Assume a startup has raised a seed round of ~$2 million. Also assume that what the startup has is a hypothesis that a big market composed of dogs will want to eat the dog food described by the hypothesis. The founders of the startup have no proof that their hypothesis is true, but some investors have voted with their money that there is significant hope that the startup’s hypothesis is correct.
The first rule of startups is that without making something that people want to buy, you’re dead. The second rule is that you should not forget the first rule. Unfortunately, at the very early stages of the startup’s existence it faces many challenges related to at least one untested hypothesis. “Hypothesis”, of course, is just a fancy word for “guess.” Steve Anderson the founder of the seed stage venture capital firm. Baseline Ventures points out: “Generally speaking, most of my investments are pre-product launch — they’re just an idea. My goal as an investor is to make sure there’s enough financing to give companies time to do that, a year to 18 months. The worst scenario is to try to raise more money when you haven’t achieved that goal. If you don’t have it, eventually you’ll run out of cash, say the experiment is wrong, and fold up your tent. That’s why when I invest I want to leave enough room for pivoting or reexamining your goals.”
Andy Rachleff: “A value hypothesis identifies the features you need to build, the audience that’s likely to care, and the business model required to entice a customer to buy your product. Companies often go through many iterations before they find product/market fit, if they ever do.” When the startup is still searching for the elements of its value hypothesis, money and time spent on growing the business is a bonfire of cash generating zero value. The early days of the life of a startup are focused on “search” rather than “execution” advises Steve Blank.