The Y Combinator is perhaps one of the most popular startup incubators in the world—and also one of the most difficult to get in.
In fact, the
acceptance rate is only around 1.5% to 2% out of approximately 10,000 applications per cycle.
It shows that getting investors onboard an app idea is one of the hardest things a founder needs to do.
But you can shift the odds in your favor by using a minimum viable product (MVP). Here are some of the benefits you can look forward to.
Showcasing product functionality
One of the primary goals of an
MVP is to showcase the app’s functionality.
This is valuable information for investors, as it allows them to gauge the problem your app is trying to solve, as well as the app’s effectiveness in addressing it.
Indeed, getting investments from pitching an idea alone rarely works anymore. That might have been the case during the early years.
But not anymore, as competition is getting fiercer in today’s market, where up to 100 million startups launch yearly.
MVPs provide something tangible that investors can see and interact with.
There’s no need to use their imagination, as is the case with just a verbal pitch.
MVPs can also help your presentations become simpler and more streamlined.
Your pitch decks exist to simply supplement your MVP with facts, figures, and statistics.
Having the actual app can also help validate your app idea. Many ideas seem great on paper but don’t translate well into a product.
One good example is the failed streaming app Quibi. Founder
Jeffrey Katzenberg saw it as the platform that would:
“Radically transform the way people, in particular younger viewers, consumed content on the go.”
The unique selling point (USP) of Quibi was that it was the
Netflix of short-form content. The idea was that people could watch shorter clips while waiting at the bus stop or riding the train.
However, the idea was ill-conceived. Turns out, people we’re already doing that with free platforms like YouTube and TikTok.
The fact that the platform charged a fee ($4.99 / month) further alienated it from users.
An MVP could’ve easily validated if Quibi had real value in the market. Alas, the app’s failure cost investors
a collective $1.75 billion.
Now, let’s look at an app that successfully used an MVP to bring an app to market—and got billions in funding as a result.
Instacart was founded by Apoorva Mehta, who had the idea for a mobile grocery delivery service.
However, he didn’t have enough funds to build the system’s backend. To test his idea, he instead opted for an app with a manual backend.
In short, whenever an order came into the MVP, Apoorva and his team went to the grocery store, bought the items, then delivered them to the customers themselves.
There was no automation at all.
But thanks to his bootstrapping, Apoorva proved that the Instacart app had real value. As a result, he raised
$2.9 billion in funding from 37 investors as of 2022.
The Instacart MVP also helped show the one thing that matters to any investor—market viability. Let’s tackle that next.
Testing product viability
Showing how your app works with an MVP is all well and good, but unless you can prove it has a
real market need, you’ll likely struggle to get investors on board.
History is riddled with startups with amazing app ideas that failed when launched onto the market.
One perfect example is the failed startup Dinnr, a service that delivers pre-packed ingredients to users based on a recipe.
The idea is that people could enjoy the joys of home cooking without the guesswork.
Michal Bohanes | Medium
To founder Michal Bohanes’s credit, he did his homework and conducted market research to see the viability of this idea.
received positive responses—70% of respondents claimed they would use the service. So he was sure he was onto something.
But to his surprise, that’s not what happened when he launched the service. The first week only had 12 orders and the situation never improved from there.
The reality was there was no market need for Dinnr.
This example showed that even market research could give flawed data.
It turns out that what people say is far different from
what they do. And an MVP—being the actual app—can help you uncover a real market need.
But an MVP can do more than validate your app with end users. It could also give you real revenue data to back up that claim.
Two of the most important metrics here are
customer acquisition cost (CAC) and customer lifetime value (CLTV), and their relationship to each other.
CAC tells how much you spend to acquire a user, which includes marketing and advertising costs. In other words, it’s the app’s expense metric.
CLTV, on the other hand, tells you how much revenue a user is bringing you over the entire lifetime they’re engaging with your app. In contrast to CAC, CLTV is your app’s income metric.
When put together in a CAC/CLTV ratio, it tells you
how profitable your app is.
If CLTV is less than or equal to CAC, your app is losing money. But if your CLTV is greater than CAC, then your app is making a profit—and worth investing in.
Remember, MVPs don’t give projections but the
actual numbers in the field.
That is the most effective way to attract investors because it gives them confidence that they’ll get a return on their investment.
Proving your product commitment
One fear most investors have is that the project they’ve put their money into isn’t going to launch.
It might be due to a lack of funds, a poor team, or a weak market need. Worse, it could be a scam all along.
