How to know when your startup idea is validated?

The author of the book Running Lean and successful startup founder Ash Maurya says “the true product of an entrepreneur is not the solution, but a working business model. The real job of an entrepreneur is to systematically de-risk that business model over time.”

 

Validating assumptions is important in a startup because it is ALL conjecture at the moment of inception. Nothing is proven. Startups are statistically LIKELY to fail and the reason they fail is because one/all of the 100 initial assumptions are wrong. A validated business model is one that has moved assumptions in the model from hypothesis to fact.

 

Validation in a startup is proof that a business model has been de-risked appropriately for the stage it is at. Some commonly articulated stages are emerging from startup practice. The initial stages are:

 

Problem/Solution Fit: prove that others agree there is a problem to solve and that your idea can solve it.

Product/Market Fit: prove that there is a working business model. Customers discover the business, use it and come back. All this makes money.

 

As a startup moves through the stages, more risk is taken. People leave jobs, stake their reputation and invest capital in increasingly large chunks. I like to look at validation against this. Against the pain that happens if we are wrong about validation.

 

Ask yourself, what do you want to know is true (not just a hypothesis) before you take on this next level of pain?

 

Problem/solution fit

 

Before problem/solution fit, the goal of an entrepreneur is to prove that there is a real problem to be solved with a low cost of failure. This means that it is ideally possible to achieve it without investing too much capital, without quitting a job, without taking any investor money.

 

This is completely possible. Here is an idea for what you might do in a single day, for example.

 

Some principles:

 

● Every validation should have a strong signal from BOTH the feeling in your gut AND actual numbers. Numbers can become a crutch used to support crappy ideas on their own. And your gut? Malcom Gladwell is right that it can tell us a great deal in a blink, but it is also the greatest liar when you want something so badly to be true.

● You should define what you want to see in the numbers BEFORE you start trying to get them. This is to stop you changing the rules along the way.

 

In problem/solution fit, it is quite possible to run this phase (without creating a custom web application). I like to see a small number of people do something that proves they value what I want to build as a business.

 

Problem/solution fit quick benchmark

 

Every business is different. So apply these suggestions to what your gut tells you.

 

Customers

50

Activated customers

70%

Visits / customer / month

3+

Payment

More than $1 (it’s the hardest $)

 

Here, you have a decent number of customers trying your prototype. 70% of them are ‘activated’ which means they have performed the steps you need them to perform to truly engage with the solution rather than bounce. Users are coming back three times per month or more and someone somewhere has given you some money because they value what you are building.

 

If you hit these numbers, and your gut told you that the people behind the numbers were valuing it, would you quit your job or invest $50K? Imagine the ’pain’ and then decide if it is validated enough.

 

This validation can be done in under three months and you would be a bit worried if you could not do it in that time.

 

Product/Market Fit

 

This is harder. Product/market fit can take six months to a couple of years and is challenging because there are so many parts to a working business model. One of them can be a point of failure and send ripples through the rest of the model that can send a team back to the whiteboard.

 

The main metric to track in product/market fit is ‘traction’.

 

Traction shows that the business is going somewhere. Customers value it. Customers keep coming back. Customers tell their friends.

 

Andrew Chen gave a helpful talk last year that started to define some benchmarks for what product/market fit looks like (slides 7-8) in the numbers. Usefully, he suggests different benchmarks for SaaS and consumer products as the business models can be quite different.

 

 

I would be surprised if many startups outside of Silicon Valley get that kind of traction in this phase. My suggested benchmarks are below.

 

Product/Market Fit Quick Benchmark

 

 

Consumer

SaaS

Customers

Clear path to 50,000

Clear path to 10,000

Activated customers

50%

50%

Visits / customer / month

4+

20+

Payment

Break even or trials to show business model at scale is profitable.

Clear path to $100K MRR. 3x CAC to LTV. 5% conversion from free to paid.

 

Consumer products need to be growing with reproducible, organic growth. If you can hit Andrew Chen’s 100K users then go for it, but I would personally be happy with 50K as long as traction is there and there is proof that an investment in growth will have predictable results.

 

SaaS products will likely have fewer customers paying more money after a longer sales cycle. The payment benchmarks are becoming fairly standard. $100K MRR (monthly recurring revenue) through 5% of the customers converting to paid accounts. SaaS startups should aim to show that the lifetime value (LTV) of a customer is more than 3x what it costs to acquire the average paid customer.

 

If you hit these numbers, do you think investors would give you $2-5m? Remember, imagine some pain and gut check that the risk/reward potential is balanced.

 

Phil Morle is the CEO at Pollenizer, a venture builder working across Australia and Asia building new startups. Follow their weekly insights for pro-entrepeneurs here.

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