Why is it important to validate your start-up idea?

It’s time to learn the hardest lesson that most startup founders ignore.


A start-up idea may look great to its conceiver but while still only on paper, it may not carry any value. A business idea derives any value only when customers are willing to pay to buy and use the creation conceived by the idea. The product or solution that has come out of your R&D lab may be great but it may fail in the market unless the idea or product is not validated from the market perspective.

The question here is, does the market need this product?

As we all may be aware, the majority of start-ups fail mainly because the idea is not validated properly before venturing into it. Validation of business ideas is a procedure of testing your idea in the real world before launching a product, service or solution. So, how to go about it? You need to validate the idea. How? Not by starting the venture in full-fledged mode. It is highly risky to do so and if done so there is a high chance that you may lose your investment made by way of money and time. Why should you validate your business idea?

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Validation of business ideas is a procedure of testing your idea in the real world before launching a product, service or solution.

What is the validation process in cases of existing ideas?

Validation process in this scenario is comparatively simpler and conventional. The system of validation of an already practised or existing idea has been in practice for a long time in the form of feasibility study. Any new venture getting into a known business arena performs this procedure as a normal process of project evaluation. Let us review it briefly.

Study the competition

If customers are already buying and using similar products or solutions, then it is a proof that there is a market for your idea. However, it is necessary to analyse whether the competition is making money and it has growth potential. You should study if the competition’s customers are happy with the existing product or service and whether your product has any differentiators or value add that address the gap in the product features and functionalities that customers of existing product are looking for.

Market potential for a new entrant

Once you have confirmed that there is a market for the product or services of your idea because the existing players in the segment are successful, you have another challenge ahead. That is, to figure out if there is sufficient space for another player in the market for your product. In other words, whether there is a potential for you to acquire a market share either by way of filling the gap in the demand side or capturing the market share from competition or developing a new market. This validation will not be complete unless you make sure that serving the estimated market share is financially viable.

Do you have any USP vis-a-vis competition?

It may be noted that even when there is room for market share, entering a market served by established players with the same product without any differentiators or value add may not usually lead to success. Venturing into a business where there is sufficient room for new players because of demand-supply imbalance is much easier than entering where the potential market space is limited or exhausted. Here, any extra features and functionalities of your product compared to the existing products that satisfies the customers can be a winning differentiator. Do you have that extra or differentiator in your idea is a question that is to be answered before you move further.

Checking if protected IP inhibits your entry

This is not to be overlooked. The question to be probed here is if there is any IP (Intellectual Property) protection in place with regard to your business that can stop you from entering this segment. If this is not done, there are chances that you will get into legal tussles that may lead to closure of business and thereby lose all the investments made by you.

Financial feasibility

Irrespective of the positive results in all the above elements of validations, this is something important that cannot be disregarded. This validation involves pricing, profitability, cost structure, market price and above all, the cash flows that could be generated during the product life cycle of the product or solution. It is to be noted that one important element that needs to be factored in here is the product life. In today’s environment of fast changing technology landscape and customer choices, you need to be conservative and judicious in estimating product life as accurately as possible. Not doing so will result in cash flow estimates going wrong and failure of the venture.

What is the validation process in case of a new idea?

This is the real focus of our discussion. Validating a new idea is complex and challenging as there may be any data and information available in the public domain to look at. It will call for a good amount of patience, perseverance and skills.

Start with problem and not solution

As you might be aware, most of the world’s inventions and ideas that we have and know of now, happened out of the need of the inventor or people they knew. Your idea should always start with a problem that you and others experience and, not with the solution. Solution comes later. If there is no problem, there is no need for a solution. The first and foremost part of the validation here is to know if such a problem exists and people are looking for a solution to it. You should be able to articulate the problem with clarity. Applying already available solutions to other problems, say copying or cloning an Amazon or Uber or MakeMyTrip or Zomato idea as a solution to another problem in another industry or market may not necessarily work to your benefit.

It is suggested that you discuss the idea with friends and relatives to collect their feedback, nevertheless by discounting it for the positive and negative bias in their opinion. Having a definite idea about the profile of your potential customers is very crucial. You should then find ways to reach out to such potential target customers to get their feedback on the problem that you are planning to solve, what kind of solution they are looking for such problem, whether your idea comes near to what they are looking for and what price they are willing to pay for the product or solution in question.

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Applying already available solutions to other problems, say copying or cloning an Amazon or Uber or MakeMyTrip or Zomato idea as a solution to another problem in another industry or market may not necessarily work to your benefit.

Is the Problem tier 1 and worth solving?

