An entrepreneur’s first premise that decides if or not they’re building an empire rests on how valid their business idea is. As per my experience, most businesses do not fail because they were undercapitalised but because not enough thought had been given to market research, testing and preparation.
In today’s piece from our Entrepreneur Insider series, this is the pain point we will touch. We will be focusing on idea evaluation and testing whether or not businesses and/or consumers will buy your offering; improving the chances of launching a successful startup.
But before we begin, it is essential to understand the importance of idea validation and further delving into why we’re doing this.
Idea validation essentially helps expose the idea to the practicals of the real world before you put in the effort of building and releasing the final product or offering. It helps you gather evidence around the idea via experimentation to make steadfast and informed decisions that are de-risked.
Your business idea must either be able to solve a real problem, fulfill the purpose intended or appeal to other incentives. The smartest approach typically would be to validate a problem and then device a solution rather than going the other way around.
If you ask me, one business idea that went for a complete toss was Google Glass. While it seemed like a good idea at first, it went for a toss at later stages. Not only was it marketed badly, but it was also a highly priced device that served no real purpose except to intervene others’ privacy. For me, it is one of the most classic examples of an unvalidated business idea gone wrong.
Now let’s quickly delve into the basics, yet essentials of validating a business idea.
1. First, develop a hypothesis
Once you’re clear with the idea to validate and set a goal, it’s time you develop a hypothesis based on that goal. An ideal hypothesis should be a testable statement that’ll also include a prediction. Take AirBnB’s case for example. Their primary assumption was that people will be willing to stay at a stranger’s home; and will be willing to stay at a stranger’s home. This assumption was critical since the entire business model functions on the idea that people are willing to share their homes.
And since apartment sharing on a long-term basis was a pre-validated concept, it wouldn’t be wrong to say that while the idea and concept was slightly different, it was validated even before they had one.
While coming up with a hypothesis isn’t usually difficult; defining the Minimum Success Criteria is. Say, if 7 out of 10 people say they’d rather sleep in someone’s couch than in a scanty hotel, does it mean that AirBnb’s idea is valid? Define this in your hypothesis.
2. Second, determine which of your ideas already exists
While your idea may sound totally fabulous, in order to make a dent, it is important that you determine if your idea already exists in the market. This might just be the easiest step of the funnel. Let’s say you’re planning to start a business with subscription gift boxes for fishing enthusiasts. Do a Google check for “subscription gift boxes for fishing” and you’ll find LuckyTacklebox and Mystery Tacklebox already exist. Now while it is better to launch a business with minimum to no competition; this doesn’t mean you cannot start a business in the same industry. If you think the competition is doing a poor job, for instance a bad website, bad reviews or bad customer service; that serves your edge.
3. A three pronged analysis before launch
According to statistics, 66% idea initiators always have a backup plan. If you do too, take up this three pronged analysis.
Investment cost – Personal Interest – Potential Profit
Look at each idea with these parameters and assign a separate score to each; based on this scale.
Investment Cost (on a scale of 1 to 10): 1 (will cost you over $2,000 to launch), 5 (will cost you $1,000 to launch) or 10 (costs less than $200 to launch)
Personal Interest (on a scale of 1 to 10): 1 (if you’re not interested at all in the idea aside from its potential profitability), 5 (you’re somewhat interested) or 10 (you’re very passionate and excited)
Potential Profit (on a scale of 1 to 10): 1 (less than $10K in annual profit), 5 ($100K in annual profit) or 10 (over $500K in annual profit)
Once you’re done rating, add up the totals and the idea that adds up the highest, should be your business idea to proceed with.
4. Experiment and build an MVP ( A Minimum Viable Product)
Now that since you’ve built a hypothesis and conducted an analysis it’s time you experiment with the idea. Essentially, you conduct an experiment to learn whether or not your assumptions are true. More often than not, initial ideas are starting points to building a better and more refined product. It is during the validation process that you get the chance to experiment with your product. You can experiment in multiple ways:
- Build an MVP : a landing page, outreach emails, physical prototype
- Prototype a Fake it ‘til you make it
- Surveys and Interviews
- A/B Testing
If your idea has the support, these experiments will help you determine a lot of facts about your product that you otherwise did not know. Once you’ve built the MVP, test it and have others test it too.
Conduct a thorough survey for feedback thereafter. Look for answers that resonate with the below themes:
Will buy your product = Your target market
What they’re actually paying for it right now = Product Pricing
People will buy/keep buying it = Demand and potential demand
And while this is stating the obvious, if nobody is or will buy your product/service, scrap the idea.
5. Revenue-Expense Forecast
Create a spreadsheet with all your ideas. Estimate your revenue and expenses on either side. Your expenses should include both operating and overhead expenses. Operating costs are costs associated with making a product or providing a service, i.e., cost of materials or shipping. Overhead expenses are costs that do not change based on the quantity of products or services you sell, i.e., incorporation, insurance and internet.
With a revenue-expense forecast, you can draw better profitability sense from your idea.
The belief that you’re doing absolutely great with your business idea can sometimes be a deterrent in successful idea validation. Here are a few things you must observe for successful idea validation:
- Be ruthlessly critical
- Keep the evaluations simple
- Be systematic
- Involve a relevant target group
- Learn from others’ mistakes
The point of validation is not to build the strongest product and come up with a perfect solution, but to test if your idea has potential. You don’t want to be burning midnight oils to build a product that people are not willing to use or buy. It is a means to double check the most critical assumptions for your business. And once you’ve marked all your checkboxes, it’s time you take the leap with the next steps- Market Research. We’ll be talking about this in our next piece from the Entrepreneur Insider.