How to validate a startup idea (step by step)

When you decide to build a startup, you're essentially becoming an extremely undiverisfied investor. You're allocating your entire life into 1 bet (yikes).

So to make sure that bet works, you need to think like an investor when validating a startup idea. This is the most crucial first step to any successful startup.

Validating a startup idea (like an investor)

Whenever I'm validating a startup idea, I have to answer 3 key questions, in order:

1. Target audience & TAM
2. Pricing & revenue strategy
3. GTM plan

You must have confidence on all of these in order to build a great startup. Of course you can just get lucky and wander your way into one, but that’s like playing the lottery — for every 1 winner, there’s 1 million losers. And we want to take luck out of the equation.

Let's answer these 3 questions together with an example idea.

The example startup idea: A journalling app that allows your therapist to access your journal, helping them understand how you’re feeling in between sessions.

1. Target audience & TAM

Choosing the target audience

This is the analysis of who is most likely to use your product, and how big that pool is.

For our idea, our target audience can either be the patients or the therapists.

1. I think therapists are a better audience to target for growth. If you win over a therapist, you win all their patients, the other way around is much harder.
2. I only want to target therapists that are between 20-40 years old, since anyone older may be adverse to using apps.

ℹ️ Notice that you need a certain level of conviction in your decision, in this case, my conviction is winning over therapists aged 20-40 is key.

Estimating the TAM

Now that we have a target audience, let’s research the TAM (total addressable market). We'll focus on the US for simplicity:

1. America — Therapists (all data points from this source)
   1. Psychologists are most popular in LA, Therapists in NorCal — NY also popular
   2. 70% women, 70% white
   3. 200k practicing therapists
      1. 20-30 y/o is 14% (28k)
      2. 30-40 y/o is 34% (68k)
   4. Companies 100-10,000 employees employ the most therapists in US (74% at a private company)
      1. 💡 This is very interesting, if medium size companies have therapists on payroll, I wonder if you could pitch this app to companies as a way to cut therapy expenses (since you may need less sessions overall with the app helping the user more in-between sessions)
   5. Assuming you target between 20-40 y/o, 96K people is TAM in US

Assuming we can win 10% of the market of therapists if the app did well, we’d win 9.6k therapists out of a possible 96k therapists.

2. Pricing & Revenue

A journalling app for therapy is nice, but how does it make money? There are often many different ways that apps make money that you're probably not aware of! Here are some I came up with:

❌ 1. Charge the user a monthly fee

I hate this idea, journalling apps are commodities, and people will not pay for it.

❌ 2. Turn it into a marketplace for therapists

Based where based on what users journal, we can allow them to explore therapists that may be right for them via a marketplace in-app.

I don’t think this will work. Marketplaces thrive on frequent transactions in order to monetize a take rate. I don’t believe people change therapists frequently enough.

🤔 3. Therapist directory/lead list

Make the app free, and once you amass enough users journalling, charge the therapists a monthly listing fee to list themselves on a directory you build in-app.

This ones more interesting, let’s do some data analysis:

1. Charge therapists listing fee $30/mo:
   1. $30 * 9.6k (10% of TAM)
      1. 288k/MRR (3.4M/ARR) at 10% market capture (9.6k therapists paying)
      2. 29k/MRR (348K/ARR) at 1% market capture (1k therapists paying)

You could get between 384k - 3.4M ARR with this idea.

✅ 4. Charge therapists to sync patient data into their CRM

Make the app free, but charge the therapist to directly sync what their patients journal into their CRM rather than retyping everything by hand.

I like this idea, data transfer tools have proven to make money in other industries, let’s do some data analysis:

1. Charges therapists $100/mo for unlimited patients and data syncing into their CRM:
   1. $100 * 9.6k (10% of TAM)
      1. 960K/MRR (11.5M/ARR) at 10% market capture (9.6k therapists paying)
      2. 96K/MRR (1.2M/ARR) at 1% market capture (1k therapists paying)

You could get between 1.2M - 11.5M ARR with this idea.

As you can see from that analysis, there are so many different ways to monetize and price the exact same journalling app! Some much more profitable than others.

I’m going to choose to Charge therapists to sync patient data into their CRM as the pricing strategy.

3. GTM Plan

Now that you're confident on who your customers are, and how you'll price your product. You need to figure out how to get those initial customers! You do this with a GTM (Go to market) plan. There are 2 steps:

1. Validate your idea is actually a problem

Up until now, we've speculated that syncing data into a therapists CRM is a problem. We're not sure. So we need to validate the idea. There are many ways to do this:

1. Scraping existing therapist directories online to get a list of therapists I can outreach to. Then cold emailing them asking to chat about their pain points.
2. Find any therapy conventions that are happening close by and attend as many as you can.
3. Create a landing page for your product with a fake checkout page, and run Google Ads, make TikTok videos, anything to direct therapists to your site to see if they would actually click pay for the product.

You need to make sure there is actually a problem, otherwise no matter how good your TAM or pricing strategy is, you won't make money.

2. Create a distribution strategy

Once you've validated this is a real problem, you need a way for your app to get users as fast as possible. This is a distribution strategy.

For this particular idea, I would:

1. Create viral TikTok content aimed at therapists (I’ll make a future post on how to do this).
2. Create a landing page and run Google ads on this.
3. Start writing SEO content about how to setup a therapy practice for success.
4. Partner with therapists in a revenue sharing program to get them to start promoting your app.
5. Partner with therapy YouTubers & Influencers in a revenue sharing program to get them to start promoting your app.
6. And so on, and so forth…

Takeaways

Validating a startup idea is hard, anyone that thinks its easy is either naive or inexperienced. But this is crucial work. You would rather find out early that a startup has no legs, than have to discover it years down the line.

By the way, here’s my rough assessment of the therapy journalling app idea:

1. This is an interesting opportunity to test out for a lifestyle business
2. Not too much capital risk involved, only risk is time and opportunity cost
3. Not a VC fundable company — in the best case scenario, your ARR is capped at ~$11M
4. Not clear exit strategy here (maybe you could sell it to https://www.tiny.com/)

TLDR; I won't be building this as my main startup anytime soon. Maybe a side hustle?