Idea validation with Willson Cuaca: How to start an investment-worthy startup

On 5 November, 2020, Amir Karimuddin from DSLaunchpad 2.0 hosted a question and answer with East Ventures’ Co-Founder and Managing Partner, Willson Cuaca, about startups and idea validation. In this session, aspiring startup founders can learn the importance of idea validation, how to avoid the founder’s bias, and, finally, how to start an investment-worthy startup.

Three key points that Willson shares to startup founders are:

• Let people challenge your ideas to avoid founder’s bias
• Combine top-down and bottom-up approach, focus on the problem
• Start execution as soon as possible, so you can learn faster than others

The session is available at DailySocial TV on YouTube. Here’s the transcript of the conversation that has been edited for brevity and clarity.

Amir Karimuddin:

Startup friends, we meet again in the webinar session of DSLaunchpad 2.0 with me, Amir. DSLaunchpad 2.0 is an online incubation platform initiated by DailySocial and for this batch it is supported by AWS. Today we have a special guest as our mentor, co-founder and managing partner of East Ventures, Willson Cuaca. I will let Willson briefly greet and introduce himself to the participants of the DSLaunchpad.

Willson Cuaca:
Hello everyone, my name is Willson from East Ventures. East Ventures is an early stage fund to invest in startups with the hope of success. Some have succeeded, many have failed, but the most important thing is that we work together to build a digital ecosystem in Indonesia. East Ventures started in 2009 and one of the first venture capitals in Indonesia and our first portfolio is Tokopedia which is probably better known to many people. In 2018, East Ventures also created a new fund called EV Growth specifically for startups with a more growth stage, so now we are managing two funds, seed funds and a growth fund.

Idea validation is crucial

Amir Karimuddin:
Our topic this time is idea validation. Validation is a crucial phase when founders want to start a startup or business, sometimes ideas that make sense to us don’t turn out to be a business because they don’t have a sufficient market or are able to develop. Willson has been a founder and now an investor, is there any difference in the perspective of validating these ideas?

Willson Cuaca:
As we often say, and if you do research on an idea, an idea alone is actually worthless. Because anyone can come up with an idea and one of the most important when we have an idea is validating whether the idea makes sense or not. One of the first and most frequent mistakes made by founders is that they hold back their own ideas. We call it founder’s bias: everyone must feel that their idea is the greatest, the best, the most recent, the most up to date, and no one can copy it.

But in reality, it is not like that, the idea is the same [with everyone else’s]. Everyone must have the same idea because each of us actually picks up the signals from our environment in the same context. For example, in Jakarta, we read the same newspapers, meet the same people, watch the same TV, drive on the same roads. Surely, we get the same idea, not too different from each other. The idea is actually worthless, when you think you have an idea, surely other people will have an idea too. But the difference between your idea from other people’s ideas is who executes the idea. So the first step of all that is to execute your idea.

Don’t just believe that yours is the best idea, validate it. Tell people your idea. They could copy it, but it doesn’t mean they can do the execution. But by telling people your idea, you actually challenge your idea [to know] whether it’s valid or not. People will ask questions and you will try to answer those. The more often you are challenged, the sharper the idea. That’s one of the very first steps of idea validation: tell your idea. No bias.

Read also: East Ventures Digital Competitiveness Index 2020: Uncovering The Opportunities of Indonesia’s Digital Economy and Bridging the Archipelago Digital Divide

Amir Karimuddin:
All right, from the time when you were a founder and now an investor, is there any change in the perspective in idea validation, Willson?

Willson Cuaca:
Same, exactly the same.

Amir Karimuddin:
Is there a special framework to speed up the process of idea validation until you finally form a market fit product?

Willson Cuaca:
Execution, the framework is only one that is execution. So after you have an idea, you think about it, then you put it in perspective, how can this idea be realized? You try to breakdown, what steps should you take to make this idea come true. You don’t need to think too much, no need to [claim that] “wow my idea will rule the world, all kinds of things”.

It’s very simple. If I have an idea today, later in the afternoon, I’ll think about what would I do to make this idea come true. Does that mean I should look for a CTO, start coding, start drawing wireframes, or I have to validate the demand, talk to the user, etc. Think about the sequence of activities that you have to do, after that what remains is the execution. More or less, it’s to stimulate the idea of action for the first time.

