A Credible Framework to Validate Startup Ideas

Entrepreneurs are known to run into dozens of ideas on a daily basis, if not more. While most of them seem to border on absurdity in the beginning, it is often difficult to determine whether or not they would work out in the long run. That’s why the best way of ensuring your idea is worth developing is to learn at the fastest possible pace and have the willingness to try out different experiments.

Based on our proven knowledge on product development and experience, we have developed a template document relating to the process of idea validation, and wrote the guide to explain each question and step in a simple, understandable manner.

How’s this helpful?

• Avoid wasting time and resources on something that’s certainly not worth it. 
• Learn proactively and pivot your idea at a much quicker pace.
• Validate your product idea without actual budget/coding skills.
• Answering all the questions posed in this guide means it can serve as a worthwhile investor deck. Couple this with running some experiments and you’re well poised to raise money from investors!
• Most critically, it provides a credible framework to separate good ideas from bad ones.

Value Proposition

What important truth does your idea uncover that is not mainstream? 

The following would be a business version of this question: what is that valuable company that nobody is building? Every correct answer is necessarily a secret: something important and unknown, something hard to do but doable (by Peter Thiel).

It is important for your idea to reveal some unknown, unconventional truth in order to create something of value. Something nobody chooses to talk about aloud, but will become evident to all after it’s unraveled. 

For more interesting nuggets and insights on startups that attract VC investors read Zero to One book. 

Define fundamental value assumptions

Here at datarockets, we classify three kinds of assumptions:

• Value assumptions: To define the value of your idea and future product. 
• Business model assumptions: This affects the manner in which you get your product monetized.
• Growth assumptions: How you’ll ensure growth of your product and continue to attract new customers. 
  

Let’s begin with the basics: the value assumptions!

What are your fundamental value assumptions? How does it help to resolve real-world problems?

On the basis of the previous chapter’s statement, it’s best to define the fundamental value assumptions and experiment with them in the fastest possible manner. Leap of faith assumptions is another popular term for fundamental value assumptions. 

If your leap of faith assumptions are not true, the whole idea is not viable. This means that if your failed assumption won’t end up ruining the whole idea, then it’s not vitally important to begin with, thus implying that it can no longer be your fundamental value assumption.

Growth evaluation

Does your idea grow with the advancements of supporting technologies (durability)?

Before taking the next step, confirm whether a new, upcoming technology won’t kill your promising idea. 

Ex: If you’re intending to develop a startup that teaches people how to drive vehicles, it may make sense to assume that with the advance of self-driving cars your business might get destroyed.

Existing Solutions Research

Has anyone implemented your idea / tried to implement it before?

Although a typical process begins with communicating with people whose pain points will be addressed with your product/service, it makes a lot of sense to first research your idea and determine if similar services/solutions are already available in the market. After ensuring that the competition is not excessively intense or your idea provides breakthrough value with its uniqueness, it’s time to proceed further.  

Find communities that may potentially be facing the problem you’re looking to resolve. Ask how they’re currently dealing with it and if they’d be interested in trying out your way. 

More often than not, other people may already be solving the problem you plan to solve. They may be doing that using some tricks or manual solutions. Identify and talk to them about how they tackle such challenges, what is it that they struggle with, and whether or not they’d like to explore your way of doing that.

Based on who your target audience is, join Facebook groups where your target audience is likely to assemble, gather feedback from your own network, or even consider talking to people on the streets. 

Remember, whenever you wish to solve someone's problem or fulfil an unmet need in the market, the first step is to get people to stop using other solutions or make changes in lifestyles. After ensuring the problem is worthy of being solved and something that people wouldn’t mind paying for, you’re ready to take the next step.

Why do you think your solution is better?

After taking the above steps, focus on the advantages and the distinguishing features of your solutions that set them apart from others. List them in a logical order and then explain why people will find more value in your solution. What value will it bring to them?

Market Analysis

Previously, we’d been assessing and validating our Value Assumptions. Ensuring the viability of your idea was their core purpose. Unfortunately, merely having a good idea to create a long-term profitable product does not suffice. Think about the different ways in which you make money out of your solution via Market Analysis and Business Model Assumptions.

Define your potential target market

1. Narrow down your potential target market. Who is your ideal customer? Why should they pay for your solution?

Targeting everyone essentially means that you’re not targeting anyone in particular. Concentrating on the appropriate target market is a good approach because it lets you maximize your returns on the time, money and energy you’ve invested. Secondly, it’s far easier to conduct  experiments in a narrow market.

Try and define specific groups you wish to target with your service/product alongside their potential sources of revenue. Depending on your idea, you can even group them by job, interests, demographics, etc. Ensure that your target audience will be able to buy your products as the revenue source of each target will be different.

