How To Validate Your Startup Idea?

13 Apr 2021

#Idealogic Insights

#Startup Library

#Useful Information

A few weeks ago we published an article on where to find startup ideas and discussed the four main sources of inspiration for aspiring entrepreneurs. Yet, while coming up with a startup idea is not as difficult as it may seem at first (especially when you know where to draw inspiration), it is obvious that not all ideas are actually viable. So before pursuing further with your startup idea and getting down to the software development, it’s essential to validate it to be sure that the idea is worth your time and money.

First of all, hypotheses

To make certain that your startup idea is worth going ahead with, you need to validate key hypotheses. What are those?

We’ve gathered six main categories that are of huge importance for a startup and identified key questions for potential founders to ask during the validation process.

  • Market size: Is it big enough to make for a good foundation for a successful and profitable business?
  • Competition: Do you have competitive differentiation and sustainable moat? Also, are there lots of competitors on the market? Are those incumbents or young companies that are usually easier to compete with? Were there companies that have attempted this before and what happened to them?
  • Fragmentation: How fragmented is the market?
  • Value proposition: Does your product have a clear value proposition for the customers? (If it’s a marketplace, it should be explicitly useful for both demand and supply sides). Does your value proposition meet acute customer pain points?
  • Unit economics: Can you get strong unit economics — business model with clear monetization opportunities and high AOV (average order value) and/or high frequency of purchases?
  • Acquisition: Can you build scalable acquisition channels? (Your acquisition engine should be both repeatable and scalable).

Those are broad general categories that will require more specificity depending on the idea you have. Still, they help to get the direction in which to head during the validation process. Adjust them to your specific idea and define a few key hypotheses.

One more thing: having answers to the questions mentioned above will help you in the fundraising process if you need external capital.

You’ve got the hypotheses. How to validate them?

Basically, there are two ways of research that will help you to test the hypotheses and prove or disprove them.

1. Secondary research

Secondary research is the one conducted by others. It is typically quite quick to find and this is where most research begins. Either free or paid, it helps to get the gist of the main data that is available on the internet.

While conducting secondary research, you will most likely use analyst reports, equity research papers, open APIs & public data sets as well as customer help & support pages. As for the specific resources, you may use Statista, Pitchbook, Crunchbase, Accenture, investor presentations for public companies, public Zendesk sites, etc.

While secondary research is indeed of great value, it’s usually quite superficial to draw conclusions. But this is where you typically start and discover the Market Size (most likely, top-down calculation of your TAM), Value Proposition, Market Fragmentation, and partly Unit Economics (e.g., AOV — average order value).

2. Primary research

Primary research is self-conducted and can require a budget and turnaround time. This type of research is much more specific than the secondary one and should be tailored to your exact area and product. So while it requires more input due to its nature, primary research generally fills the gaps not answered by secondary research.

There are several types of primary research:

  • Internet research: This is where you typically check Competition and Market Fragmentation (sources to use: Crunchbase, TechCrunch, various articles on the Internet, Reddit, Twitter threads, etc.). Moreover, your own internet research will help you to come up with a more exact Market Size (top-down macro analysis and segmentation that secondary research provides are usually not enough and lack precision). So try to conduct your own bottom-up calculation of a Market Size to better understand the potential of your future business.
  • Customer discovery. This includes surveys and conversations with potential customers. You can test things like Value Proposition and get to know what is of actual importance to your target audience. While customer discovery is a useful and quite insightful tool in the course of the validation process, there are a few caveats to it.

Caveat #1: Qualitative customer discovery should include a sufficient number of respondents, otherwise the results will not be representative and may even mislead you. While the concept of “sufficiency” here is quite vague and depends on the product you aim to create, the low starting point is usually 30 people.

Caveat #2: Be careful with your conclusions — people are usually nice and may not tell you about the negative aspects of your potential business. You need to hear the truth so try to interview not only your relatives and close friends (their feedback is the trickiest) but also stranger people. Not only will they be less emotional with you and more likely to tell what they actually think but they also can have a completely different (and, therefore, very useful!) perspective due to different backgrounds.

Caveat #3: You should also remember that you’re building a product and not a feature — so ask comprehensive questions.

  • Performance marketing and sales tests (landing pages, outbound email tests, SEM analyses, etc.). This could be done to supplement your secondary research on Unit Economics, Value Proposition, etc. Indeed, you will still have to make theoretical assumptions since you can’t test everything without the actual product. However, such a test will give you a good sense of what is really interesting and important for your target audience.

Summary

A seemingly compelling startup idea may sometimes be completely not viable when founders get down to the execution process. So early validation is essential — it’s critical to kill initial ideas that don’t meet immediate criteria and not waste your time and money on them as even initial software development may be quite costly. Moreover, the very process of validation helps to adjust your initial assumptions and better understand the fundamentals of how your future business should operate.

And final advice from Idealogic: while making assumptions, always expect to be in line with industry averages and not above them — that’s where many startups have failed due to their excessive optimism. We were impressed by the honest confession of Andrew Wilkinson, Flow founder, because it’s a pure example of fighting in a battle you can’t win. Keep your head below clouds, and you will win!

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