Most entrepreneurs spend months perfecting their product before showing it to a single customer. Aaron Lee believes this is backwards—and dangerously wrong.
The co-founder and CEO of Smith.ai, a communication platform serving thousands of small businesses, built his first proof-of-concept in just 3-6 months. His previous company, Red Beacon, was acquired by Home Depot after winning TechCrunch's top prize. Before entrepreneurship, he was one of the first engineers at Google Videos, later moving to YouTube's monetization team.
In this interview, Lee reveals why charging customers from day one is the only validation that matters, how to build marketplace supply without venture funding, and the counterintuitive approach to pricing that helped Smith.ai achieve profitability from launch.
Watch the full interview now on EO's YouTube channel! Below is the complete transcription of the interview. Minor edits have been made for clarity and readability.
Key Highlights:
"To get the first proof of concept prototype, it shouldn't take you more than a few months. I would say 3 to 6 months. And if you are taking longer than that, that means you are not showing your product early enough to your customers."
"Will the business owners pay for it? It doesn't matter how much you charge, you can charge like $1 per call or $2 per call. The fact that they're willing to pay and they're willing to pay month after month after month is the best testimonial for your product."
"Will the business owners pay for it? It doesn't matter how much you charge, you can charge like $1 per call or $2 per call. The fact that they're willing to pay and they're willing to pay month after month after month is the best testimonial for your product."
From Google Videos to YouTube: When Giants Collide
Tell us about your background and how you ended up at Smith.ai.
Aaron Lee: Hi, I'm so excited to be here. I'm Aaron Lee, co-founder and CEO of Smith.ai. Smith.ai is a startup that helps small medium businesses to handle the inbound and outbound communications 24/7. We handle your phone calls, live chat, SMS, and Facebook Messengers.
So I joined Google early 2004. I was one of the first two engineers to build Google Videos. Also by that time, YouTube came along, so we were kind of competing, but by the end of 2006, it was clear that YouTube was taking the internet by storm and the rest was history. So after that, I joined the YouTube team and worked on their monetization, so I worked on AdWords for video, AdSense for video. And eventually I spent about almost 5 years at Google.
Google is a very engineering centric company. Back in the days, when Larry and Sergey and Eric were still the trio running the company, the mantra was let the engineers explore, give them the flexibility and the freedom. I think both Larry and Sergey are also engineers by training, but they're not business focused. If you probably remember when they pitched to Kleiner Perkins or Sequoia, they did not have the business model. They said, let me show you some of the really cool technologies.
So, I was an engineer by training, but at the same time, I was also fascinated by the products, the user experience, and some of the business model. If you're building a product for B2B or B2C, you really want to talk to a ton of customers, and even after you build a product, the prototype, you want to talk to them even more, because once you put the product in their hands, you will find out a whole new set of problems and the things that they're interested in, and they will never be the problems that you anticipated that they will have. So that part is very interesting to me. So I started moving further and further away from engineering to building products. So I said, well, it's time for me to start my first company.
So I joined Google early 2004. I was one of the first two engineers to build Google Videos. Also by that time, YouTube came along, so we were kind of competing, but by the end of 2006, it was clear that YouTube was taking the internet by storm and the rest was history. So after that, I joined the YouTube team and worked on their monetization, so I worked on AdWords for video, AdSense for video. And eventually I spent about almost 5 years at Google.
Google is a very engineering centric company. Back in the days, when Larry and Sergey and Eric were still the trio running the company, the mantra was let the engineers explore, give them the flexibility and the freedom. I think both Larry and Sergey are also engineers by training, but they're not business focused. If you probably remember when they pitched to Kleiner Perkins or Sequoia, they did not have the business model. They said, let me show you some of the really cool technologies.
So, I was an engineer by training, but at the same time, I was also fascinated by the products, the user experience, and some of the business model. If you're building a product for B2B or B2C, you really want to talk to a ton of customers, and even after you build a product, the prototype, you want to talk to them even more, because once you put the product in their hands, you will find out a whole new set of problems and the things that they're interested in, and they will never be the problems that you anticipated that they will have. So that part is very interesting to me. So I started moving further and further away from engineering to building products. So I said, well, it's time for me to start my first company.
Building Red Beacon: The Perfect Storm of No Money and No Competition
What was your first company and how did you navigate the 2008 financial crisis as a new startup?
