BUSINESS PLANNING SERIES
Last time, we wrote about the importance of True Competitive Advantages and how the lack of at least one will likely condemn your business plan to the Reject Pile. Today, we will look at another common Fatal Error – Lack of Market Validation, or —
No One Ever Said They’d Buy It!
One of the saddest mistakes we see in business plans, especially from first-time entrepreneurs and, regrettably, from some second- and third-time entrepreneurs as well, is the failure to actually validate the market for their new product. They propose to go ahead and build their product without asking anyone if they will actually pay for it. The “If we build it, they will come” model is fine if you are building a simple iPhone app that you plan (hope) to sell for $0.99 and will only take 100 hours for you to build it. It’s something else again when you are betting the kid’s college money and taking out a second mortgage to fund your efforts.
Here’s some typical answers received (and our unspoken responses) when investors ask about market validation:
“I’m my own target customer. I’m ‘scratching my own itch.’ I know what to build.” What we hear you saying: “OK, so I guess there might be a market for at least one of these.” More to the point, “scratching your own itch” is just the beginning. It’s your inspiration, NOT the strategy for a real business. “I’m the target customer” is NOT market validation.
“We didn’t bother with research. It doesn’t matter what 10 people think, there are millions of potential customers.” Our unspoken questions: “If there are millions, you mean to say that you can’t find at least 10 that will commit to buying your product? If you can’t find 10, what makes you think there are millions, or thousands, or even hundreds of potential customers?”
“My customers won’t understand mockups. I have to build it to show them first.” We hear you saying, “This product is too complex to sell, or even understand.” If you can’t describe your concept in 30 seconds or less, it’s either too complex, or you don’t understand it yourself. Let’s pretend that your customers don’t get it from mockups. By definition, your first customers will be early adopters who will probably be OK with, and anxious to get, an alpha version. If you can’t find a few who are excited about your product, perhaps your product isn’t exciting.
“I’m no good at sales and marketing. I have to build a product so good that it sells itself.” Our immediate thought: “This guy does not understand business.” We don’t doubt that you can build what you say you can build. (If you can’t, that’s an entirely different problem.) The high risk is not that you can’t build it; it’s that you be able to find actual customers who will cough up cash for what you have built. The earlier you can reduce this uncertainty, the more likely we are to invest. No sense in putting this off.
“My friend / co-worker / brother / teacher thinks it’s a GREAT idea.” We hear: “His mommy thinks he is smart and handsome too!” It does not matter what non-entrepreneurs think of your product. Actually, it doesn’t matter what real entrepreneurs think either. They are not experts on your problem, probably have outdated ideas and might not like certain technologies or methodologies (e.g. Mac vs. Windows, Linux vs. Windows, Open Source vs. Proprietary, etc.), probably due to bad experiences. Of course, none of these “expert opinions” matter, because you have done your homework and actually have real-world people who are saying that they want your product and are willing to pay for it, right?
Conclusion: The only thing that matters is that people are willing to give you money. It doesn’t matter what “experts” say. When 10 people say that they will give you money if you build this thing, that’s the only validation that matters!
The next time, we’ll look at Fatal Error #3 – Incorrect Positioning vs. Competition. I hope this is helpful. We want every entrepreneur to be successful!