How To Validate A Business Idea

Most people don’t know the importance of this. But knowing how to validate a business idea can save you years of energy and hundreds of thousands of dollars in investment.

It can all go down the drain and puts you in massive debt…

Because no one wants to buy your product.

Most people overvalue the idea and undervalue the execution and demand.

I used to watch shows like Shark Tank and Dragon’s Den. These are shows where rich businessmen sit in a row and decide whether to invest in business ideas.

There’s hundreds of episodes and one of the most common themes are people who have the stupidest ideas that clearly no one will pay for and have spend thousands of their (sometimes, hundreds of thousands) own dollars in.

While I can’t say I agree with the structure of the show for the investors (there’s too many psychological influences affecting you from making a calculated, logical decision – peer pressure, TV spotlight, people egging you on, glamour, and so on), I do think the show teaches a lot of good lessons.

Because I wanted to learn about this myself, I read every article, book, and video I could find online about the topic. There wasn’t as much as I thought, so I wanted to summarize the best stuff I learned.

Many businesses can be started and validated with very little money. Don’t be convinced on the myth that businesses need tens of thousands of dollars.

It’s a myth that you need hundreds of thousands of dollars to start one. Frankly, it is an excuse for people who are scared to start.

I do think that there are SOME businesses that require a large purchase. The mobile and telephone industry requires you to build towers or lease them. But even then, there are ways of getting around that. Richard Branson used a strategy of leasing an airplane (which costs millions) and being able to refund it in a year if he didn’t make enough money.

There’s pros to every business, you have to be more optimistic. A business with a large initial investment has a higher barrier to entry and usually less competition. (Again.. don’t use this as another negative excuse. There’s pros to starting something with little investment too)

A great book for this is The $100 Start-up. There’s tons of examples of all different types of industries where someone has succeeded on doing this.

Anyhow, here’s the bare-bone essentials:

How To Validate A Business Idea, Product, or Service

This outline will give you a good sense of what you can do:

1. Get a general feel for how many people out there are in the niche and are interested.
   1. Look at the size of communities on the topic online and in real life, Google Trends, search traffic for terms and/or statistics on the market.
      1. Search volume can only take you so far. People can search ‘homelessness’ 10,000 times a month. Doesn’t mean they’re buyers. Look at how many people are actually buying in a market and/or find a market where people actually buy and have proven it in the past, like fitness.
      2. Realize you won’t get CLOSE to capturing a percentage of the market. 1 out of every 3 start-up entrepreneurs fall for the myth of “This is a 10 million person market, if I just get 1%, I’ll be RICH!!” It’s VERY tough to get even 0.01%. Richard Branson failed in this with Virgin Cola vs Coca Cola. And he’s Richard Branson. Use this to get a more realistic assessment of the market you can capture.
2. Get in front of the community you want to capture.
   1. Free
      1. This usually takes a lot longer. Are you willing to wait years to build a blog? A quicker way would be to get on forums, communities online, meet-up groups in real life, youtube channels, etc. Talk to them on the phone. Real person contact is crucial. Help them out and figure out their pains and needs. Noah Kagan validated an idea in 24 hours and got $1,000 sales just by reaching out to friends on Facebook. He recommends going to people you already know like a local church group.
   2. Paid
      1. Tim Ferriss and Justin Mares have validated businesses in record time by paying for $50 to $200 worth of Bing or Google Ads. People keep doing this every year even when I think it doesn’t work anymore. A standard online sales conversion rate is 1% so make sure you get enough people on the page first though. Justin had a killer product idea, which allowed him to get sales with less visits.
3. Ask them to actually pay to validate it.
   1. A lot of people will pretend or say they will buy your product if you ask, but true validation comes from when you actually get them to pay for your product. One of the best ways to validate a product for very cheap is to do a Kickstarter system where you get people to pay for it before it’s built. It takes a lot of the anxiety out of the equation. Again, if you look at the $100 Start Up book or Kickstarter, people do this all the time.
4. Be willing to pivot to please the customer but don’t sell away your passion.
   1. People forget that business is about giving value to customers. Otherwise, they won’t pay for your stuff. The only reason they are paying is because of some end result you are promising them, whether it’s the pleasure from the taste of chocolate or the experience of escape from a tropical cruise. Many successful businesses have pivoted to shape a product into what the customers want when their first idea failed: Instagram started out as Burbn, a whiskey app, but when they saw through their analytics that users only used the photos element of the app, they slowly shaped it over and over again until it was Instagram. This is crucial higher-level business thinking that most people don’t do. Many founders are blinded by only their own ideas.
   2. This is something that people forget. Don’t be in it for the money. There’s plenty of stories of founders who made a ton of money but found themselves selling a product they didn’t like to an audience they didn’t like. They over-chased the money. Start with a topic or area you are already interested in. This occurred in a emotion-evoking story in the book Will It Fly? by Pat Flynn, where someone managed to make over 6 figures but hated his work.

If I had to summarize this outline in a couple sentences, it would be: 

Get in front of real people who are interested in your topic and ask them to pay for a product. If they pay, it’s validated. Be willing to pivot and shape the product to what your customers would pay for. Make sure it’s an area you’d have a lot of fun in, a market that is not too small, and make sure it’s not just because you’re a horrible salesman.

Conclusion

While there are plenty of business courses and books by billionaires, these should be ignored if it’s not the stage of entrepreneurship you are in right now.

As detailed in the awesome business book Rework, as you grow, you can become too caught up in adding features for customers and make your product too complicated and bloated.

If you want more details on validating a product, these are highly recommended reads.

Click on them to learn more or buy them:

Will It Fly?, The Lean Startup, and The $100 Startup.

Also, check out this 24 hour validation story.

Has this helped you with validation? What other challenges do you have?

Let me know in the comments and I’ll see you next week.

Will