User research to reduce investment risk

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Why include user research and competitive analysis in your due diligence demands

“We’ve done our research,” is something you’ll hear from every tech startup looking to raise investment. As an investor in such startups, you’d expect market research and some competitor analysis as minimum, because if you’re going to invest, you want to know there’s a genuine need for the product.

But how well has the company assessed how their proposed product or service fits their target audience? How well does their offering fit with those people’s day-to-day habits and their values? Besides that, how will their product offer more value than their competitors? And will the person who uses it perceive that value in the same way?

These are the things that user research can establish, so next time you’re making your due diligence demands, consider asking: “Where’s your independent user research?”

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When even the big league get it wrong

A juicer that gives you fresh juice without any mess or any need to prepare your fruit and vegetables. That sounds appealing. You can see how there might be a need for something like that amongst fast-paced juice fanatics in Silicon valley. It was on-trend, it had the backing of a juice guru, and it overcame a major obstacle to drinking fresh cold-pressed juice: having to spend time preparing your fruit and vegetables and cleaning up afterwards. Anyone who has had to clean a traditional juicer will know how off-putting it can be.

Look at Juicero’s solution though and it becomes a less convincing proposition. You might not have to peel and chop your vegetables, but you have to order the pre-prepared juice packs, make sure your juicer is connected to WiFi (otherwise it won’t work), and allocate a significant part of your kitchen countertop to it. And you have to pay $700 for the juicer and a premium for the packs. Or at least you had to.

And was it 10 times better than any other juicer on the market? Because, according to PayPal founder Peter Thiel it would need to be if it were to stand a chance of succeeding.

Despite $120 million-worth of investment from some of the biggest venture capitalist companies in Silicon Valley, the Juicero’s career was short-lived. The company, which launched its juice press in 2016, sold its last Juicero in 2017. Bloomberg’s exposé of the redundant technology was the final straw: squeezing the juice packs gave you nearly the same amount of juice as putting it in the Juicero, and you could do it faster.

There are many similar high-profile examples, and one that clearly shows where independent user research might have saved millions is former Twitter CEO Dick Costello’s social fitness app, Chorus. Even Costello admitted the failure of the app after just 8 months was down to “hard-wired human behavior”. Designed to use social accountability to help people meet heath and fitness goals, the app overlooked a fundamental aspect of human nature — when we feel that we aren’t meeting others’ expectations, we disengage. If we’re struggling with our fitness goals, that’s not something we want to share, and we’re unlikely to want to encourage others.

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Validating the user-product fit

The truth is that what we as customers say our needs are and what they actually are often diverge. An ideal is more appealing than a reality. Our logic says one thing, our emotions and our subconscious make us do another.

The thought of a mess-free juicer might have us clamoring for next-day delivery. Put us in our kitchen at the start of a busy day and we’ll probably reach for the coffee pot.

The thought of having our friends help us get fitter and leaner sounds great. But once we’ve missed a workout or two, do we really want a friendly reminder of how we’ve failed, even if that’s not the intention?

It’s estimated that 42% of tech startups fail because there is no market need for their offering. Their failure was probably more complex than that. However, even if a market need is established, as you would hope was the case with Juicero and Chorus, that doesn’t mean the proposed solution has been validated. Before you have a functioning product that you can user test, there is only one way to establish whether the idea will work for real people in the real world, and that’s by conducting user research using a prototype.

Another useful thing it can tell you is whether this idea could actually beat the competition. That’s not just products similar to yours, but products that fulfill a similar function in a totally different way, for example a radio versus online news. Just because there is room to improve on a competitor’s product, that doesn’t mean the proposed improvement will be perceived as valuable for the user. The proposed product might have more features, but are they of any real value? Will they make enough of a difference for a person to switch their loyalty.

Through conducting research around a concept and around the competition, user research can help tell you two critical things: is the company you’re thinking of investing in making the right product? And are they making that product right?

There are various ways to conduct user research, but whether through in-depth interviews, contextual enquiries or diary studies, a skilled researcher will be able to ascertain how a concept, a prototype or a final product could work for the target users. It takes into account human psychology and the target market’s reality. In essence it’s a reality check for any product or service at any stage.

In conclusion

You may not be one of venture capitalists on Forbes’ Midas List, but if you’re investing in tech startups it’s worth considering that a little user research could go a long way in reducing risk.

User research can be undertaken from the very earliest concept development phase, and initial user research doesn’t need to be complex or costly. So, if a company director tells you it’s too early to have any user research, or they can’t afford it yet, you might want to rethink your investment. Why would they not want to show that their idea has merit with real people as soon as possible?

Even if they have done the research, ask them who’s done it. Was it an independent company? Was it a trained user researcher? Anyone can ask questions, but a skilled user researcher will have training and experience that ensures the conclusions are significant and free of bias. Get an independent researcher to review their research if necessary.

Of course, user research alone can’t guarantee an investment. Risk and investment cannot be separated. Markets change, trends change, what is culturally acceptable changes. But human nature doesn’t change, which makes user research something you should really think about including in your due diligence process. It won’t eliminate risk, but it can mitigate some of it.

Even if your gut still tells you the investment is a good one, if there’s no user research been done, you really want to ask yourself “why?”