Aaron Lee: So I left Google in 2008, with two other ex-Googlers, right in the month of the financial crisis, and all the VCs were like, no money for you guys. And we said, great, that means we can keep our heads down, build the product. So by the time we launched our first product, it was a company called Red Beacon. It's a marketplace that connects homeowners with home improvement professionals. And we took the top prize in TechCrunch, and because the year prior, there was no funding for the other startups, so we had no competitors. So we went nationwide very quickly.
Back then, finding a reliable professional was really, really difficult. You may go to Yelp or Yellow Pages or Angie's List. It's just really unreliable. You don't know, would they be able to do it at the price that you can budget for, and what time can they come. We believed we could actually build a much more efficient marketplace where people can go in, they can submit the job request, they just say, within 10-15 minutes, people say, yep, I can do your job, this is my price range, and I can come by next week. So we wanted to make the connection between people having a job, like homeowners, to the professionals who are looking for projects or jobs much more efficiently. And that's not much different than LinkedIn, when they first built up, they are basically matching opportunities with the job seekers.
Back then, finding a reliable professional was really, really difficult. You may go to Yelp or Yellow Pages or Angie's List. It's just really unreliable. You don't know, would they be able to do it at the price that you can budget for, and what time can they come. We believed we could actually build a much more efficient marketplace where people can go in, they can submit the job request, they just say, within 10-15 minutes, people say, yep, I can do your job, this is my price range, and I can come by next week. So we wanted to make the connection between people having a job, like homeowners, to the professionals who are looking for projects or jobs much more efficiently. And that's not much different than LinkedIn, when they first built up, they are basically matching opportunities with the job seekers.
What was the biggest challenge in building that marketplace?
Aaron Lee: I think the most challenging part of building Red Beacon is when we have the demand and we don't have the supply, you have to quickly find the supply or the customer will be disappointed. It's almost a race. How quickly can you find the most reliable, amazing providers that can meet the needs?
In the early days, how do we source these kind of supply side? We sourced many of the review sites. If you think about it, it's almost like a human scraper. You go into Yelp or Angie's List and you look at these profiles and you say, which pros are getting the most consistent positive feedback, and then you just call them up and say, hey, I have a customer that is waiting for you. Would you be interested in signing up? By the way, I can send you the job right now. If you can tell me your email, your phone number, we'll start building the profile for you. So once you build up that database, then you can do the matching a lot faster and a lot more efficiently.
Now, here's the challenge. If you don't have enough supply, then the customer will be disappointed because they said, I submitted the job. I've been waiting for more than a day now and there's no one interested. This platform is not useful. Now, if you have too much supply, then the business will say, I don't get enough jobs from your platform. Eventually we figured out one of the magic numbers is if you can send about 4 to 5 jobs per week, you can keep the companies or the providers or home improvement professionals engaged. Once they get engaged, they will be excited about your platform. That means whenever someone puts a job in, they will respond quickly.
In the early days, how do we source these kind of supply side? We sourced many of the review sites. If you think about it, it's almost like a human scraper. You go into Yelp or Angie's List and you look at these profiles and you say, which pros are getting the most consistent positive feedback, and then you just call them up and say, hey, I have a customer that is waiting for you. Would you be interested in signing up? By the way, I can send you the job right now. If you can tell me your email, your phone number, we'll start building the profile for you. So once you build up that database, then you can do the matching a lot faster and a lot more efficiently.
Now, here's the challenge. If you don't have enough supply, then the customer will be disappointed because they said, I submitted the job. I've been waiting for more than a day now and there's no one interested. This platform is not useful. Now, if you have too much supply, then the business will say, I don't get enough jobs from your platform. Eventually we figured out one of the magic numbers is if you can send about 4 to 5 jobs per week, you can keep the companies or the providers or home improvement professionals engaged. Once they get engaged, they will be excited about your platform. That means whenever someone puts a job in, they will respond quickly.
The Home Depot Acquisition: Why Brand Trumps Everything
How did the Home Depot acquisition come about?
Aaron Lee: Home Depot actually knocked on our door and they said, wow, this is something that I've been thinking about for a long time. After the acquisition, I actually stayed on as the CTO for another 3 years. It was really a perfect match when Home Depot approached us because they wanted to build a connection between their customers. So they have two sides of the marketplace, the homeowners and the home professionals.