Now, there are some industries where people are very unlikely to pay for additional services. As a case in point, the probability of people paying to use social media for communication purposes is very low. In such scenarios, use your discretion and prepare a draft of your monetization strategy. While it needn’t be your final blueprint, it will greatly simplify your task by helping you select more attractive markets.

2. Use Google Trends/Semrush to see how many people google solutions for the problem you are trying to solve

Tools like Google Trends or Semrush give you an accurate picture of just how many people are seeking solutions to the problem you’re attempting to resolve. Most importantly, such tools allow you to check who these people are, know what their trends are, and provide a reasonable accurate estimate of the size of your target market.

3. Reach out to five well-known people in the market and ask for feedback on your idea

After gathering the necessary information based on the previous steps, select a market (or a couple of them) that seems most promising. The next step in this phase is to gather feedback from specific groups of people relevant to your market. Doing this will give you plenty of actionable insights and the opportunity to further examine your idea from different perspectives. 

Create a portrait of your target audience

In this phase, try to be as specific as possible about all relevant attributes of your target audience that describe them/their lives accurately and narrow them down further - age, gender, interests, position, personality, daily schedule, reading patterns, etc.

Regardless of whether you describe a person or a company, depending on your sales model (B2B or B2C), the approach will remain unchanged. Consider the example from the "1-Page Marketing Plan" book.

Conduct target user interviews

According to Eric Migicovsky, a Y Combinator partner, the best firms are those whose founders establish a direct connection with their users. If you happen to be a founder, consider talking directly to the users of your product or solution.

Eric cites a useful example of a structure that can be used to hold your user interviews. After tailoring the structure based on our needs and priorities, this is what we’ve come up with:

1. What makes the problem difficult for them?
2. When did they last face it?
3. What have they done to solve the problem?
4. What are the things about existing solutions that they don’t like?
5. How much would they pay to resolve the problem?

Business Model Assumptions

List your business model assumptions (based on the assumptions on what you assume your customers are going to pay and how much)

After defining the problem to be solved, doing user interviews and knowing more about the target audience, it’s now time to brainstorm ways of monetizing your product. 

It’s a good idea to first get better informed about various types of business models before jotting down your assumptions about how your customers would be paying and how much. Put every idea on your mind on the table. Consider these two examples:

• I assume users will pay $15 per month to gain unlimited access to music on my platform (Subscription-based model)
• I assume concert managers will not mind paying $50 to promote their event on my platform if I implement advertising. (Ad-based)

Growth Assumptions

List your growth assumptions (what is your plan to rope in new users and how much cost would that involve)

To survive and thrive, it’s critical to ensure your product grows smoothly and plan out ways in which you’ll attract new users or enter into new deals (partnerships). You’ll have a far better picture of your future marketing investment by writing down all possible growth hacking and marketing ideas. (prepare to get startled by the fact that budgets for marketing are often bigger than those for development purposes ;))

Does your growth engine generate new users from the actions of existing users? List out your acquisition loops.

Getting new users effortlessly without spending any money is always a pleasant feeling. In that context, consider exploring acquisition loops which will make a great addition for your monetization strategies.

The core idea behind acquisition loops is as follows: The more users you have, the more users are attracted.

You can implement acquisition loops in the form of referral programs (e.g. Airbnb and Uber offer free coupons/rides for each referred user) or content loops that are user generated (Reddit, social networks, etc.).

Natural acquisition loops are extremely important when you’re planning to execute an Ad-based business model, because the average revenue per user (ARPU) of ad-based models are lower in comparison to let’s say SaaS. That's why they must acquire new users cheaply to generate sustainable profits and reap massive profits.

What’s your assumed revenue source? How would your profits/expenses grow as the number of customers grows (scalability assumption)?

Needless to say, it’s not easy to accurately predict your expenses and profits. Some startups have funding to cover their expenses for two years or so until the venture starts making profits. If that’s not your case, pay close attention to this aspect and foresee your potential scalability issues and expenses.  

Competitor Analysis

High-level SEO analysis

This step needs us to continue working with product positioning and simultaneously address several key questions:

1. How many people are interested in this? 
2. How difficult is it to rank on the first page of Google?
3. What keywords should I use to promote my product or service? 

As you begin to answer these questions, it will become crystal clear that some keywords are more popular as compared to others. Some find it really hard to attain a high ranking on Google. Here, our objective is to compare word combinations that translate your business model to identify keywords with a balanced volume and keyword difficulty (KD).  

Utilize tools like Semrush, Ahrefs Keyword Finder, Google Ads Keyword tool, etc. to collect the information about Volume, CPC, KD and leading websites that rank by these keywords.

