How To Validate A Business Idea With The Least Possible Investment
7 Lean Startup options To Validate A Business Idea with the Least Possible Investment and get market validation by minimising risk.
After you have investigated customers frustrations and pains through interviews, it’s time to come up with a value proposition for a business idea ready to be tested and validated. The thing that makes bringing a business idea to life a critical stage is that at this point entrepreneurs and companies may start spending money. The size of the investment really depends on the type of business, but the key thing is: whatever the business is, the level of uncertainty at this stage is still so high that it’s imperative to minimize the expenditure, as it all might turn out to be a massive loss.
The best way to approach this is to fake the proposition in the most credible way and test it on the field, with the objective of minimising potential losses in case something was fundamentally wrong or needs to be drastically changed. This is a practice that Alberto Savoia called “pre-totyping“. He defined pre-totyping as “fake it and test it before you make it“.
It’s quite clear what “make it” means in this case: do not necessarily start coding for months or do not secure a premium commercial location on a busy road to open that organic restaurant. Instead, there are at least seven techniques to be explored to gather customer commitment, and possibly start collecting revenue, before putting big money on the table.
The seven techniques are roughly ordered below so that the ones requiring the least amount of financial resources are at the top:
Pinnochio – It’s a non-functional version of the value proposition, and works particularly well where size, shape, weight, portability are the key elements to be tested.
An example is how Jeff Hawkins tested the Personal Digital Assistant Palm Pilot after the market failure of the first handheld computer, the GRiDPad. In order to test the key value proposition of portability and size, he cut a block of wood to fit his shirt pocket, and he carried it around for months, pretending it was a PDA. Through that, he realised that he would have personally used it, and that he was ready to undertake the technical challenge to build it.
These days 3D printers can be a lot of help for these kinds of tests, and they work best if followed by a few rounds of interviews or trials with prospective customers willing to help.Landing Page – This is the classic trick of creating a fake page for a product that doesn’t exist yet in any form. A few pounds on a domain name, a bit of creativity and some useful tools, and a landing page is ready to present the value proposition and collect orders. Luke Szyrmer, agitator of the London Lean Startup scene, wrote an interesting book about this practice. A landing page is extremely helpful to determine the level of interest for a value proposition. The key thing to be considered is that a certain amount of budget needs to be reserved to drive qualified traffic to the page, usually in the form of Google or Facebook ads.The superpower of a landing page is that it provides real data about acquisition and activation, ultimately allowing founders to assess the acquisition costs and the conversion rate of an online business and draft a financial plan if required. Moreover, gathering email addresses of potential customers provides a useful list of people to be interviewed to refine and iterate the value proposition and its presentation.
Concierge Service– This option replaces complex and expensive software development with the founders’ work. It requires launching a landing page with a form, and then have the founders doing what a software would do to fulfil customers requests. It works particularly well with marketplace businesses.A notable example is how Nick Swinmurn validated the online shoes giant Zappos.com (acquired by Amazon for $1.2B in 2009). After he had the idea of selling shoes online, he didn’t build a complex supply chain or invest in a huge stock of shoes. Instead he made a deal with a few shoe shops in his neighbourhood, took pictures of the shoes and published them on his website. If a customer ordered, he would go to the shop, buy the shoes and send them by post. It involved a lot of work to do for each single order, but the concierge service is not made for scaling, and not even to make a profit. Instead, it helps enormously to validate a value proposition and to de-risk the whole new venture. In case orders start piling up, entrepreneurs like Nick would have collected enough validation to be able to meet with investors, and get funds to automate the most time consuming and customer critical operations, starting in this way a proper business that delivers the value proposition.
Re-label – This is probably the most controversial one, and works with a few numbers of new ventures. It involves putting a different label on an existing product that represents the value proposition intended to be tested. It might be something from another country, or packaged differently and proposed to a different segment, or sold through a different channel at a different price, etc. In case the test produces positive results, the next step is to make the real thing happen. Depending on the business, a landing page might be needed as part of the test.
Pretend-to-Own – This technique is about borrowing or renting something needed for a business idea before investing money to buy it. Again, the idea is not to necessarily make a profit out of this exercise, but to validate the value proposition.Businesses like HSS hire or Appear Here are largely serving these kind of business needs: before rushing to buy a tool or sign a contract for renting a prime commercial space for a shop, they allow entrepreneurs to “pretend to own” something, postponing a sizeable investment until they have enough validation about the value proposition.
For example, a film sound service testing the value proposition for an advanced recording technique won’t buy an expensive new equipment immediately, but they would sub-rent that from another service when customers order it until they have enough repetition of orders to justify the investment. It’s mostly common sense, really.Minimum Viable Product (MVP) – This is one of the key principles of the Lean Startup methodology, and involves some more development work and investment than the options above. It dictates to create an actual product with a number of features reduced to minimum. In Eric Ries’ words, the objective is to “collect the maximum amount of validated learning about customers with the least effort“.Twitter, for example, started as a way for broadcast SMS among a group of people, and there were no @replies, #hashtags or retweets. Fin-tech startups like Monzo or Tide launched early versions of their app-only banks using prepaid card or not allowing customers to set standing orders. An MVP is a minimalistic exercise to provide target customers with the absolute minimum set of features that will make the product credible and loved.The two best things about MVPs are:
Not all MVPs involve developers.
One notable example is how Drew Houston validated Dropbox’s concept without writing a single line of code. The service he had in mind was so complex that it was impossible to demonstrate a working prototype without a sizeable upfront investment. He had two choices: either spending years of development for a product nobody might have wanted, or faking it. He went for the second, and he produced a three minute video explaining how Dropbox worked. Then he posted the video to a community of early adopters obtaining validation from thousands of users who applied to be in the waiting list for the first release (here’s the actual video).
MVPs are not only for the tech industry.
Success stories such as Bleecker burgers or Pizza Pilgrims demonstrate how an MVP might take form of a food truck in a street food market. It gave founders time to engage with customers, get their feedback, refine the value proposition and learn how to set up a value chain without risking to sign lifelong debts for a proper brick and mortar restaurant from day one.
Provincial – in case the highest costs of delivering a value proposition are associated with scaling the product, it makes sense to run a test on a very small sample of customers, or a limited area. For example, the founders of a mobile application that helps people find cafes that only serve organic coffee should start from the city or the neighbourhood where they live, and launch a MVP hard-wiring the names and location of the cafes they already know directly in the app instead of setting up a database with thousands of places across the nation. A notable real example is how Uber was launched. When they started to test the market to deliver their value proposition of simplifying cab hailing, Uber founders started from a three cars fleet in NYC and then launched in 2010 in a single location, San Francisco, targeting the high-end of the market (black limo kind of cars) that they had identified as the early adopters. This allowed them to iterate and validate the proposition and be credible in front of investors.
In order to simplify even further the options when choosing which experiment to use to test a business idea on the market, we have created a matrix and a detailed pros and cons analysis for the most common practices.
Different experiments are grouped based on the evidence they provide and the effort required to conduct them, read more here.
The key message is this: before quitting a day-job, jumping with both feet on a business idea re-mortgaging the house, or committing with the execs a budget for those deliverables, it’s worth de-risking the launch of a new business or a new product by being Lean: fake the proposition making it as credible as possible, and see if it gets any traction.
If it doesn’t, go back to the whiteboard, and re-work some elements of the value proposition or the target segments. But here is the good part: you haven’t committed that much up until now. If it does, well, that’s where the real fun starts.
Have any thoughts or questions?