So Home Depot thought it would be amazing to basically say, if you go to Home Depot, buy something, it could be a kitchen cabinet or a carpet or something that you want to install, and you can find someone that can do it for you, but they also want some kind of trust, they have the brand, they've been here for almost 4 decades. So when people talk about, oh, this is coming from Home Depot, they have the trust, they have the brand. They're not like, Red Beacon, oh, I never heard about Red Beacon.
So that is the problem when you build up the marketplace, you need to get to the critical mass. In order to get to the critical mass, you need the brand and the trust. So that is something that I would say not even money can buy. You cannot buy the brand, you cannot buy the trust, you cannot buy the distribution. You probably can unless you spend a lot of money.
So Home Depot thought it would be amazing to basically say, if you go to Home Depot, buy something, it could be a kitchen cabinet or a carpet or something that you want to install, and you can find someone that can do it for you, but they also want some kind of trust, they have the brand, they've been here for almost 4 decades. So when people talk about, oh, this is coming from Home Depot, they have the trust, they have the brand. They're not like, Red Beacon, oh, I never heard about Red Beacon.
So that is the problem when you build up the marketplace, you need to get to the critical mass. In order to get to the critical mass, you need the brand and the trust. So that is something that I would say not even money can buy. You cannot buy the brand, you cannot buy the trust, you cannot buy the distribution. You probably can unless you spend a lot of money.
The Birth of Smith.ai: When Nobody Answers the Phone
What led you to start Smith.ai after your time at Home Depot?
Aaron Lee: Over the past 3 years at Home Depot and throughout my career, you keep hearing people say, look, I cannot respond to your lead. I am driving on the road, I am working on this roof, I'm working in the attic. If you think about the transition from Red Beacon to Smith.ai, it's very similar. When we send them the leads, we say, hey, I have a job for you. And they will say, oh, I'm just so busy. When we call them, they don't pick up the phone. When we send them an email or a text message, they don't reply right away. And that problem is so fundamental to pretty much all the SMBs today because they just don't have the time and they don't have the team, and they don't even have the IT experts to build a system to do it.
So we started building our team by using both AI and the human agents as the fallback, and the goal is to make sure that we can handle every single call that are coming in within a few rings. We're not just about taking a message. We want to qualify the lead. We want to make sure that our agent can handle the business and represent the business.
So we started building our team by using both AI and the human agents as the fallback, and the goal is to make sure that we can handle every single call that are coming in within a few rings. We're not just about taking a message. We want to qualify the lead. We want to make sure that our agent can handle the business and represent the business.
Who is your ideal customer?
Aaron Lee: I call the ICP, the ideal customer profile for Smith.ai. They are the people that time is money. Every single minute counts. High opportunity cost. If you miss a call, let's say you're a real estate agent or you're property managers, if you miss a call or chat, the cost of missing that is very high. The last one is, I call the high LTV, lifetime value. So think about dentists. Now, you go to do a dental cleaning or cleaning your teeth, it might seem like, oh, it's only $200 to $300. But once you find a good dentist, you're going to stay with the dentist for many years. So the lifetime value of that patient could be tens of thousands of dollars and even more for the orthodontist.
So if you think about that, people who have high LTV, high opportunity cost, time is money, would be our ideal customer profile. So that means lawyers, home service professionals, real estate agents, general contractors, interior designers. We serve a very, very long tail of customers.
So if you think about that, people who have high LTV, high opportunity cost, time is money, would be our ideal customer profile. So that means lawyers, home service professionals, real estate agents, general contractors, interior designers. We serve a very, very long tail of customers.
The 3-6 Month Rule: Why Speed Beats Perfection
How did you approach building Smith.ai differently from traditional startup advice?
Aaron Lee: In the early days of Smith.ai we spent a lot more time talking to our customers first. We spent a few months talking to the customers, and while we're talking to our customers, it's actually a good way to acquire your first customers because you know the pain points, you know that they're looking for the solution we're offering. By the time you build a product, you can go back to them and say, I have the product that you asked a few months ago. It doesn't mean that they will say, great, I'm going to pay for it. And then they will say, wait a minute, I really want this, but you guys don't have that. Can you come back to me when you have it?