Amir Karimuddin:
From the point of view of a beginner startup, what should we prepare to know that the idea is the right one?

Willson Cuaca:
There will be no idea that is 100 percent okay. But if you want to eat, you need to have a cook, so if you want to make a digital product, you have to have a coder. Then if you want to eat fried chicken, you have to have chicken, then it has to be fried. So if you want to make a product, whether it is a mobile product or a web product, it must be clear who cooks it, then what is the product. Then you have to think when the item is formed, what are the key success factors that you can measure, so you know that the item is correct.

Even before the minimum viable product stage, you must already know what you have to do. After that you need to be creative to do the first MVP. For example, if you already have a programmer or you are a coder yourself, then you make the first product, then go ahead invite friends or anyone to try the product. After that take the feedback, pay attention to what can be improved.

But before all this happens what you have to do first is to answer this: What problem do you have to solve? This is the root of everything. Determine the problem, build the product, then try to see if it fits. Can the problem be solved? Talk to many people, get feedback, check again, is it true that the problem is solved? It’s more or less like that, so there’s a lot of trial and error. But the problem statement must be very clear.

Amir Karimuddin:
What are some indicators that an idea has been validated, that the idea fits our market target?

Willson Cuaca:
Ask the user if I can solve their problem well, for example, “Oh yes, it is faster, usually it takes 3 days now it is only 3 minutes”. That is a sign that your idea is correct. That’s just the idea and the first validation: product-market fit, whether this product is suitable for the market. We haven’t talked about monetization and all kinds.

Amir Karimuddin:
Okay, earlier we were talking about the market too, this was mentioned several times about total addressable market. From your side, what kind of method does East Ventures use to calculate the total addressable market for a startup?

Willson Cuaca:
Frankly speaking, we rarely count it, because when we want to count it, we already know. It doesn’t mean anything when people say, “The total addressable market is 5 billion, meaning that my start-up could immediately become 500 million because I control 10% of the market shares”. We mostly don’t believe in things like that. We’d rather ask, “What problem have you solved now?”

Always remember that ideas are very cheap, everyone must have the same idea. Do you know that in the community or consumers, there have been people making products like this? Usually for the Indonesian ecosystem, there may not be fresh ideas. Surely everything has been done. Then ask again, what’s the difference between your product and other products? So there was product formulation at the beginning.

Amir Karimuddin:
Okay, we talked about if there is no really fresh product, so differentiation and of course execution will always be needed, but we don’t use that basis to go to the market as well as to investors, actually from the start-up side itself–

Willson Cuaca:
It’s not enough, it’s impossible for you to say “Oh, I have this idea and there are already 3 people using it. I want to raise money.” That’s impossible. Vision, problem statement, and execution must be categorized separately due to their differences.

From the startup side, the founders must think a lot about the problem that they are trying to solve. They have to keep dreaming about the mission that they want to achieve and the possible target market. They also have to think about the execution that they have done. All these must be assembled into one story, and that is what they sell to the investors.

What you sell to investors is your dream, right? But the investors will ask, “How do I know if your dream will come true, what do you know about your dream?”. So you have to be able to explain what kind of industry you are, what the results of the research are, and then tell them: “This is what I’ve done, what kind of learning that I’ve done, what I want to do in the future?” From there, investors will see, “Does the founder understand what he is talking about? Does what he is talking about make sense? Is his mental logic correct?”

It’s the art of investment. It’s hard to explain this in matrix, but there are signals that can let us know whether the person standing in front of us seems to understand what he knows, and it seems like he can tell what he doesn’t know, because that was the most important. But if there is a person who cannot tell what he doesn’t know, well that’s even worse, you know what I mean?

How to start an investment-worthy startup: Top-down and bottom-up approaches

Amir Karimuddin:
There are some questions. First from Radium Ikono from Schoters, “I’ve heard Willson said that a large market size is not as important as a proof in small-scale. Can you explain further about this? Second, due to the pandemic, are there changes of hypotheses from VC side regarding idea validation and investment?”

