Much of this information is taken from my new book, The Startup Playbook: Founder-to-Founder Advice From Two Startup Veterans.
The first two startups my co-author and I worked on were founded on the following belief: we know the solution to our customers’ problems, those customers will find our solution, smack their palms to their foreheads, and beg for an opportunity to pay us for it.
It didn’t work out that way. In fact, both companies failed.
Over time, we learned that our initial ideas were only the beginning; there was no way to know what to do without involving our potential customers. Looking back, it seems ridiculous to do it any other way, but we didn’t know any better. We thought it was enough to have a great idea.
You likely have an insane number of ideas related to your new venture — ideas about the market, your solution, your customers, and the people you’ll want to surround yourself with.
That’s all great, but let’s get this out of the way: it’s highly unlikely that any of your ideas are truly unique. Moreover, it’s unlikely that you’ll ever come up with one that is.
The world is loaded with really smart and observant entrepreneurial people. Often, these people are already working on implementing an idea similar to yours and already have funding to accelerate their progress.
The good news is none of that really matters.
As we explain in our book, it’s not great ideas that make great companies — it’s the excellent execution of a great business model that leads to success. And you can’t create a great business model without first testing your business idea.
We don’t want you to make the same mistakes we did, so we developed a 9-step process to test your business idea.
Vetting Your Vision: 9 Steps to Solidify Your Idea
1. Who Are Your Customers?
Seems like a basic question, right? Unfortunately, the answer isn’t always so simple. Most often, the errors in defining a target market are complex, such as discovering late in the process that the people who need your product can’t afford it.
To minimize such errors, you need to clearly and correctly define your customer at the beginning.
The best way to do that is to go out and talk with as many prospective customers as you can — at least 30 people to start.
Based on your conversations with prospective customers, create a composite persona based on their sets of problems, situations, needs, demographics, ages, backgrounds, company sizes, incomes, and geographies.
Go beyond who your target customer is — ask yourself why they’ll buy your solution.
Why do they have this problem in the first place?
What behaviors do they exhibit that contribute to this problem?
Why would they be willing to spend money to solve it?
While it may seem counterintuitive, you want to make the persona as specific as possible.
Automotive manufacturers are superb at this. Each vehicle has a specific target customer. They consider economic, physical, and demographic preferences, and even create color palettes based on their research of target customers.
Sometimes, the process of tightly defining a customer forces you to realize that very few people actually care about your product or even your vision, in which case you need to refine your idea or scrap it altogether.
2. Determine Your Value Proposition
Your value proposition identifies the problem you’re solving, how you solve it, and the benefits of your solution.
The big assumption all new founders make is that someone, somewhere, is willing to pay for their idea. How can you be so sure?
What will your customers gain when they use your product?
Will it generate money for them?
Will it have entertainment value?
Your value proposition will include everything the customer hears, sees, and experiences with respect to your offering, well beyond just the product you deliver. This includes marketing, advertising and positioning, packaging design, price, and even how it’s sold.
Truly understanding feedback from potential customers will make value proposition problems clear very early on, and it will save you from wasting time, energy, and resources that you might have spent pursuing a product that isn’t viable.
3. Find Your Product-Market Fit
The level of product-market fit is the extent to which a good market (many potential customers) is addressed with a product that meets that market’s needs, wants, or desires. In other words, a product-market fit is proof that both the problem and the solution have value to people.
One of the most high-profile lessons in product-market fit (or lack thereof) is Pets.com. Pets.com was created to sell pet food and accessories via the web, which cut out the middleman and lowered prices. Sounds like a winning strategy, right?
As it turns out, Pets.com assumed people wanted their service, but the market wasn’t ready for it. The company burned through over $300M in about two years and went public before it crashed.
Pets.com provided a valuable lesson for entrepreneurs everywhere: it doesn’t matter how innovative your solution is, if there is no market, you won’t succeed.
The best way to test your product-market fit is to use your connections to gain access to people and offer them your product at a discount.
Their answer to the “How much would you pay for our solution?” question will tell you a lot about your product-market fit assumptions.
There’s usually a gap between a person saying they like an idea, and their willingness to pay for it. In those scenarios, test different potential price points with your prospective customers.
Be as critical as possible at this point in the vetting process, because it’s one of the first things investors look at. The more prepared you are to answer their questions and provide proof of solid product-market fit, the better off you’ll be during the fundraising process.
4. Can You Build the Product?
Understanding the technical requirements of building your product, and knowing if you have the experience or knowledge to do so, goes a long way in proving to yourself and potential investors that you can deliver.
As with all steps of testing your business idea, the more data you have to support your assertions, the better off you’ll be.
Be as detailed as possible during this planning stage. If you have the right startup team, there should be enough experience within the group to make some reasonable estimates as to the effort and time required to build your product.
If you’re creating a software product, map out the development in as much detail as you can. If there is hardware involved, add manufacturing and production to the list, too.
One trick that we see successful startups use at this early stage is focusing their thinking on the likely bottlenecks in the process. Remember: bottlenecks are more likely to occur in the parts of the process you don’t understand.
A more unique product will likely have more unknowns than well-established ones. If you haven’t developed something similar before, seek out guidance from others. Your efforts here will significantly decrease your risk of building a faulty or, even worse, an irrelevant product in the future.
5. Build a Prototype
Try not to get sucked into the details with a prototype; just get something working to get feedback from prospective customers as soon as possible.
The prototype should show off the compelling features that differentiate you from the current alternatives to your solution.
But beware: too many startups get stuck at this stage wasting time, money, and market opportunity trying to make it perfect. Your first prototype will not be your last. As you refine your idea and your business model, it’s quite likely that you’ll create new prototypes to validate with your market.
