How To Validate A Business Idea With The Least Possible Investment

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.