The Power of a Bottom-Up Approach: Finding Your First Buyer

As an entrepreneur, one of the most crucial steps in building a successful startup is conducting customer interviews. In my previous posts, I emphasized the importance of finding that one customer whose problem you are solving. Today, I want to dive deeper into why this bottom-up approach is essential and how it can differentiate you from others in the startup world.

When you're starting a business, discovering that first customer is vital. Sometimes, you might get lucky and encounter a problem that you personally want to solve, making you the “ideal” customer. In these scenarios, it's relatively easy to find others like you and validate your idea further. Remember, validating your idea is key—it’s the holy grail to avoid expensive pivots. However, more often than not, you won’t be the person facing the issue. When you haven't experienced the problem firsthand but have merely observed it, conducting customer interviews (also known as customer discovery) becomes crucial. This process helps you understand the problem better and reduces your biases.

Our professors, who were seasoned investors, often stressed the importance of a bottom-up approach. They highlighted that investors almost always skip the top-down approach page in a pitch deck. However, when a founder uses a bottom-up approach to build the market size, investors are instantly intrigued. This shows that the founder has made a genuine effort to talk to and identify their customers, indicating that the startup is ready to gain initial traction. This gives the founder an upper hand in securing investment.

Bottom-Up vs. Top-Down Market Sizing

To illustrate the difference, let’s compare bottom-up and top-down market sizing.

Top-Down Approach:

1. Start with a broad market size.

2. Narrow it down to your target market.

3. Assume a percentage of this market will use your product.

Example: You’re creating a new fitness app. You might start by saying the global fitness market is worth $100 billion. If you capture just 1% of this market, you’ll have a $1 billion business. This approach is speculative and often unrealistic because it doesn’t account for the specifics of your target market.

Bottom-Up Approach:

1. Start with specific data about your potential customers.

2. Calculate the market size based on real interactions and data.

3. Scale up from your initial customer base.

Example: You interview 100 fitness enthusiasts and find out 30 are willing to pay $10/month for your app. You then project this on a larger scale, estimating that in your city alone, there might be 10,000 similar enthusiasts, giving you a potential market of $3 million/year. This approach is more reliable because it’s based on real customer data and behavior.

Why Investors Prefer Bottom-Up

Investors rarely believe in 3–5-year projections made using the top-down approach. They know these numbers are often inflated and unrealistic. However, if your projections are built using the bottom-up approach, investors recognize that your growth plan is based on actual customer interactions and solid data, making it worthy of serious discussion.

In my next post, I will discuss how to build a bottom-up approach effectively using more examples and provide a basic spreadsheet as a downloadable file that you can use. Stay tuned for more insights and practical tips!

Have you experienced the benefits of a bottom-up approach in your entrepreneurial journey? Share your thoughts and stories in the comments below!

And as always, keep hustling!