A prototype is just a patched-together, working model of the core functionality of your product. It’s merely proof that you can build the difficult parts of the product and show them to potential customers and investors.
For example, say you have a vision of a breakthrough coating for skis that reduces friction tenfold over current technologies. Your prototype may be a block of wood coated with your new material — it can be that primitive.
The bottom line is that building a prototype proves you can do what you say, and it’s a springboard to getting feedback on your product and value proposition from your target customers.
6. How Will You Be Different?
It’s very hard to build a business if you don’t have a discernible advantage. Additionally, it’ll be unlikely you’ll get funding or be able to sell your offering if it isn’t highly differentiated.
Your advantage doesn’t have to come entirely from the product you create. We’ve seen companies with mediocre products beat competitors with stronger products, often because the company with the mediocre product had a superior marketing campaign, sales approach, customer support, or an innovative pricing model.
You, too, can differentiate your product relative to five factors: price, quality, service, functionality, and focus.
Functionality: What your product does — the number and depth of features you offer.
Service: What you provide beyond your product, including the level of support, training, and assistance you offer to your customers.
Quality: The performance of your product with respect to errors, omissions, failures and, ultimately, returns.
Price: The price of your product relative to the rest of the market.
Focus: Your focus on specific geographies, demographics, packaging, or delivery that can enhance your uniqueness.
Take Drybar, for example, a hair-styling chain that has a hyper-focused product offering: “no cuts, no color, just blowouts.” You might question whether their singular focus is differentiated enough in the crowded hair care market to succeed. Yet, Drybar has grown to about $100 million in revenue and seventy stores in their first six years of operation.
Drybar differentiates itself through focus and consistency. Every salon looks high-end and similar to others, regardless of its location. Likewise, the salons are always comfortable, and their stylists always deliver to the client’s expectation. This is true differentiation in service.
7. How Will You Go-to-Market?
Simply put, go-to-market refers to the methods you use to get your product in the customer’s hands.
Your go-to-market plan should include who your target customer is, the best way to make them aware of your solution, the key messages that will resonate with them, and the method they’ll use to purchase your product.
You also want to consider how you’ll sell your product. Will you sell directly to customers (via direct person-to-person sales or over the phone), through channels (via resellers or integrators), self-service (via the web), through retail outlets, or through some combination thereof?
Dropbox, the cloud storage company, kicked off their growth to over four million users in less than two years with a great go-to-market strategy. Before they even launched their product, they built a community around it and instituted a broad beta program to get early customer feedback.
Their strategy created exponential growth. While not nearly the first product to market, Dropbox beat their competition with a better go-to-market plan than their competition.
Many startups can build a differentiated product, but they struggle to make potential users aware that it exists. That’s why you need a go-to-market strategy.
8. How Will You Make Money?
Except for some slower-moving, bootstrapped companies, most startups will lose money until they gain momentum. Your costs will be higher than your revenue as you develop your product and start to deliver it to customers.
There are some companies that run at a loss for a long period of time, and their investors support the loss because they feel the company is gaining critical momentum, or there are enough customers that will lead to revenue further down the road.
For now, assume you need to make revenue as soon as possible. What do you do?
First, consider whether your sale to each customer is a one-time event or whether your initial engagement will lead to more sales down the line.
Also, determine if you will sell your product or license it. If you sell your product, your customer owns it in perpetuity. If you license it, the customer pays for the use of the product for a specific length of time. When that time is over, they have to pay you for another license.
Remember: your choice in pricing models is not only about how you want to execute, but it’s about what your potential customers prefer as well.
9. Can You Get Funding?
While getting funding for your idea isn’t a perfect test of your business model, it’s a pretty good indication that you’re on the right track.
Venture capitalists and angels have seen a lot of startups and are great at pattern-matching, or comparing your business model to others. If your business model and results match up with failures in their portfolio, they will likely pass on your company on that factor alone. There’s nothing you can do about that.
It’s better to focus on factors you can control. For example, your diligence and research can convince them there’s a real market for your product, that there are solid potential customers, you have a strong value proposition, and you can execute on the product.
Contact experienced entrepreneurs who have previously raised multiple rounds of investment. They’ve probably learned a lot during their experiences, which can help you shape your ideas and presentation.
You can also sample a few VCs for feedback. Quite often, an associate at a venture capital firm will give you time and input so they stay on top of the startup community and get a chance to be an early investor when that time comes.
Can’t Answer These Questions Yourself? Find a Mentor
Objectively vetting your own business idea is extremely difficult. To help you think through the challenges and areas we’ve outlined in this article, we strongly advise that you find a mentor or two.
Make sure that you trust them and you enjoy being with them. That personal connection is one of the key differences between mediocre and great mentors. There are plenty of people out there who will gladly give you advice, but naturally you’ll only want help from people who are invested in both your startup and you as a person.
The early days of your venture are the time to hash out, vet, and iterate on your idea. It’s a challenging time for your startup, but a good mentor can guide you through this process of change.
When you go through the 9 steps to test your business idea, you may arrive at the end only to realize that your best option is to let your idea go.
Don’t be discouraged. It’s good to change, adapt, or even punt on an idea. You’ll become a stronger team, you’ll learn more, and your refined — or new — idea will be that much better than your old one, and will have an even greater chance of success.
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Will Herman is the author of The Startup Playbook, as well as an entrepreneur, angel investor, corporate director, and startup mentor. He has started and managed five companies (resulting in two IPOs and two corporate sales), invested in over seventy startups, sat on the boards of twenty companies, and has advised over a hundred more.