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Beware of start-up hockey stick expectations

Wednesday, 25 January 2012 | By Marc Peskett

I meet with a lot of innovators from all walks of life.

 

The thing that strikes me the most about them is that they typically have one thing in common – they all think that their idea will be a great commercial success.

 

They believe their customers will love their product, pay good money to get it and their business will take off in a hockey stick trajectory.

 

Based on these beliefs and assumptions, the innovator sets up a company. They then develop a glossy business plan and proceed to spend a lot of their own money, as well as funds obtained from investors, in order to commercialise their innovation.

 

After spending a heap of start-up capital, they launch their product and eagerly await the moment when the cash will roll in.

 

What happens next is that a few early adopters pick up the product and start to use it.

 

But the early adopters are only a small percentage of the total market. Overall demand remains low and customer take-up is only a fraction of what the innovator originally assumed.

 

The price early adopters are willing to pay is also a lot less than originally assumed, too.

 

In fact, no one really wants the product and it turns out the grand market opportunity just isn’t there.

 

The business now has valuable information about the market and the real opportunities, but by this stage, there’s no money left to invest in reconfiguring the product into something that customers really want.

 

I know the picture I’ve just painted isn’t the sorry tale of every innovation idea, but it’s an all too common story I’ve heard time and again from start-up entrepreneurs.

 

To avoid treading the same path of many failed innovators before you, you must use a discovery based planning process to identify the right product and market fit, before betting all your funds on a single strategy.

 

There are three key steps to discovery based planning:

 

1. Identify your assumptions

 

The first step in a discovery planning process is to identify the “leap of faith” assumptions that you’re making. (This is a phrase coined by Eric Ries in his book The Lean Startup, recommended reading for all start-ups).

 

These "leap of faith" assumptions are generally about market size, market share, customer needs, pricing and how fast your business will grow.

 

Writing these assumptions down will help you focus and clarify your thinking about them.

 

If you’re struggling to identify your assumptions, reflect on your financial projections and the assumptions you needed to make in order to set those projections.

 

2. Test your assumptions

 

Once you have identified your assumptions, develop a plan to test and validate each of them. Build a scale model or prototype and invite potential customers to try it.

 

Gather their feedback on the usefulness of the product and what they perceive its value to be.

 

Find out who your economic buyers are. These are the people that will actually spend money to buy what you’re selling.

 

There’s a big difference between users who will try something for free and buyers actually willing to pay for the privilege.

 

Talk to the economic buyers and get a feel for their pricing expectations and limits. The discovery process is not just about identifying product features that customers want.

 

It’s also about identifying who the real customers are and how to capture them, the value proposition, the best way to market the product and where the growth opportunities are.

 

3. Use the feedback

 

Use the feedback and information gathered to assess whether the leap of faith assumptions you have made are still valid. Most times they won’t be.

 

By knowing which assumptions are incorrect, you can adjust your expectations and strategy before your funding runs out.

 

It could take several iterations of the test and validation process before you can confidently proceed further.

 

But when you do, you’ll be surer of the outcome and can enjoy a better return on investment as a result.

 

The information you gather from this discovery based process will be essential if you want to develop a successful, scalable and profitable business model.

 

Be warned though, the process may also tell you that you don’t have a viable business model. Prepare yourself for this potential outcome and consider it a blessing in disguise.

 

It’s better to fail fast, adjust and adapt, than to exhaust all your resources proceeding down a fruitless development path.

 

Marc Peskett is a director of MPR Group a Melbourne based business that provides finance lending, grants advisory and capital raising services as well as business advisory, tax, outsourced accounting, and wealth management to fast growing small to medium enterprises.  MPR Group is a member of the Proactive Accountants Network.

 

You can follow Marc on Twitter @mpeskett

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