It is not enough that you have identified and articulated a problem that you and others seek solutions to. It is necessary to evaluate if it is a tier 1 problem meaning whether it is one of the top 3 problems your potential customers are experiencing and looking for a solution to. In other words, the problem must be big enough to be worth solving.

Let’s assume your target customer is the CEO of a small business. Their top 5 problems might look something like this:

1. Generate more leads
2. Automate processes
3. Outsource our payroll
4. Onboard CTO
5. Marketing tools for online platform

If you’re planning to launch an online marketing tool, you can see that’s not a tier 1 problem for the typical CEO of a small company. This is just an example. The CEO will be more focussed on solving their top 3 problems. They will not bother about your solution at the moment even if your product or solution is great. This is probably the hardest lesson that most startup founders ignore to learn. If
your product is not on top of the prospect’s mind, you’re miles away from a sign up.

Is it really a new idea?

This is important. You should find out whether a similar solution is already existing in the market that addresses your problem idea. If the answer is yes, then there are two things you can and should do. One is, as discussed elsewhere, evaluate if there is space for you to pursue the same solution in the market. Secondly, you need to ensure that there are no IP protections that restrict your entry.

If you are convinced that your idea is novel, then you should move on to the next steps in your validation process. Though an idea on paper cannot be IP protected through patent protection, you may take whatever possible steps to ensure that your idea is protected from infringement. One option is copyrighting the idea. This is, however, a topic of different discussion.

Doing things that don’t scale

What this means is solving an underlying problem under the condition of no solution including the one you have is not available. The process involved here is to solve the problem as if no such solution in the form of your idea is available. This will provide the answer to the question if such a problem exits that seeks a solution and it is worth having a solution. LinkedIn Co-founder Reid Hoffman once said, “The only way to scale is to do things that don’t scale.” Many entrepreneurs worry too much about their 1000th customer and their future $100 million-dollar business – when they haven’t even acquired the first customer. In a competitive and uncertain market where most startups fail, entrepreneurs should be very careful about the steps they take to launch and should validate startup ideas before aiming for the stars.

Regulatory Approvals

We have witnessed in recent times in India and elsewhere that technology-backed businesses are facing legal hurdles because there is no legislation in support of them. Examples are Cryptocurrency, Gaming, etc. So, it is important to make sure that your product and/or service have regulatory backing necessary to take it to the market.

Test your Product/Service and Market

One of the most important validation stages. Once you’ve determined there’s space for your product and/or service in the market, ensure you’re putting the most useful, intuitive, miniature version of it into the world. By testing it means testing the issues,
bugs, functioning, functionalities, features of the product or services and its market viability.

Testing your product with real users can provide valuable feedback and inputs when assessing market validity. Take your product or service to your selected target audience with a trial offer. It will help you in identifying the acceptance levels, flaws and gaps if
any and help plan any improvements that are required to be made. This will also give another important feedback as to if your target customers are willing to pay to buy it. Needless to reiterate that it is a prerequisite to have clarity on the profile of your target customers.

This step cannot be skipped at any cost. Without a proper feedback on the product or service from your target customers, you could end up in firefighting after investing heavily in your venture. It is as good as testing the waters before taking the plunge!

Financial

At the end of it, the big question! Will this idea make money? Will investors fund the idea? This needs to be evaluated before going ahead with the venture as making money is one of the most important objectives of any venture, if not the top most objective.

What needs to be looked at here is:

If the price and cost are good enough to make profit

How will the working capital be managed

How will funding come

Will the investment be returned in reasonable time

Why is validation of start-up ideas important?

The validation of an idea will strengthen your resolve to venture into an unfamiliar territory with more confidence. This will also help you to understand the market and take safeguarding measures. Business validation will help you in concluding whether you will succeed and estimate the time it takes to reach the goal. Overall, it will help you prepare better and remain well-equipped to take on the market challenges. 

Abdo Riani, the founder and CEO of VisionX Partners, a startup development company, says in one of his articles, “There are many startup ideas that exceeded expectations in the early validation stages but failed later due to a poor product, execution, marketing, management or other reasons. The percentage of startup failure after early traction is significantly lower than it is for startups that get into development mode with no traction at all”.

To conclude, there is no debate on the need for validation of your business idea before you venture into it as otherwise there is all the likelihood of you losing the effort, time and money invested in the venture.

Joseph Varughese
Joseph Varughese
Joseph has 22 years of finance experience, 13 years in technology and 6 years as an entrepreneur. He writes on business life cycle, startup ecosystem and entrepreneurship.

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