Willson Cuaca:
We are talking in the context of an early stage startup. If we talk in the context of a start-up growth stage, of course the market doesn’t need to be too accurate as long as the problem statement is clear, and the execution and the plan to solve the problem are also clear and measurable. One more important thing: there are two kinds of approaches to market research, top-down and bottom up.

The first is top down. For example: “Indonesia has 267 million population, 167 million internet users. Jakarta has 14 million population, so it is more or less possible in Jakarta if internet penetration is 80%, there may be around 10 million users. 50% of population are men, so there are 5 million male users, My application is suitable for men, meaning that 1% of the 5 million will use my application.” I never believe this kind of calculation, because it can’t be that simple. If everything is that simple, everyone will have become a unicorn.

We prefer a bottom up approach, from the problem statement. For example, an application for water gallon delivery: which home community should it be delivered, how many people are in that community, how many drivers are needed, what is the cost, how the application matches the drivers and how much demand, from there how much the cost is, can it be delivered in a very fast time. The problem is clear. If I can deliver gallons of water, once I press the app’s button, within 30 minutes it arrives. Now that’s a measurable KPI. The difference with other people is, if other people take one and a half hours, I take half an hour. And then from there I see, okay in my community, if I my drivers are doubled, tripled, quadrupled, because my people are two, so become four, six, so I can be ten times faster that means in three months it is going to be this much, now it’s more logical and the execution is more understandable.

So top down is okay, but it should not be held as the only market research, bottom up is also necessary, these are brought together, so from there we know whether this start-up is working or not. That’s the total addressable market approach, which in my opinion is the most practical one.

The second question was about the hypothesis after the pandemic. Actually, it has always been the same, pandemic or no pandemic, new companies will still appear. This means that with or without pandemic good founders will always appear, and from the East Ventures’ side, our hypothesis is always the founder hypothesis, not the market hypothesis. We are still looking for founders who can solve problem, but the problem during a pandemic and the problem when there is no pandemic is different. For example, when there is no pandemic, everyone travels, meaning there are problems at the time of travel that must be resolved. During a pandemic like this, everyone cannot travel internationally, but there is also domestic travel, which means there is a shift from international travel to domestic travel. This means that there is shift from the segment but it does not change the hypothesis that a product must solve the problem and a founder must be able to manage the company. The pandemic does not change our hypothesis, there’s only a shift happens.

Amir Karimuddin:
The next question is from Michael Adrianus from Koalabora. The first is about “think global act local”. How to validate local marketing that can be accepted globally in the digital era like today? The second one, from investors point of view, every day and even every year, there are indeed so many pitch decks coming in, but what is the difference between an ordinary startup idea and an idea that attracts investors?

Willson Cuaca:
The first, think global act local, but when you say think global act local doesn’t mean you have to target the global market, those are two different things. Think global act local means learning from outside according to local. Whether your solution is targeting the local market or the target of the international market is a different question, which is, “Is your problem a global problem or a local problem?”

Is it because there is a Facebook that started from the US, does it mean that in Indonesia we can create an Indonesian social network? No, why? Because it is actually a global problem and it takes a global ecosystem to make it work. It must be started from an ecosystem that can support ideas like this. And the fact that Indonesia uses the alphabet, it is very easy for Indonesians to adopt products from the West. That is one of the weaknesses and the advantages of us. A weakness because outsiders can get in, the advantage is that we can actually go out, but until now it hasn’t happened, right? So from there we solve the problems, global problems and local problems.

From the East Ventures side, we prefer to solve the local problem because global problem is too big and we need a different ecosystem to solve the problem. And if you pay attention, all global startups always start from local. Founders must have started from their own local, they solved the problem, but because their ecosystem supports them to go global, they go global. Our current ecosystem is not mature enough for an Indonesian startup to go global because our own ecosystem is just getting started. It is only 11 years old. So we have to focus on local problems like e-commerce, logistics, and all-things local.

Amir Karimuddin:
The second one was about pitch deck, this is the question that everyone asks, what is the difference between ordinary ideas and ideas that attract investors?

