Category Archives: Market research

What is Validation?

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What constitutes validation is one of the first, essential questions we ask in our work with entrepreneurs using the Business Canvas Model (BMC). We also discuss value proposition, targeting customers, and product/market fit. However, validation for all of the components in the Canvas is never really defined.

Validation is the ultimate goal of the process using the BMC. Through validation we are looking to determine the sufficient number of paying customers that creates a market adequate enough to create a business opportunity.

Entrepreneurs do not have the luxury of knowing how many paying customers they have when beginning to pursue an opportunity. Many teachers of entrepreneurship, including Steve Blank and those at the Innovation Corp program at the National Science Foundation, claim that an entrepreneur needs to talk to at least 100 customers in order to reduce the uncertainty surrounding a startup. In fact, the more confirmation achieved, the less the uncertainty. The specific number of 100 is likely derived from qualitative studies performed by social scientists who claim that a population of 100 in a survey makes for a valid survey. In reality, most entrepreneurs find that after talking to about ten customers, the results tend to be the same. So, what constitutes a sufficient number of interviews?

In the past, I have stated that entrepreneurs should interview as many people as necessary to confirm the valid, the uncertainty of the market to a comfortable level. Of course, that omits the concept of confirmation bias. Entrepreneurs need to be mindful to avoid thinking: “My invention is great, so I’ll do anything to make the numbers believable.” Do not fall prey to your own lies, damn lies and statistics.

In research methodology, validity is the soundness of the design of each test and methodology used. Validity shows that the findings/results truly represent the phenomenon claiming to be measured. We cannot talk about validity without discussing reliability. Can the test be repeated or replicated with another population and obtain similar results? Is the test inherently repeatable?

Entrepreneurial validity means using good methods to test hypothesis obtaining data with observable facts that can be measured and are relevant. In addition, the test results must end up with a binary result. The test either passes or fails. There is no “close enough” response. As Yoda says, “Do or do not. There is no try.”

During hypothesis testing, an entrepreneur must “draw the line in the sand.” Ask whether your metric provides you with a level of success that gives rise to doubling down and taking the next action step? Can you tell the difference between complete failure and overwhelming success? Where does your opportunity fall?

What happens if you land close to the line in the sand but do not pass over? There are two possible scenarios: One would come from the norms of your industry. In other words, understanding how your competitors view this metric would provide the necessary knowledge to take action. The second should come from the business model. How many positive responses are required in order to be successful?

Now that you understand what validity is and why it’s important, make sure that you understand exactly how to test for validity. Testing for validity must correspond to the extent to which a concept, conclusion or measurement is well-founded and corresponds accurately to the real world.

 

Opportunities

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Our new program, Accelerate, asks entrepreneurs to be mindful of opportunity recognition in a number of ways. Technology researchers and developers often see many options to pursue. An important goal for very early stage entrepreneurs is to ideate as many possibilities for their technology in order to determine as many potential products or markets as possible. Then, with the use of a few tools and secondary research, they need to narrow their focus to only a few reasonable and potentially profitable choices.

At our Accelerator we start with two tools: One is to examine the technology opportunity and a second to represent the business opportunity. This approach helps provide an opportunity to examine the scope of the opportunity and make better choices. The narrowing of opportunities is usually represented by easier adoption rates, shorter buying cycles, and leverage to a larger market.

With this data in place, we have our interns dig in and research the market and industry both on a macro and micro basis. On a macro level, we assess the market size and industry attractiveness. Markets are composed of groups of buyers so that determining which groups compose the Total Available Market (TAM), Served Available Market (SAM) and Target Market (TM) is important to determine which should be pursued. Also, by definition, an industry is a group of sellers that represent potential completion. As it turns out, some markets and industries may be clearly more attractive for an individual startup to enter than others. On a micro level, industry attractiveness is, in part determined by the competitive response and current benefits offered by competitors. On the market side, we focus on whether the real or perceived benefits a startup offers are better, different, faster or less expensive than the competition. We ask whether a startup can create a perceived differentiation of improved benefits or costs in the minds of their target market?

We examine trends in both the startup’s market and industry. Is the startup ahead of the trend analysis? If it is too far ahead it becomes difficult to sell the value and benefits that are offered and the market will likely not see the need. The dead pool is littered with products and startups that never materialized. Some examples include Webvan, Ask Jeeves, Pets.com. If it is too far behind in the trend analysis, the startup will never catch up. The goal is to ride the wave of each trend with a base of intellectual property that protects the opportunity and stalls or slows the competition. We also investigate the economic and social forces potentially impacting the startup. Is there a political or regulatory change? Is there a technological advance that provides a customer desire? Do you have the window of opportunity? Good entrepreneurs know that timing is everything.

In the early stage, an entrepreneur needs to access an ability to execute on a potential opportunity. However, validation of the opportunity, product market fit and Business Model Canvas must be present while confirming that financial viability is likely.