But if you look at, from the moment that we know what we need to build to the moment that we launch, I would say 3 to 6 months. Of course, we have a lot of bugs to fix, we have a lot of things to improve, but to get the first proof of concept prototype, it shouldn't take you more than a few months. And if you are taking longer than that, that means you are not showing your product early enough to your customers.
So I think one thing that a lot of founders are embarrassed or maybe a little bit shy, is they don't want to talk about their ideas. They say, oh, my idea's not fully baked. I'm not ready to tell the world. I think the problem is, by the time you want to show your product, it's probably too late. You should have gotten the feedback and advice. So we basically, early on, we tell people, hey, we're building this, would you like to try, and by the way, it's not going to be perfect and I'm probably going to be very embarrassed because the product may or may not work, but I would love to get your feedback. So, having a thick skin, not feeling embarrassed is the key. From there you start learning and learning, you start iterating your products.
But if you look at, from the moment that we know what we need to build to the moment that we launch, I would say 3 to 6 months. Of course, we have a lot of bugs to fix, we have a lot of things to improve, but to get the first proof of concept prototype, it shouldn't take you more than a few months. And if you are taking longer than that, that means you are not showing your product early enough to your customers.
So I think one thing that a lot of founders are embarrassed or maybe a little bit shy, is they don't want to talk about their ideas. They say, oh, my idea's not fully baked. I'm not ready to tell the world. I think the problem is, by the time you want to show your product, it's probably too late. You should have gotten the feedback and advice. So we basically, early on, we tell people, hey, we're building this, would you like to try, and by the way, it's not going to be perfect and I'm probably going to be very embarrassed because the product may or may not work, but I would love to get your feedback. So, having a thick skin, not feeling embarrassed is the key. From there you start learning and learning, you start iterating your products.
The $1 Per Call Test: Why Payment Is the Only Validation That Matters
How do you know if you have product-market fit?
Aaron Lee: One thing, it's very important to know whether you have the right product market fit is, will the business owners pay for it. It doesn't matter how much you charge, you can charge $1 per call or $2 per call. The fact that they're willing to pay and they're willing to pay month after month after month is the best testimonial for your product.
And by the way, one of the most important things about the SMB is they are very budget sensitive. Meaning if they don't find something of value, even maybe $20 or $30 they will cancel it right away. They are not going to wait. Now, versus if you think about a bigger company, more cash on the balance sheet, they may say, oh, a small amount, they probably don't care. It's okay that your product is not full featured, but it's important that people are paying for your MVP.
So, in fact, we are generating revenue since day one. We're not the type of companies that you have the freemium model, meaning 98% free users and 2% paid users. Every user who uses our product on Smith.ai, they're paying for it.
And by the way, one of the most important things about the SMB is they are very budget sensitive. Meaning if they don't find something of value, even maybe $20 or $30 they will cancel it right away. They are not going to wait. Now, versus if you think about a bigger company, more cash on the balance sheet, they may say, oh, a small amount, they probably don't care. It's okay that your product is not full featured, but it's important that people are paying for your MVP.
So, in fact, we are generating revenue since day one. We're not the type of companies that you have the freemium model, meaning 98% free users and 2% paid users. Every user who uses our product on Smith.ai, they're paying for it.
How did you figure out your pricing strategy?
Aaron Lee: To be honest, we didn't know what was the right pricing strategy. So we started, we picked a number. I think in the beginning, we were charging people $2 per call, and we knew that we were not perfect. Then at some point people will say, okay, wow, this is really good value. When you hear people say, this is so cheap, then you know you're a little bit underpriced. Now, at some point you're charging something a little bit higher, and people will say, wait a minute, I don't understand why you guys are charging me this. This should be very little and very cheap. So we adjust our pricing. So every year we change our pricing based on the values that we deliver.
Our goal is if we can absorb some of the cost, we can get more customers, then at the end, it's a win-win. There are more people who are using our platform, they are paying at a lower rate. So, I would say don't get too hung up on coming up with the perfect pricing in the beginning. Your pricing should be proportional to the values that you deliver to the business. It's okay to change your pricing, that's definitely fine.
Our goal is if we can absorb some of the cost, we can get more customers, then at the end, it's a win-win. There are more people who are using our platform, they are paying at a lower rate. So, I would say don't get too hung up on coming up with the perfect pricing in the beginning. Your pricing should be proportional to the values that you deliver to the business. It's okay to change your pricing, that's definitely fine.
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