How to Build the Perfect Startup Funnel

June 20, 2017

7:15 am

Funnels are remarkably useful in many aspects of startup life. Whether you are trying to get users to try your product, or sell to an enterprise customer, or hire an engineer, or raise capital, you are dealing with a funnel. Here are a few funnels we will be discussing:

 

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Funnels are essentially inverted pyramids that are divided into stages. The objective is to move through the funnel from top to bottom, while trying to lose as little as possible in each stage. Unfortunately, a perfect funnel would be – you talked to 100 companies, and every single one became a customer, or you talked to 20 investors and all wrote you a check.

Perfect funnels basically don’t exist in real life, that’s why we are going to talk about strategies and methods for getting to as close to a perfect funnel as possible.

The 5 Rules

Rule 1: Optimize Funnels Bottom Up

Here is the first and most important rule of any funnel: Optimize funnels bottom up.

Why? Because it is too costly for you to add leads or potential customers or investors to the top of the funnel, spend all the time moving them through the funnel, only to find out in the end that they won’t close.

Picture this – a massive bucket of water. You keep pouring a ton of water, but it doesn’t fill up because there is a hole on the bottom. 

Leaky buckets, or funnels that aren’t tuned on the bottom, are a waste of your time.

First, you make sure the bottom of the funnel is solid and then you work your way back up through stages.

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Here are examples of leaky funnels:

  • If you have a conversion funnel to get people to download your app, but there is a bug in your on-boarding process, then you have a leaky bottom – no point in trying to get more users to come to your site. You need to fix on-boarding first.
  • You had 10 customers in a later stage of the conversation for an enterprise sale but they all said no. Why? Apparently your product doesn’t pass their security requirements.
  • You have two to three meetings with investors, and they keep passing and saying you are too early.

Being able to close is critical, so you want to make sure you really understand what closing would require and how to optimize the bottom of your funnel.

Rule 2: Understand Conditions to CLOSE

While you can’t be positive that a customer will buy or an investor will give you a check, you can reduce the risk of not closing by qualifying your leads, actively communicating and using reflective listening.

Here is a powerful technique – imagine a sale already happened. Imagine an investor wrote you a check. Imagine you have a lot of engaged users actively using your product. Now ask what must have happened? What conditions must have been true? 

With that in mind, construct a set of questions and a check list to help you confirm that you are on the right track.

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For sales – you need to understand the economic buyer, decision maker, confirm there is an intend to buy, the timeline, the budget, criteria for success of a trial, and all other things that need to happen in order for a sale to occur. Figure out and understand the process ahead of time so you can win it.

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This technique works with investors. Make sure to ask about their process in advance, the check size, if they invested in competitors, if they intend to make more investments this year, ask if you are a potential fit, which partner would be working on this, what their concerns are and how you can address them.

Rule 3: Tune One Stage of a Funnel at a Time

Once you spent time optimizing the bottom, and have more confidence about closing, then work your way up one stage at a time.

Don’t try to optimize across all stages of the funnel at once. Focus on one stage at a time.

The goal is to improve the drop off by a little bit, by setting a small goal and hit it. For example in the picture below, try to improve drop off between Meeting and Trial stage by five percent. If you succeed in tuning it, do not stop – keep going.

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You should focus on fine tuning the same stage until you can’t tune anymore. Then move off to the other stages of the funnel and repeat the tuning.

Rule 4: Use Actions and Nudges to move through Stages

So, how do you actually tune the funnels?

In general, it depends on whether you are working on the product or doing sales or raising capital.

One common strategy in all of them is a Nudge to take an Action. A Nudge is an explicit ask for a user, a customer, an investor to take an Action.

For definition purposes: an action is something a user, a customer or investors do, an action causes movement from one stage of a funnel to another and a nudge is something you do to cause the action

Examples of a nudge to bring about action would be:

  • For a web site could be as simple as copy – please sign up to get our updates. Or another similar example of a nudge could be a logos of customers or press articles — sign up because we are awesome. In this case sign up is an action we want a visitor to take. If we succeed, then the user moves to the signed up stage.
  • An email announcing a 50 percent sale on all sweaters. The expected action is a click followed by a purchase of a sweater.
  • Informing a VC that you have a term sheet from another VC. The action you are looking for is to get a competing term sheet.
Rule 5: Figure out Stages of the Funnel

The next thing to understand about funnels is that they are all different and have different shapes and stages.

