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How to validate a business idea

Why validate a business idea?

Validating a business idea or business model is verifying that the hypotheses on which we base our business strategy are true and that our company is viable. Basically, it is checking if “there is water in the pool” before we try to dive (sounds like a good idea, right?) Validating the business idea can save us a lot of time and money, especially frustration!

When we think of a business model, we surely establish a value proposition (solution to a problem), addressed to a target audience (whom we are going to help) who will receive it through a specific channel (Internet? A physical location?) and that they will be willing to pay us a price that justifies our investment (Price x quantity of products sold>variable + fixed costs).

Validating our business model means being able to quickly glimpse business assumptions and test them. The business model is the structure of our strategy and a good entrepreneur must learn to ask the right questions to validate a business idea.

The following simple example will help us understand the importance of validating a business idea. Juan has the million dollar business idea: to sell plants online to elderly people who like plants but cannot move from their house to the nursery. Juan has an aunt who told him that the idea was very good; a friend’s grandmother also found the idea interesting. He loves plants and would love this service to exist. Who doesn’t? As they told him it was important to quickly build a business model on canvas. Some of the aspects of his business model might look like this:.

So after putting together his business model, he sets off to start his business. He buys a few plants and creates his website with a great design and name: “plantasadomicilio.money”. Now is the time to be successful!

A few months later you meet Juan. He is confused, his business was the next Amazon and yet it never took off. Now he is liquidating his plants while thinking about the lost money and time.

What was John’s mistake? Not asking the right questions, that is, not validating your business model in time.

How to validate a business idea

When Juan devised his business model, he started from the basis that many things were true, without questioning it. In a good summary, Javier Megias proposes that Validating a business idea consists of questioning hypotheses that we can classify into three groups:

Customer hypotheses: These are those that relate to how our customer behaves, who they are, and how they are going to react to our value proposition.

Hypothesis of the problem: This group of hypotheses are all those related to the real existence of the problem that we propose to solve.

Product/solution hypothesis: This includes the hypotheses directly related to our product, the way in which we are going to solve that problem

Most of the time, business deals with common sense; Validate a business idea too. In this sense, the first step is to formulate the appropriate questions to validate the hypotheses. John should have asked himself:

  • Are there really older people who love plants and gardening but can’t get to the nursery?
  • Are these people willing to pay a price that justifies the new delivery system?
  • Do these older people know or use the technology by which I want to communicate and perform my service?

The process of validating a business idea must be simple and as fast as possible. Below you will find 4 steps to validate a business idea.

1. CAPTURE YOUR IDEA ON A CANVAS, AS DETAILED AS POSSIBLE.

After a while working with canvases, you can probably sketch out a coherent business idea in 30 minutes (or much less). That’s fine if you’re just exercising creativity, but if you’re determined to pursue your idea a little more than usual, I recommend that you put in extra effort for this one to incorporate as detailed as possible the mechanics with which your business is going to work. function. If we go back to Juan’s canvas, we see that he is very lazy and he is not really rigorous with his propositions. In this step he is going to want to go through this process to include numbers and go into more detail than he did the first time.

In case you find it useful, we have included a copy of the Canvas in our Free Kit, along with another Guide to analyze the Viability of a Business. 

2. IDENTIFY THE MOST IMPORTANT ASSUMPTIONS REGARDING RISK AND IMPACT ON YOUR SUCCESS.

As we said before, validating a business idea is about testing hypotheses on which we are building our strategy. Each business idea has multiple underlying hypotheses, however, they are not all the same. In Juan’s case, his business is not going to be affected in the same way if the grandparents are not willing to buy items online, as if they are not willing to buy plants at all.

3. CREATE AN MVP TO TAKE TO THE STREETS AND START TESTING

The creation of a minimum viable product (MVP) is key so that you can validate a business model. An MVP is the version of your product with the fewest details, features, and development time that is presentable to the market.  It’s a quick build version that allows you to go outside and see how people respond to your product.

4. TEST THE HYPOTHESES OF YOUR BUSINESS MODEL

There are many ways to test and validate your hypotheses. Here are the three main ones:

  • Interviews and qualitative information : It is one of the easiest ways to obtain information and feedback about your product. It is important that you interview people from your target market. If I have to give a number I would suggest no less than 10 people. Your questions mainly have to aim to validate your hypothesis about the problem and the solution (your product and service). The problem with this method is that it does not give you 100% reliable objective information. In general, these interviews will help you to know the general points of view about a product and the problem and to have a general view of the problem. I strongly recommend that you pay attention to the words that people use to describe their problem, it will help you a lot when putting together your marketing elements later.
  • Carry out tests (for example «Smoke tests» and «Split tests»): You will need a little exposure for this but it is one of the most important tools. Well-designed “split tests” are responsible for keeping all the variables constant except one, so by sending almost the same thing to two audiences, we can know what the reaction is to a change. A key tool to validate a business idea is the smoke test. These consist of launching sales pages before we have our finished product to test the response of our target customers. For example, Juan, before buying the plants, could have created a page for people to place orders and if people did, he would simply tell them that there was currently no availability. With the placement of that page I could have seen if there was a real interest in knowing how many people “ordered”. The example is on the internet because it is the easiest, but we can also place notices with phone numbers and see if someone calls us or not. That’s a question of creativity.
  • Surveys: Surveys are the way to validate a business model that is in the middle of the previous two. If you don’t have a business or platform through which to place surveys, this option can be difficult. As for the practical aspects, make an effort to make a good summary of questions and that they are not more than 10 . The effort pays, there is a lot of information on the internet about how to create good surveys. A poorly designed survey can lead us to make poor decisions. Try to do at least 100 surveys . Less can be biased and the results insignificant.

In Mckinsey, the most important strategy consultancy in the world, they have a phrase that guides their work “facts, facts, facts” (facts, facts, facts). The point is that to start a business in a solid way we need to base ourselves on objective facts and not opinions. Validating our business idea is the way we are going to save time and many disappointments. IT IS VERY IMPORTANT TO CARRY OUT A GOOD VALIDATION OF OUR BUSINESS IDEA.

Lastly , an important aspect is to note that validating a business idea is not a one-time thing. Validating a business idea is something that must be done constantly and is one of the main habits of entrepreneurs. 

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