Great Scott! How to test your start-up idea!
As quoted by Ash Maurya, there is a common myth of the risk-loving entrepreneur who jumps off a cliff with no parachute (Maurya, 2012). But hopefully, if you are reading this article you are seeking a better way to mitigate the risk of your start-up. Before I started working with entrepreneurs, I used to wonder how they took risks that would normally freeze the general population. I had been there, safe and secure in my corporate role with a guaranteed paycheck. A friend of mine, who owns two successful businesses made it clear to me that the risks taken were not based on gut feel or a whim but calculated in nature.
In reality, most successful entrepreneurs are quite risk-averse, and this is reflected in how the entrepreneur carries out their activates. Entrepreneurs tend to bootstrap their business, using their funds to pursue their tasks. This is a form of being risk-averse, as they would rather keep the funds within their account instead of spending it on key recourses.
As start-ups are fundamentally uncertain, the best course of action is to protect the downside by prioritizing the riskiest assumptions first and iterative through the development cycle based on the feedback gained.
As outlined in the best-selling book, Running Lean (2012), Ash Maurya outlines the difference between uncertainty and risk. Uncertainty is that there is the existence of more than one possibility to the outcome, whereas risk is the state of uncertainty where some of the possibilities involve a loss, catastrophe, or other undesirable outcomes.
We can break down the types of risks using the Lean Canvas modelling tool which was outlined in previous articles. The risks are as follows.
Product risks are the real possibility that your product may fail to satisfy the expectations of the customer, user or stakeholder. There are many examples of product risks, these could be key functions that do not operate as outlined by the marketing of your product or if your product is unreliable and difficult to operate. This centres on focusing far too much on the solution, introducing Innovators bias (Maurya, 2012) whereby you dismiss your customers feedback or do not even seek this and push ahead with your product. A good example of this was the introduction of the Sony Betamax video system in the 1970s. Sony introduced this to the masses, which incorporated superior quality compared to the VHS system.
The main determining factor between Betamax and VHS was the cost of the recorders and recording time. Betamax was in theory, a superior recording format over VHS due to resolution of the picture, slightly superior sound, and a more stable image; Betamax recorders were also of higher-quality construction. However, these differences were negligible to consumers and thus did not justify either the extra cost of a Betamax VCR or Betamax’s shorter recording time which was a feature that Song ignored following the feedback from their customers. So focus on getting the product right when you develop your start-up. Spend time listening to customers, don’t get blinded by the love for your solution and develop something that solves a real customer problem.
The customer risk is a fundamental starting point when developing your start-up and forms one of the two most important boxes on the lean canvas (along with the problem). When you start building your start-up, it’s important to look towards customer segments that are fairly broad as you will spend the very early stages narrowing these down until you have a micro-niche customer segment. This forms the basis of the one strategy of one client segment, one problem, one message and one offer (Seddon, 2018)
Although you need to ensure that the customer segment, although targeted is big enough to meet the traction goals of your business. As an example, if you were an accounting start-up, you may focus on the early-stage startup sector or the SME market but if you were to focus on accountants within a very specific field this may not repay the investment in time and money. So, ensure that you have modelled your minimal business growth aims and discussed this with an external advisor or coach to determine the correct customer segment.
Channel risks have to be considered; you need to build a path to your target customer segment which is aligned to your offering. Will you focus your efforts on building a strong social media led presence? If so, which platform would you use? Is your product focused on the business-to-business or the business-to-consumer market? These are the type of questions you need to be brainstorming and researching as you test out your assumptions. So how do you determine the answers to these questions? Get out from behind your desk and speak to potential users and customers of your product. This will provide you will mountains of information which can be used to answer some of the assumptions. I would recommend that you speak directly with a potential customer instead of using surveys or focus groups as these are better suited once your product has been released and they have had an experience of this.
There are many different forms of desk research you can complete by simply completing a Google search. The secret is to find out where your potential customers hang out, as an example, if you sell business-to-consumer, there is a very good chance that Facebook would be a great option. Facebook has 1000s of groups you can join which will provide pools of research customers that will provide a great source of feedback, although be very careful not to sell directly in these groups due to the risk of being banned.
LinkedIn tends to be the preferred platform for business-to-business channels, and it is here where you will find the main contacts within your target customers. As you are in the testing assumptions stage, I would not focus on any paid advertising as your message will not be aligned at this stage and you will end up burning through your cash resources very quickly. The rule when looking at channels is if it works in a none paid manner, it will work in the paid manner (Ellis, 2018). The only difference will be the reach you get obtain through paid means.
So, get out of the building, visits customers, gain valuable insights and start researching and building your chosen channels to find the customer segment that will provide the best value to gain growth for your start-up idea.
Lastly, you need to focus on the riskiest assumptions from a market perspective. By market perspective, I am referring to the existing alternatives currently on offer, the pricing that the market can sustain and how your costs will be aligned to your offering. If the market price is comparatively low and you position yourself in a higher bracket, you will need to ensure that your product has an unfair advantage to the customer otherwise the product offering may become unviable as a going concern.
This topic is vast, and this article is only an introduction to this area. The purpose of focusing on assumptions is to learn as much as possible before you waste time, money and resources and in later articles, I will be outlying the need to adopt a learning-based approach and use evidence from testing as the basis of your plans.
Ellis, S. and Brown, M., 2017. Hacking growth: how today’s fastest-growing companies drive breakout success. Currency.
Maurya, A., 2012. Running lean: iterate from plan A to a plan that works. “ O’Reilly Media, Inc.”.
Seddon, D., 2020. Seven Steps to More Sales, Maverrik Ltd.