- Logan Burchett
Three Ways to Validate that Your Startup Will Make Money
Do you have a solution for an important customer pain point? You may have a great business idea. However, if you are a first-time entrepreneur, you may not know the next steps to turn that idea into a business.
Starting a company comes with a lot of unknowns, even for seasoned entrepreneurs. I’ve been that corporate analyst, sitting in my cubicle, watching serial entrepreneurs transform great ideas into successful companies. Meanwhile, I mulled over my great ideas to no avail because I simply did not know where to start.
Those serial entrepreneurs have discovered how to leverage a repeatable process for success. Successful founders know to execute one step, first and foremost, that changes the game from great idea to profitable business. That step is idea validation.
Validation helps prove that customers will pay real money for your future product or service. Idea validation happens during the very early stages of business before we have an actual product, service, or even a company name.
Why is idea validation so important? Not only do you need to know if you have a real target market as a founder, but idea validation also becomes critical for investors during a fundraising round. Validation also provides feedback early on, which allows you to tweak your idea and improve your business model before the wheels are set in motion. Finally, if executed correctly, validation helps you establish a customer base and possibly pre-sale revenue before your product even exists.
Three main strategies exist to complete idea validation. We recommend you complete all three to set your business up for success.
1.) Competitor Validation How many similar businesses or competitors exist in the market? Even if you have an extremely unique idea to solve a common pain point, alternative solutions probably exist and you need to know the size of that market. Take inventory of startups and established companies and ask these questions:
What do they charge their customers?
How long have they been around?
How big is the market?
Is the pain we want to solve big enough?
For example, if we identify a solution within a niche market, but we observe that customers will pay a lot of money to solve that pain point, we can validate that our business idea holds value. However, if we determine that several businesses have tried to solve a pain point within a niche market, but customers weren’t willing to pay money for the solution and those businesses failed, we can either pivot our idea or prevent a wasted effort. Let the market data lead us to an informed conclusion. Consider creating a simple spreadsheet to list all potential competitors, product features, years in business, and how much money they raised. This begins to create quantitative data around our idea validation. We can use that data to differentiate our business model from competitors and create a unique value proposition within the marketplace. This data serves founders during our future fundraising round. Investors will complete this same analysis and call it due diligence. We deeply understand the competitive landscape and can prove the uniqueness of our business and how we will compete.
2.) Customer Validation
Talk to as many potential customers as you can, as soon as you can. Ask potential customers about the pain point you want to solve. We want to gather unbiased, uninhibited feedback on the size of that pain point and what they are willing to pay to solve it. Initially, we do not discuss our specific business idea, because we may lead them toward the answer we want to hear to validate our idea. As a bad example, if we are performing customer validation during the early stages of Forecastr, I could say, “I’m creating an app that will replace Excel for financial modeling, what do you think about that idea?” Instead, I should ask questions like, “How do you currently perform your financial projects? What are your biggest pain points?” Instead of leading customers to validate our idea, we ask them questions about the process and log the data to mold our business. Start asking customers, “What would you pay to take this pain away today?” We need to understand the price sensitivity in our target market and what other resources customers currently use to mitigate that pain. Performing customer validation also helps us build a customer base early in the game. As you talk to potential customers, collect their contact information, build a working relationship, and add them to a waitlist for your growing business. Not only will you learn more about your target market, but you can also build real traction before a product even exists. Before Forecastr hired our first developer, we already had a waitlist of hundreds of customers. Those customers expressed interest in our solution, so as soon as we had a real product, we could reach out to them and generate immediate revenue. Just like competitor validation, customer validation data becomes critical for investors during a future fundraise. Real customer feedback and a growing waitlist help prove to investors that your business idea will make them money.
3.) Pre-sale Validation
Start selling right away. Collecting pre-sale revenue is perhaps the number one move in the early stages of business to validate our business for investors and set our company up for success. How do we sell a product that doesn’t exist yet? Talk to customers one-on-one, perhaps during or as a follow-up to customer validation. Ask customers if they would pay money for the product upfront in the form of pre-sales or pre-sold subscriptions. Customers that are not ready to pay may want to join your waitlist, but the more pre-sale revenue you generate, the stronger your validation holds for investors. Real money from customers inherently proves that customers are willing to pay for your idea. While competitor analysis and customer waitlists provide powerful data points toward validation, real money trumps all in the validation space. You can also create a basic website for your idea that allows customers to enter credit card information for pre-sales with the click of a button. Even if the button leads to a page that says, “We’re not quite ready yet,” we can collect data on the conversion rate for additional validation without customers spending a dime.
Overall, validation helps us understand our idea, our market, and our customers on a deeper level. Founders, do not start your business on the assumption that you have a great idea. Success stems from real data, which we can find achieve through these three steps.