This happened with
Pay by Touch, a promising biometric payment app. But ineffective and irresponsible leadership led to its bankruptcy, leaving investors and clients hanging.
An MVP is great for allaying these fears. It shows your commitment to building the product.
Because an MVP might be a
bare minimum app, but building it is no joke. Take a look:
Add all of that up, and it costs roughly $100,000 to $127,000 to build an average MVP. If you have an innovative feature or complicated functionality, that could balloon further.
And while an MVP takes a relatively short time to develop—around three to four months—the schedule tends to be very taxing.
Creating a decent MVP takes a lot of iterative research, planning, design, development, and testing.
Think of it as a full-fledged app development process squeezed into a span of only a few months.
But the biggest challenge is maintaining a balance between essential features and development time.
On the one hand, you want to make your app as robust and engaging as possible. However, you also need to launch it as soon as possible, so you can’t spend too much time developing it.
But if you put the time and effort into building your MVP, it will show. And it can give investors the confidence that you have what it takes to succeed.
Receiving initial feedback
An MVP is an effective way to get feedback from end users, which you can use to evaluate the success of your app.
MVPs can also give valuable insights on how to improve your app. You can then incorporate them into the next version before testing again, refining your app with each iteration cycle.
This is the exact process that
Uber used to become a success today.
Founders Travis Kalanick and Garrett Camp released an MVP version of Uber that focused only on booking a ride, with zero other features.
Their goal was to test their idea’s viability and—hopefully—get useful feedback in the process.
The MVP proved to the founders that the ride-hailing idea would be a hit. But more importantly, it gave them insights that they used to further refine the Uber app.
From that initial set of feedback, Uber gradually added more features like in-app tracking and fare splitting. Even today, Uber still relies on user insights to improve.
Aside from helping build the best app that could attract investors, user feedback can also be used as proof of concept.
For instance, reviews can tell investors what your users think of your app. This is yet another indication of market need and potential demand.
If you’re getting fantastic feedback, that’s a good sign that could sway some investors.
That’s why it’s vital to incorporate feedback-gathering mechanisms into your MVP, like the one below.
Asking for reviews as someone uses the app gives you the most accurate feedback.
But it’s important to request one the right way, or else you’ll risk annoying users. Timing is everything, so give them enough time to enjoy the app first.
You can even throw in an incentive to encourage participation.
You can find more tips on how to ask for reviews and feedback in
our article here.
Proving you have a skilled team
An MVP is great for proving not just the viability of your app but your development team as well.
It doesn’t matter that you have the best, most profitable idea in the world if you don’t have the right people to bring it to life.
Therefore, it’s no surprise then that many apps fail because they don’t have the right talent behind them.
Take the online auctioning platform Auctionata, for example. The startup aimed to change the world of fine art by allowing users to join in biddings through their online devices.
At the time, founder Alexander Zacke touted it as the “fastest growing company in Germany,” among other things. And it managed to raise $96 million since its founding in 2012.
However, the startup got plagued with
fraud, financial misrepresentation, and misconduct.
But more than that, the app itself failed to meet expectations. It delivered poor customer service and slow performance, while also struggling with issues concerning online payment.
And that was more than enough to shut down the company in 2017.
Stories like these make many investors skeptical of even the most interesting ideas.
But an MVP can be your proof of concept. It shows that your team can create the initial app well, so they have what it takes to deliver the final version.
An MVP can also help you illustrate your
development process and approach, and how it gives your team an advantage over others.
DECODE, for instance, fields a dedicated team with members from various roles in every project we do, as it’s the only way to ensure a successful MVP.
DECODE also uses Agile methodology, where the development process is divided into small sprints.
This allows us to rapidly build and test an MVP in multiple iterations, each incorporating user feedback.
The bottom line is that having the right development team is a challenge. It takes experience, expertise, and sound work ethics.
But if you have this advantage, showing it through an MVP can make your project much more attractive to investors.
An MVP is your best fundraising tool
The thing is, you don’t need an MVP to get investors. In fact, plenty of founders have done it just by pitching their idea.
But as this article shows, an MVP will certainly increase your chances of getting funded and achieving long-term success, especially with so much competition in the market.
You just need to make sure you build your MVP
the right way.
If you don’t know how to do it, please read our
excellent primer here.
Or, you can simply partner with the DECODE team to help you out. Get in touch with us today, and let’s see how we can bring your MVP to life.