A 3-step Process to Test your Startup Idea
Most startups fail. Debates about why are nearly as old as Silicon Valley itself. Some argue it was the team and its inability to execute, while others point to the lack of a market for an idea.
Both are critical in achieving ‘product market fit’, but a CB Insights post-mortem study found that ‘no market need’ was the #1 reason for failure.
Entrepreneurs put their heart and soul into these ideas (not to mention their capital), and in many cases the pain of a failed startup could have been avoided with some customer research up front.
In this post, I am going to share three relatively inexpensive tests I’ve used while working at a VC to quickly learn about the market demand for startup ideas.
1. Begin with Face-to-Face Conversations.
At this point your idea is largely in your head. Prospective customers can’t get inside there, so it’s important to start sharing your idea to see what people think about it.
Understanding their level of enthusiasm is important as is learning about the best way to describe your idea so people can judge whether it’s something they can get behind.
How to do it —
Start by getting to know the person you’re speaking with and the kind of solutions they currently use in the space. It’s important to establish trust so they will be honest in their feedback on your idea.
Then describe how your idea would work, asking them if they understand it and whether it’s something they are interested in.
Pause often to allow them to react and ask probing follow-up questions. Try to understand pros and cons vs. alternatives they are using today and whether they volunteer other people they know who would be interested in using your idea.
Friends and others from your network can be a place to start, but seek out ways to extend your research to people you don’t know.
Even if your network is large, it is not nearly large enough to support a business so strangers will need to understand what you are doing and decide whether it’s something they can support.
The excellent book Sprint by Jake Knapp of GV offers some tips on how to recruit people using Craigslist. I especially like the screening process he describes and have used a similar approach.
When I was researching an idea I had that would ultimately become a sports apparel company still in stealth-mode, we walked around tailgates prior to Seahawks games and asked fans if they had a few minutes to talk about a new business idea we were working on.
We had plenty of takers in only a few hours’ time without offering incentives and gained very valuable feedback.
What you can learn —
You will likely get a mix of reactions from people after describing your product.
Ratios are not the most important factor here — instead you should be looking for evidence that something about your idea creates excitement since people need that to abandon the status quo.
You should also note the types of people that respond in certain ways. In the sports example, we categorized people by the type of apparel they were wearing and this type of segmentation was important in getting some partners interested in working with us.
The most critical piece of feedback you can learn here, though, is a concise and clear way of describing your product that gets some people excited. Do not proceed until you have this as it will be essential for making the most of the next two steps.
< $200 for possible incentives; free if you can find people out in the wild
2. Next Put into Context with Quantitative Surveys.
Here you are trying to understand a broader market response to your idea as well as the segments most excited about it. This builds upon what you’ve learned from step #1 and helps you understand how large the audience for your product could be.
How to do it —
Again I urge you to go beyond your immediate network to get unbiased feedback from strangers. I’ve run many quantitative concept tests using Survey Monkey’s Audience product.
No matter the platform, make sure you can download the individual responses as those will be important.
Demographic values are critical for understanding different segments and fortunately you get age, gender, household income, and region for free with Survey Monkey. Be sure to ask for any other variables you think might lead to interested segments.
I’ve asked for presence of children, home zip code, as well as some that are specific to a business we are trying to learn about. I ran a survey to gauge the interest in Wrench, a company we’d later back, and asked for information about the types of cars people drove as well as how many were under warranty.
You can see a preview of that survey here.
The most important section in a quant survey is when you describe the product or service and ask people how interested they are in using it.
Take what you’ve learned in step 1 and use words that you believe will catch people’s attention. I use a 5-point unipolar distribution for answer choices ranging from ‘extremely interested’ to ‘not at all interested’ and being consistent has allowed me to compare results across tests.
It’s also important to understand what customers do today for the problem your product solves. I like to ask about the status quo as well as how satisfied people are with it.
Customers not happy will be far easier to acquire than those who do not have a clearer need. Lastly, I always make at least one question open-ended where I ask if people have any feedback to share.
What you can learn —
Total Addressable Market (TAM) is a key question investors will ask about your idea and quantitative surveys are a good way to find that out.
If more than 40% of total respondents answer in the top two categories, then it looks like you may have a product appealing to a mainstream audience. If you’re below that, then try to find segments of people that cross that threshold.
How big are these segments and can a large business be built for them? Wrench did very well with vehicle owners (a large segment) and certain segments were even higher, which both gave us confidence about their prospects.
I’m also very encouraged when people’s enthusiasm shows in the open-ended response. When we tested Wrench, many people had responses like ‘sounds good — where do I sign up?” Others mentioned that they were excited to tell their friends. Both suggest that people will be willing to pay for a product rather than just express interested in a hypothetical version of it and that word-of-mouth could be a large source of customers.
$300 for 200 untargeted responses. Goes up with narrower audience or if looking for more people.
3. Lastly, see if People Act Through Targeted Ads.
A prospect telling you they are interested in a new product is quite different from buying it. Without a working a product you can’t get that far, but you can get close by serving ads to prospects and seeing if they are willing to take further action like signing up for a waiting list.
How to do it —
It’s important to start market testing ads by considering the type of go-to-market your product is likely to use. If it’s something where people are already searching for solutions, then search is a great place to start and you can test demand on Google AdWords.
If it’s something where a market does not yet exist, then you’ll want to start on a place like Facebook that does better for new categories.
Facebook is the place I most often test new ideas and you can get started rather quickly by building a landing page where prospects can sign up to join a waiting list.
Given their unmatched targeting capabilities, you can also apply your learning from step 2 to get in front of the customer segment most interested in your product.
We did this with the sports idea I mentioned and used Squarespace to build a simple landing page. Next, we brainstormed ad idea concepts and took photos so we could load them into Facebook.
I recommend at least 4 different ad creative concepts since you can rarely predict which will work best and more variety will increase the odds of a successful test.
The final step is the most fun and is where you select your target and see how the market reacts to your idea. It’s helpful to have some experience with Facebook as it’s a powerful platform with a steep learning curve.
Once you start receiving signups, be sure to contact people quickly to start a dialogue with them. They can be a great resource as your idea comes closer to reality and might even be your first set of customers!
What you can learn —
Ideally you will get a sense for customer acquisition costs and can do so by dividing your cost per signup by an assumption of the % that will become customers. You will also learn which type of creative works the best.
Relevancy scores of 7 or higher are ideal and I find it especially encouraging if people tag their friends in the comments or respond verbally with their excitement level as we sometimes see.
Word-of-mouth can be a great tailwind for consumer businesses and this type of activity is a good sign that might take place.
$500. This should get you close to 50k impressions depending on the demand for the market to reach your audience. Shoot for a 1% click through rate and a 15% signup rate. Some ad platforms also offer credit to get started that would offset some of this cost.