The Letter of Intent Fallacy
By Alice Bentinck, EF Co-Founder
Customer development and gaining customer traction is vital to be able to build your startup successfully. Investors want to know that someone somewhere wants to use your product and that they’ll pay for it.
In the world of tech enabled startups, this is relatively simple. You can prove customer traction through having users signed up (or even better paying customers) and interacting with your app or website within a couple of weeks.
However, in the world of deep tech startups, where the product may not be ready or usable for months, if not years, how do you prove customers want what you’re building? How do you show that a customer really wants your product?
A Letter of Intent (LOI) has become the typical way for a B2B deep tech company to show that they have customers who want their product.
Investopedia outlines a LOI as “in most major business transactions, a letter of intent (LOI) outlines the terms of a deal and serves as an “agreement to agree” between two parties.”
It’s a light legal document where the customer makes a soft commitment to potentially using your product in the future.
Using LOIs as a short cut
Teams use LOIs as a way to prove that customers want what they are building, but too often we see teams use this as their only attempt at customer development.
A LOI is meant to be a proxy for customer traction, but why get customer traction in the first place?
Customer traction means that you are moving towards product market fit. It means you have strong understanding of your customers’ needs that allows you to build a robust product that accurately and effectively serves those needs.
This point about customer understanding is often lost in the race to get a LOI. It can take a matter of days or weeks to get a LOI, it can take months to truly understand your customer.
In the same way with an app it’s not sign ups that matter, but level of user engagement, for a deep tech company, it’s not LOIs that matter but the level of customer understanding.
Customer understanding > LOI
The best cofounding teams are able to tell in depth stories about their customers. They can speak about named individuals that they have a relationship with and can talk about how and why customers want to use the product. This is not surface level and this doesn’t come from infrequent and sporadic interactions.
The best teams spend significant time with their customers. They grab a beer together, watch them at work and get tours of their factories/hospitals/stores etc.
The best teams feel real empathy for the customers that they’re working with. They know how these problems affect them and want to make a change.
This depth of understanding leads to better product development, more engaged and patient customers, and better long term outcomes for the startup.
You can’t get this from a signed piece of paper. And more often that not we see potential customers renege on their LOI to the team’s surprise and dismay.
LOIs can’t shortcut customer understanding
In the same way that raising money doesn’t mean you have a successful startup, having an LOI doesn’t mean you have customer traction. The process of understanding your customer is far more nuanced than that.
So don’t kid yourself that a LOI means you’re done with customer development and get out there and speak to customers face to face.