When someone is new to sales, they’ve heard about finding leads, qualifying them, setting up a demo, doing a trial and then closing.

The actual sales funnel has a lot of nuances, and captures the sales process specific to each company, and sometimes even to each customer. It is fine to start with a generic funnel, but very important to quickly recognize where and why it is wrong and tune it.

For example, when you are pitching a venture firm, the process is literally different for different firms. Some have you meet with associates, then one partner, then two partners, then ask for diligence, then have you present at the partner meeting.

If this sounds confusing, it really is, and thats why it is so important to ask in advance what is the process for each firm.

Activation and Retention Funnel Tips

We will now look at some specific tips that apply to different types of funnels.

If you are running B2C business, you need to master Activation and Retention. Activation typically includes getting a visitor to sign up and explore the product. Retention is focused on bringing the users back and making sure the user continues to use the product. Ask yourself:

Activation

  • What does the user do right after they sign up?
  • What do they do the first five minutes, first day, first week?
  • What is the hook that will get them to come back?
  • What are the key Nudges?

Retention

  • When and why would the user come back?
  • What are the key Nudges?
  • What do you expect the user to do?
  • How often do you expect the user to comeback?

B2C Churn and Magic Moment Tips

Churn occurs when a user stops using the product. Since it typically costs money for most businesses to acquire users at scale, businesses with high churn aren’t viable.

The Magic Moment is a state such that if a user hits this state, there is a very high likelihood that the user will remain a user in the future and won’t churn. 

More precisely, if the Magic Moment is reached by N users, then for this group of users, and each such group, Life Time Value – Cost of Acquisition equation results in a viable business.

For example, Facebook discovered that once a new user added 20 friends they would stay. The reason was that friends would generate content that would help pull back the new user. Facebook benefited from discovering their Magic Moment early on and tapping into massive Network effects.

To sum it up, the Magic Moment helps us create a viable business.

Sales Funnel Tips

Sales are the bread and butter of B2B and are pretty well understood. When you are starting a new company, you don’t know in advance what YOUR sales funnel will look like. Once you become a real business, you will have a lot of predictability and control over your sales by mastering and optimizing your sales funnel.

Here are some important things to consider with your sales funnels early on:

  • Qualify Leads: Come up with a checklist to qualify your leads. Disqualify quickly.
  • Define your funnel: Guess stages of your funnel. Make it specific and unique. Iterate as you learn more about your customers. If you are struggling or have a big drop off, you may need to add a stage / nudge.
  • Use reflective listening: Ask about the process in the beginning, and confirm your understanding at every stage, every meeting.
  • Create predictability: As you optimize your funnel you should be able to get better and better at forecasting.

Read how to get your startup noticed by investors

Investor Funnels Tips

We’ve written a lot of posts here on the topic of fundraising. To succeed, the founders need to prepare, execute on the business, get in front of the right investors and walk through the Investor Funnel.

Here are some key things to consider:

  • Setup your investor funnel: Create spreadsheet or use another tracking system to setup your investor funnel. We covered it in details in this post.
  • Pre-qualify each investor: Before engaging, figure out if this investor is right for you. Are they interested in your space? Are they actively investing? Have they funded a competitor? Is their check size appropriate for your stage? Do they have bandwidth? Make sure you are clear about all of this in advance. Here are the questions you should be thinking about.
  • Understand the process: Ask investors about their process. Ask during each meeting what the rest of the process is like from here. This allows you to keep track and keep refining your funnel.
  • Use reflective listening: Use reflective listening to confirm that you understand what’s being said. Avoid happy ears. Accept a NO, don’t accept a MAYBE.
  • Understand how to commit: Commit investors and understand conditions for each commitment. Read this post on how to commit investors with confidence.

Funnels are really important in all aspects of startup life. There is a lot more to them, but hopefully this post is a good starting point for you.

Read the extended version of this article at Alex Iskold

Read more about creating a clever startup team at Tech.Co

This article is courtesy of Techstars, the best global ecosystem for entrepreneurs to bring new technologies to market. From inspiration to IPO, Techstars empowers the world’s most promising entrepreneurs throughout their lifelong journey by providing a global ecosystem made up of tens of thousands of community leaders, founders, mentors, investors, and corporate partners.

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Alex Iskold is the managing director of Techstars in New York City. Serial entrepreneur, founder of Information Laboratory and GetGlue. Engineer, geek, complex systems addict, lover of art and wine. Invest and help tech startups. He actively blogs about startups and venture capital at http://alexiskold.net.

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