Willson Cuaca:
One thing we try to look for when we see a pitch deck is the authenticity, you have to become yourself. You don’t try to pitch so that the investor is impressed or uses the terms you read so the language is correct or you try to express yourself so that the person is really interested in you based on what you read. Try to be yourself, be authentic. And it can be felt through the pitch deck actually. Why is a pitch deck authentic? The problem is specifically solved, the problem is very detailed, or the problem is very local. How you express the product-founder fit also matters, to show you are the right founder to solve the problem.

Timing and execution

Amir Karimuddin:
Okay, the next question is from Fikri Vicaksono from Ailom, let just say they think we have a problem and we have a solution, but in one case this market is not ready with a solution of the technology, what should we do? What should be changed to get an early adopter?

Willson Cuaca:
If I can go bluntly, don’t do that. You are saying something like, “I want to build a jet plane, I can build it because I have the skills, but no one can buy it. Do I make it then after that I educate?” Why do it now? Maybe it’s not the time yet.

Actually, investors have a simple way of thinking – not a complicated one. The components are the problem, solution, and timing. If you say that the market is not ready, why would you do that?

Amir Karimuddin:
Yes, so timing is important.

Willson Cuaca:
Very important, timing is one of the most important factors actually.

Amir Karimuddin:
How to know whether the timing is correct?

Willson Cuaca:
We cannot know. We know that from experience. When you are surfing in the sea, how do you know the timing of the waves is right so that you can be in front of the waves and not behind it? It is not after the waves are visible because it might be late, but there is the feeling. Where does the wind come from, there are ripples, something like that. We don’t know for sure; we know maybe around 70-80%, but the more we do it, the more we think about it, the more it gets. That’s timing. No one can time it so there is a saying, “Don’t time the market, there’s no way that you can time the market.”

Amir Karimuddin:
Based on your experience, are there any ideas that are either saturated or expired or are too late in entering the market?

Willson Cuaca:
There must be, so do your research, and don’t think your idea is the best and the only one, that means you are a frog underneath coconut shell. Read, chat, research, search, chat, read DailySocial.

Amir Karimuddin:
The next question is from Ferry Darmadi, My Clinical Pro. This is about SaaS, East Ventures also has a lot of investment in SaaS startups, one of the issues from market validation is that usually SaaS has a subscription system. Is it a valid idea to have free trial to get the market share? From the VC side, is this technique interesting?

Willson Cuaca:
That’s one of the tools to get users, so it’s okay, if you want to directly charge the premium, it also depends on how much ready your user is to pay. The most important thing in SaaS is how well you solve problems from subscribing. The more urgent their problem must be solved, the sooner they will pay.

Amir Karimuddin:
EV has invested a lot, the portfolio is already extraordinary. If there is a certain segmentation, is it possible that the investment is not only in one or two startups, maybe even in many startups with the same segment?

Willson Cuaca:
So a segment is too broad, sometimes. For example, the segment is e-commerce, does that mean we only invest in one e-commerce? Of course not, because in each segment there are verticals, so as much as possible from the East Ventures’ side, we definitely don’t want to invest in startups that are immediately complete. First is not ethical, that’s the most important, the second is inefficient, it’s difficult. Once the startup is in difficulties, we as investors will find it difficult too, so we don’t want that to happen. What happens sometimes is that after we invest, the startup pivots and it hits another one, it’s often like that. Well sometimes that’s a headache but as much as possible we stay ethical.

Amir Karimuddin:
If for example it is not a pivot but it is certified because it has become big, let just say, for example, Tokopedia, one of your portfolio, has gotten bigger and bigger, and it turns out that it also intersects with the segments that East Ventures has also invested in, how does it work, is it synergy, collaboration, or is it competing?

Willson Cuaca:
Do not compete, but synergize it. It’s best if you buy it after that.

Amir Karimuddin:
Okay, now there is a question from Winata from Varena ID. Of all of startup pitches that East Ventures has received, is there one opportunity that was missed? What was the reason why you did not invest at that time?

Willson Cuaca:
Not yet. We’ll just find something else.

Amir Karimuddin:
The next question is about objectivity. A founder wants to validate an idea, maybe he is confident in his idea, he has been challenged a lot of time and still defends the idea. But then the idea is not necessarily accepted by the market, when he should switch it? Is there any experience you can share, Willson?

