Why would anyone spend all their startup money on building a gee-whiz technology without first proving there is a market? It’s done every day. That’s a key reason so few early-stage companies get funded.
Too many entrepreneurs leave the validation of the business model to investors and fall into the trap of producing a product or service that is labeled “nice-to-have” instead of “need-to-have.”
In my 30-plus years of experience, I have seen innovative, early-stage companies receive a “pass” from investors who categorize the companies’ products into the “nice-to-have” box. How do these investors come to that conclusion?
One in particular told me, “I just couldn’t imagine using this service in my life…the current way is just fine for me.”
This investor’s fast judgment could be compared to my reaction to teenagers’ and young adults’ adoption of MySpace or YouTube. Whether or not I like or use those sites is irrelevant – I’m not the target market.
I remember in the late 1970s when Citibank introduced ATMs to offset traffic from relatively expensive bank tellers. Many asked, “Who needs that?” Of course, consumers quickly discovered that it was extremely convenient to make deposits, print bank statements and have access to cash any time of day, including evenings and weekends.
Now, ATMs have nearly put traveler’s checks out of business, in addition to launching other ATM-type technologies that issue us movie theater tickets, parking passes and Charlie Cards for the subway in Boston.
What is the lesson from this experience? Always define the market yourself. Quantify it and qualify it in a way that leaves no doubt about its existence by following the steps below:
Step 1
As one smart investor said, “The first step for proving your delivered value is to describe the specific ‘pain’ you are solving, not only for users of your service but for all stakeholders.”
Why will people use what you are building?
Why will people and companies pay you for providing your service or product?
Provide specific research results to investors. The “gut reaction” can’t argue with real data.
Step 2
The second step for proving delivered value is to size markets and sub-markets very specifically. Instead of saying, “The market for XYZ in 2006 was $13 billion,” which is an interesting but easily dismissed data point, drill down into specifics of who uses what, why and when.
There are so many efficient survey tools available like www.surveymonkey.com, working with research pros doesn’t have to be prohibitively expensive. True, you need those pros to know what to ask and how to ask it, and to analyze the results. But the process is now highly automated and usable by even the smallest companies.
Step 3
Those numbers and analyses will give you the jumping-off point for estimating your own market – customers who do X are likely to buy Y – from us. They will be willing to pay Z for our product or service. Do the math.
In the early ‘90s I was speaker at a national conference where another speaker introduced the first prototype of a PDA, touting the convenience of receiving emails on the device in his shirt pocket. I, barely conversant with email then and perfectly happy with the phone, wondered why anyone would want that. Now that a lot of my business communication transpires via email, I can’t imagine why so many of us thought this was a “nice-to-have.” We just didn’t realize it was going to become a “must have” and most of the investors, judging value on anecdotal evidence, didn’t either.
Step 4
Be very specific about how you are going to capture customers and when.
The founders of Research in Motion (RIM), the company that brought us the Blackberry, encountered difficulties in going to market using the accepted carrier routes (also called the “walled garden” in North America). They were so convinced of their own research and numbers that they devised an alternative go-to-market strategy, direct to users. After a few years the market became so large that carriers could no longer ignore the huge numbers that paying customers were delivering to RIM. RIM paved the way with this go-to-market strategy and if it’s appropriate for you, use it.
Clearly, RIM founders knew something that others didn’t and bet their future on it.
Step 5
Analyze your competition. How is your product or service different from theirs? What “pains” do yours solve that your competitors don’t address, or address poorly? What do their customers and prospects think and what do they want that’s different? Would they switch to get it?
Step 6
If possible, before you go to investors, have some paying customers.
Even if you have done your homework and proved to yourself and potential investors that there is a market and that you will be the preferred solution, sometimes you have to repackage your product to make it palatable. Sometimes, customers just don’t want to know what they are really buying.
A good example is smart cards, which suffer from a scary “big-brother” image. My first client at Bellcore was Bill Barr, one of the two founders of the Smart Card Forum, who participated in creating and building the concept of smart cards and implementing the first market tests. The tests initially encountered heavy resistance from shopkeepers and consumers. Despite that initial reluctance, many of us happily sail through the EZ Pass lanes on the highway, swipe Charlie cards on the T, accept cash cards as gifts from stores and use Smart Card technology all the time – we just haven’t figured out that that’s what it is. And smart cards are growing in every area of our lives. Nice to have? Yes. Must Have? Yes. Or at least that’s what we realize now.
The smart card is a solution that was repackaged to fix very specific, identifiable “pains.” Users aren’t buying smart cards; they are buying “convenience” and “no longer waiting in lines.” Transit authorities and stores aren’t buying big-brother information about customers; they are buying a service that gets them their cash faster and cheaper.
As these examples show, just because a potential investor doesn’t “get it” doesn’t mean that you aren’t developing the next blockbuster technology. It just means that faced with no long track record of customers, revenues and growth, you have to prove your case the best way you can – with substantive research, testing, competitive assessment and trials. And then you have to communicate that intelligence in a way that says “in five or 10 years, this technology is going to change the world and how we live in it.”