Competitor overview

Competitor overview is an extremely important step to undertake before proceeding further and it requires you to gather information about your competitors’ users, business models, revenue, etc. We this guide, we want to draw your attention to three attributes:

1. Your Advantage
2. How Hard to Replicate Your Advantage
3. Why Should Customers Buy from You

From these characteristics, it’s clear that you’ll compare your value proposition with your competitors and know what your unique selling proposition is.

Learn more about your competitors

Usually, you’ll get more insights from a personal interaction with your rivals than from conducting a basic competitor overview. It’s a good idea to reach out to them and know more about how their business is shaping up and the struggles they’re going through. Some effective ways of doing this include:

1. Scheduling a demo as a user. When it comes to small startups, you’re more likely to be able to engage in a personal talk with product owners that are very interested in collecting user feedback. 
2. Contact product owners directly as their competitor. Generally, experienced startup owners are not opposed to the idea of talking to competitors and others from within the same industry. In most cases, they’ll frankly talk about their experiences/struggles, caution you about some pitfalls and share some additional information that you may find relevant.
3. Conduct in-depth research on their personal pages and blogs. In some rare cases, founders openly reveal all the information about the product and its metrics such as conversions, active users, revenue, etc. 

Experimental Plan Definition

Until now, you’re likely to have collected several interesting ideas of business models as well as growth assumptions. Now is the time to get them tested.

How are you going to test your business and product positioning assumptions? 

Let’s face it. It’s not viable to build MVPs for every different assumption. Do the smart thing, instead. There are many tricks that you can implement to test ideas without actual development. We covered some of them in our blog post on the Lean Startup approach:

• Landing page. After using builders to develop simple websites with your value proposition, collect early-bird invites or sign-ups for testing the app. This is an effective way of evaluating the interest of users. 
• Demo video. Several startups received funding only for the video that explained their vision because the product had already been built.  
• Crowdfunding platform. This can be a useful option not only to validate your ideas, but also to identify early adopters and receive payments before you actually develop the product. 
• Concierge MVP. Sometimes, you can test the idea manually rather than having a web platform or application. 

Where can you find your early adopters? 

Now you must locate people who’re facing the problem you plan to solve and get them to test your product/solution. They will not only give you valuable feedback, but also spread the word. By now, you should know how to find them because you’ve already talked to them in the Value Proposition stage.

• Crowdfunding platforms
• Facebook / Reddit / Telegram groups
• Current clients (if your business is running offline for now), etc.

How are you going to collect feedback? 

Put differently, how will you communicate with your early adopters?

• Feedback forms
• Facebook groups / Telegram channels
• Email campaigns

Experimenting

Experimentation time! At this stage, you would have every information you need to test the assumptions and begin data collection to identify your product positioning and go-to-market business model. 

After launching your demo videos/ landing pages, go ahead and collect some data. Not every idea is explained in the same way, so you may want to quickly run a couple of Google ads to see people’s reaction to various keywords for product positioning. 

Putting the metrics on the table will let you see what experiment turned out to be most successful. Although we offer to check these metrics, it’s your call on whether or not to make changes in this list:

• Impressions
• CTR
• Visits
• Signups
• Conversion rate
• Cost per Signup
• Assumed Average Revenue per User

You may also want to check our massive, extremely helpful guide on Startup Metrics. 

MVP Scope Definition

If you’ve successfully reached this stage, congratulate yourself for making good progress! You now have a very good reason to believe that your idea is worth developing. Time to define the scope of work by preparing for MVP building:

1. Define your go-to-market business model.
2. Conduct interviews with customers who have signed up. Ask about their expectations and top-3 features they’re looking to implement in the product. Match their expectations with your pricing model.
3. Do a cross-analysis of the interviews in order to find out most desirable features. Consider writing simple User Stories.
4. Predict revenues for 100/1000/10000 paying customers and calculate your business model’s unit-economics
5. Obtain estimates on the numerous features and determine the ones you wish to include in the MVP. Make it a point to only include the most important features that help validate your key assumptions. You can always add the rest at a later stage. Ensure that your budget for MVP is less than 30k-40k.

Conclusion

Yeah, it does look like a long, tedious process. But here’s the good news for you! You can test your ideas quickly and effectively after gaining some experience. 

Another piece of good news: if you happen to fail at any stage, there’s no reason to be upset about it, because it basically means that you successfully prevented your money from being wasted on developing a product that was likely to fail in the first place. Sometimes, a back-up option for a not-so-strong idea is to pivot it and repeat the cycle. 

Besides, we’re always ready to help in whatever way we can with the idea validation process and product development insights. All you need to do is to drop us a line and we’ll be happy to talk!

Previously published at https://datarockets.com/blog/business/validate-startup-idea/