Willson Cuaca:
Usually if the idea is well validated, the growth is fast. In the beginning, the user can grow 10 times that easily, from 2 to 20, from 20 to 200, because the numbers are small. There is no fixed formulation of how much you should grow, but it can be felt, there are more and more users, more good reviews, you can feel the sentiment is positive.

Amir Karimuddin:
Okay, now if for example it is receiving so much feedbacks and the feedbacks are all different, how do we decide which direction the company should follow?

Willson Cuaca:
Now that’s the entrepreneur’s judgment call, the business instinct –the way he puts himself, the way he understands the situation, reads the market– now that’s another skill. Not everyone has it, good entrepreneurs have it.

Amir Karimuddin:
What about a first-time founder?

Willson Cuaca:
A founder must remember one thing, he must not be biased. For example, if you make a product, many users say it is good, many users also say it is not good and the founder just takes the good thing, the others he doesn’t want to listen, now it’s biased. So the first thing he should do, he should listen to the bad things first — the good ones, think of it as a bonus. That alone is enough to make him grow better.

Amir Karimuddin:
Let’s say a founder who has failed several times. The idea had been tried several times, had validation, was successful, but it was not able to scale, and finally was closed. It happened already many times. Because you say that investors usually trust founders more than ideas, so what do you think of that kind of founder yourself?

Willson Cuaca:
If he tried and failed continuously, the question is, can he answer why did he fail? The three most important things from East Ventures’ point of view as investor when looking at founders are integrity, self-awareness, and paradoxical.

The second character, self-awareness, is very important. If someone has tried to found five companies and they all failed with the same failure, with no validation and the products did not fit the market; has he ever asked himself why does he keep failing? A good founder is the one who has the ability to unlearn and relearn, so he can distance himself from the knowledge that has been collected, see it from the outside, then try to re-enter. “It’s used to be like this, if now I do something else what does like?” The ability to see from the outside, go inside, unlearn and relearn certain knowledge is very important. As long as he does the same thing repeatedly and it fails, whenever he repeats it, it will fail. If at one point he says, “Okay. I don’t want to do the same thing anymore, it’s not the case but the way it works that I change”, now maybe there will be a change, it requires very high self-reflection.

Amir Karimuddin:
Of many East Ventures’ portfolios, there must be some that didn’t work. Maybe you have also done some sort of evaluation of the problem. Which is actually more of an issue: is the idea, the execution or the founder?

Willson Cuaca:
Everything is, but it usually starts with the founder.

Amir Karimuddin:
It means that from the very beginning, apart from the idea, the character of the founder, especially a beginner startup is very important. How do you actually sharpen the character for a beginner founder?

Willson Cuaca:
The character is formed from the actual habit, because habit is something that is unconsciously repeated. Every founder must have the ability to self-reflect in order to understand where his weaknesses are, where his strengths are, and try to fix these weaknesses. When he wants to fix these weaknesses, he must be able to introduce the ability to develop new habits. After the new habits are formed automatically, his character slowly changes, but habits are one of the most difficult to change, almost impossible, especially if you get older, the older the more difficult.

For example, one of the most frequent habits in the developed founder is blaming other people. If something happens, they blame the market, blame the COVID-19, says that this is the user’s fault, or somebody else. Everyone is wrong, something like that. If he can change it, before he speaks, he pauses and thinks first, well maybe that habit will help him to think more clearly, that’s a simple example.

Read also: COVID-19 spurs an 18 months leap in Indonesia digital transformation journey, according to Willson Cuaca

Amir Karimuddin:
Okay, earlier we talked about people, the more experienced people are, the older they don’t necessarily have the skills to understand…

Willson Cuaca:
The more experienced people have a lot of knowledge, but whether their knowledge is relevant is one thing that must be questioned. The second is whether he or she has the ability for life-long learning because sometimes when people already acquire enough knowledge, they are already stuck, they cannot acquire enough new knowledge anymore. Now it will be difficult, but it does not mean that experienced people can’t become a founder. There is something you can use, but the ability to detach himself from old to new knowledge to be relevant to conditions and market, that is much more important than his old experience.

