We keep hearing the phrase “around 90% of startups fail“ and therefore decided to share our know-how on how you can decrease the chances of being in those 90%. The number one reason for lack of success is misreading the market demand. This is usually the result of entrepreneurs tackling problems, that are interesting to solve rather than those that truly serve a market need. There is nothing as frustrating as investing resources in a product or service, for which in the end there is no demand. However, there is a way to find out if your brilliant idea really has potential before betting all your money and time on it. You simply need to validate it first. Let’s see how simple idea validation really is in the article below.
What exactly is Idea Validation?
Idea validation is the process of collecting evidence from your target audience to test if there is a market need and if there is a potential for paying customers for your business. It helps you understand the user’s problems and to find out if your idea is really worth pursuing. It’s a very logical step when developing a new business opportunity. However a lot of founders do this process wrong, without even realising it.
“A startup is a human institution designed to create a new product or service under conditions of extreme uncertainty” – Eric Ries
Startups are exposed to a lot of risks. Since they are small companies they usually don’t have a lot of capital – both cash and human. Another challenge they face is the liability of newness, because they don’t have empirical data about the market. This includes a lack of established relationships with financial institutions, suppliers, distribution network, and shortage of access to existing customers. However, the most crucial factor are the cognitive biases of the founders. Let’s dig a bit deeper.
Cognitive Biases
Based on neuroscience, cognitive biases are faulty patterns of thinking, that cloud your objective judgement and lead you to misinterpret information from the world around you. That’s why it’s important for entrepreneurs to understand the most common biases, that they subconsciously experience, to minimize the risk of false positives. We have summarized them for you:
Optimism Bias
Optimism is one of the most important traits you can have as a founder. You need to be able to convince people – co-founders, investors and customers, to buy into your vision. But optimism and the tendency to be over-optimistic can also block you from accepting facts. If the idea becomes the sole value of your business, you will do everything to protect this value and neglect facts coming from the market.
Representative Bias
We have the tendency to think we are representative of a whole group of people, in the founders case – their target audience. Instead of doing a thorough examination and asking the question “Is my target audience using XYZ?”, entrepreneurs usually replace it with the far easier question “Am I using XYZ?”. The mistake here is judging for the target customers on the basis of your own needs.
Confirmation Bias
Confirmation bias is the tendency to search for, interpret, favor, and recall information, that confirms or supports our beliefs or values. This is why we tend to disregard evidence that doesn’t fit into our views. When testing an idea, the confirmation bias is usually what gives founders the false sense of validation.
Hypothesis-driven entrepreneurship
Yes. There are plenty of challenges. However, there is a solution for it: following the approach of hypothesis-driven entrepreneurship and the methodologies of Lean Startup and Customer Development.
As a first step for idea validation you have to define all your critical hypothesis. Look through you Business Model Canvas, Lean Canvas or Business Model Plan and state all the assumptions, that need to be true for your idea to work. Start by identifiyng your leap-of-faith assumptions – they are the riskiest and can make or break your startup.
“There are no facts inside your building, so get the heck outside.” – Steve Blank
Then as a second step: you need to go out and talk to your clients. Not to validate the solution in the first place, but rather to understand if there is a problem in the market. You are trying to find out who the customers are and what problems they have. Only then, after you have validated the problem, you can proceed and start building a solution. So first learn from your customers, understand what the problem is and then use your entrepreneurial traits to develop a solution.
Passing “The Mom Test”
One thing you can rely on, is that people will always want to end conversations in a positive way and it will cost them a lot of energy to say your idea is bad. For this instances the author Rob Fitzpatrick wrote the book “The Mom Test: How to talk to customers & learn if your business is a good idea, when everyone is lying to you”. It’s a practical guide on how to avoid mistakes when interviewing clients. Here are the three most important rules to pass “The Mom Test”:
Talk about their life instead of your idea
Don’t start talking about your idea before finishing your customer development interview. Once you mention it, you are exposing your ego and people will have a very hard time telling you it’s not a good idea. This will only result in a lot of false positives. Instead ask people about their lifes – their problems, constraints, goals etc.
Ask about specifics in the past instead of generics or opinions about the future
Always ask “How did you do XYZ in the past?” and not “Would you ever do XYZ?”, because people are creative and will tell you what you want to hear. There is no actual value in anyone giving you hypothetical answers, because most of the times they are just over-optimistic lies.
Talk less and listen more
Again, don’t go into pitching or defending your idea. Let your customers do the talking and listen carefully, so you can ask good follow-up questions. This is your best chance to understand your audience and the current market.
Talking to customers
The process of idea validation is based on talking to your customers. For this to bring real value, there are a few mistakes you should avoid. If you follow these simple rules, conversations can’t go wrong.
- Know that all feedback is good feedback
Always nod and smile, even if you’re devastated, because someone has just told you that this is the stupidest idea ever or because you have realised there is no real problem to solve. Remember, this may essentially save you from investing a lot of time and resources into an idea that has no potential.
- Be a fool
Don’t act too smart around customers. Even if you feel like you know everything there is to know, don’t believe you can anticipate people’s answers. Ask a lot of questions and try to really get to the bottom of things.
- Stuck? Ask for numbers!
You will probably have an interview guideline, but if you get stuck you can always ask for numbers and try to quantify. Here, you can ask questions like “When was the last time?”, “How often do you do this on a monthly basis?” etc.
- Be a kind scribe
It’s okay to write down the most important insights during an interview. However, you should only take notes when the other person is speaking. Stop writing once your interview partner stops talking to avoid unease and suspicions. Otherwise they can feel surveyed and may be less open and honest with you.
Conclusion
Founding a startup will always bear a certain risk. Validating your idea and talking to your customers is a crucial first step to ensure there is a real demand for your product or service. By avoiding cognitive biases and using a hypothesis-driven approach, entrepreneurs can minimize failure. When talking to customers, it’s important to pass „The Mom Test” by not talking about your idea, but by focusing on people’s problems and by listening very carefully. Asking specific questions about past behaviours and avoid hypothetical and suggestive sentences, that would keep you away from receiving real insights about your audience’s life, pains and goals. The customers will give you a problem and you as an entrepreneur have to come up with a solution. If you need help with the idea validation or with finding the right direction, I would be happy to have a chat. Feel free to contact us here.
