculation. The goal isn’t precision; it’s identifying fatal flaws.
III. Work backwards from revenue to required customers.
Divide your minimum success criteria by annual revenue per customer to get your required customer count. Then research if your market can support that number.
If the math doesn’t work, you have two options:
- find ways to charge more (different customer segment) or
- reduce your success criteria.
Steve kept the same technology but switched from price-sensitive developers to architects who could justify premium pricing.
This test doesn’t just tell you if your idea will fail - it helps you pivot to a version that can succeed.
That’s all for today. See you next week.
Ash
Author of Running Lean and creator of Lean Canvas
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P.S.
Ready to stress test your business model like Steve did? Take my business model design challenge, where I’ll walk you through the complete Rapid Viability Test framework, plus six other critical dimensions that determine whether your idea is worth pursuing.
It’s the same systematic approach that’s helped thousands of founders avoid costly dead ends.