Amir Karimuddin:
The next question is from Rea Kintara Dikatio, from Credit. There are two cases. First, the execution is good but the product is not optimal, maybe because of lack of resources–

Willson Cuaca:
Well that means the execution isn’t good.

Amir Karimuddin:
Second, there are products that are rich in features but their traction is still low, from the perspective of which investors have more potential to–

Willson Cuaca:
Both are not good.

Amir Karimuddin:
What is the ideal one?

Willson Cuaca:
Ideally, the execution can never be 100 percent, there is no such thing as a 100 percent good execution. Instead there is an efficient execution, the right target, at the right time, the right place, the right problem, and getting good feedback from the user and the feedback is used to do a good execution again. It doesn’t need to be 100 percent. So, what was discussed beforehand, the point is that the execution is not good, as the features did not get attraction. Good execution but nobody uses it that means the execution is not good because execution is not only coding to be an app. Beautiful apps don’t necessarily mean good execution. Apps that can solve the problem, it executes well, even if the apps are bad.

Amir Karimuddin:
Next question, if for example a startup wants to enter an existing market, there are already players who are already quite large in the market. Is this a form of validation that the market is really potential? Differentiation aside, are there other things that need to be prepared?

Willson Cuaca:
If a lot of people have done it, it means that the market is already saturated. If you want to get in, go ahead, the only thing that makes you different from the others is the differentiation, nothing else.

Amir Karimuddin:
Is saturated the easiest indicator?

Willson Cuaca:
I think everything is the same.

Amir Karimuddin:
If for example, everything is the same but there is no market leader yet, because again we are talking about, maybe some industries that have had so many players, but haven’t seen a market leader yet. What do you say about that?

Willson Cuaca:
This means you have to think, why can’t anyone lead the market? What are the current players lacking? Can you get in and make a difference so that you can execute better than what is already there? But at the same time, you have to think, what if the current players have the same thoughts? The thinking is more complex actually, you need to think 2 or 3 times, the chess move should be a little further.

Amir Karimuddin:
For a new startup, is it better to look for a niche or smaller market or go straight to a bigger market?

Willson Cuaca:
There is no exact definition of whether to enter a niche or to a bigger market. What is clear is that if you enter a large market, remember that it’s large because it already has players inside, whether it’s old or new. That means you have to have a good differentiation. If you enter into a niche market, it means that it is still young, still new, meaning you have to educate the market, and you have to be prepared that market education is very expensive, and it takes a long time.

Ideally, you should enter a niche market that has been educated. For instance, if you want to pick mangoes from the mango tree, there are mangoes that are ripe but very tall, there are mangoes that are very young but low. The young ones you don’t want to take. If you take it, you have to wait, maybe it’s still small and very sour, but if you take the high one, you have to climb and it is crowded, lots of people want to take it, what you are looking for is the mango that is almost ripe, that is the one you take, in two days it will ripe, but it was not too high. Low hanging fruits.

Amir Karimuddin:
From your experience, what is an indicator or traction that shows that the idea is validated and convinces you to invest in the startup?

Willson Cuaca:
When the founder can explain how he achieves the traction he has, there is a detailed explanation of how he analyzes the user, it shows when we ask.

Amir Karimuddin:
This question is from Andhika of Racamin: “My startup already has revenue and also has a group but still doesn’t have much to do with technology. I have talked to VC but they are not sure because the tech is still low. I need funds to recruit and add more resources, and it’s kind of like egg and chicken situation. What do you say about this?

Willson Cuaca:
We recommend that with existing resources he builds the technology a little bit to see if he can implement the tech.

Amir Karimuddin:
The last question: Do you have tips about idea validation, especially for those who want to build features?

Willson Cuaca:
We talked about various things, from problem statement, low hanging fruits, and timing. If you already have a clear market problem statement, and you have an idea, and you seem to know how to execute it, what you have to do first is do it right away because the more you wait, the later you are than others because the faster you do it, it doesn’t mean you get first mover advantage only, but you can learn much faster than the person who might execute it tomorrow, you are already learning it one day faster. The essence of the ideation is only one: immediately execute!

Amir Karimuddin:
It looks like our time is up, thank you very much Willson for sharing this time with our startup friends. Hopefully this can be useful and applied by each startup.