Category Archives: validation

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.

 

First Impressions Matter

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We are in the process of evaluating the applications for Angel funding for our current round. Like most investor groups we use Gust as the platform for entrepreneurs to load their company information. Overall, I must admit I am disappointed in many of these applications. Many of the applications look strong in terms of idea or concept. Some apparently have traction. Some claim to have traction, but don’t support that claim. However, the real problem is that for more than 90% of these applications, it is the first time I am exposed to you. The application is my first impression. And first impressions matter! Here are a number of items that are problems.

Incomplete applications. Gust is a standard format platform. The executive summary, financials section, team composition are all fairly straightforward. Missing items or incomplete items leave a bad first impression on me. If an entrepreneur does not provide all the information by the deadline, then it requires substantial explanation. Leave a note somewhere on the document telling me when the document will be completed, and why you require the additional time. I understand, we are looking at a moving target, but at some point I need to review a snapshot.

Financials Section. On Gust, the financials section is where the entrepreneur asks for funding and offers a summary of projections. It includes a place to upload documents. Upload your documents. I expect to see a spreadsheet with details of the projections.

  • I don’t want to see a pdf file. With pdf I really can’t see the basis of your numbers. Load an Excel spreadsheet with assumptions and a polished look and flow.
  • One tab of sales projections is not enough. In addition to the assumptions tab, there should be at least tabs for a cover summary, a cash flow projection, hiring guide, balance sheet and revenue models. You need a minimum of five and don’t overwhelm me with 20. I don’t need that level of detail…yet.
  • Hidden tabs that include details I need to review are a minor inconvenience. Why should I work harder on your application? Make your data clear and easily accessible.
  • On the positive side, I have seen a few spreadsheets, that have a nice summary up front, a tab with an assumption table linked into the spreadsheet, a hire/HR table and clear, bottom up projections that go over time until past cash flow positive. The revenue projections are important and should not be overlooked.
  • Spreadsheets are a complete topic for another blog. For now, I will admit that spreadsheets are something of a work of fiction, because they are guesses. But the closer the entrepreneur comes to being correct about these numbers, the higher my confidence level in the venture.

Articulating the Value Proposition. Don’t make me guess what your real value is to customers. If you are not perfectly clear in articulating the product to the target market, then how will I know you will be able to effectively sell the product/service?

Proof Points – Gust does not ask for this, but it is important that you be very specific as to the stage of your venture’s development. This will come out in due diligence. But if you have a finished product or channel partners already lined up, that leads to a much better impression for investors.

Know the Rules of the Game. An understanding of how our Angel group operates will benefit the entrepreneur immensely. For example, if our average investment is $400,000 and you are seeking $900,000 then be certain how you can fill out the rest of the round. I don’t particularly like building piers. I want to build a bridge to the next round. If you have funding that supplements ours, then great. However, know that we prefer to lead rounds unless the terms of the other funding is sufficient. So, be careful uploading the other term sheet – know what we like.

Stage of Development. Don’t hide the point that customers aren’t paying or you don’t have any customers yet. Be honest and forthright and just tell us exactly how you will conquer the world. Make me take a bet on you through truth telling.

Traction. Traction is right. Traction works. Traction clarifies, cuts through, and captures the essence of the evolutionary spirit. Traction, in all of its forms …has marked the upward surge of saving the world (thanks to Gordon Gekko for the quote).

Traction is the basis of all that is good in a startup. Traction is the market validation of a value proposition with its target market. Traction shows proof points on its business model. Traction is based in real sales (not a give away product) and has evidence of other proof points – channel partners, a supplier base or existing value chain.

No Faith Based Entrepreneurship. I am really not interested in what you believe. Save that for church. Show me the proof. All that matters are evidence based startups.

Get these right and investors will be your friend.

Disclaimer: These are my own views and not those of any investor group that would have me as a member.

Lessons Learned

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I recently returned from a three day educators workshop on the Business Model Canvas (BMC) and Lean entrepreneurial process. There were a number of important points from the workshop that served as reminders for me, and I thought this should pass them on.

People, money and knowledge are the three ingredients that bridge opportunity and value. I think of these as the triangle of success. Miss one of these items and your startup is destined for failure. A caveat about money: In this success triangle, consider your customers. Customers lead to money, not the other way around.

Story telling is one way entrepreneurs can convey their value proposition. All entrepreneurs should become good storytellers. Everyone remembers a good story, but when was the last time you remembered a great statistic? Entrepreneurs need to understand the nature of a good story arc and bring that arc into all their pitches and conversations. People remember stories – make yours a good one.

Business Model Canvas (BMC) is founded upon evidence-based entrepreneurship. The Business Model Canvas is uses the scientific method to reduce the uncertainty in a startup. Get out of the building and get the facts. Facts are the evidence that will lead to better results.

It is okay to receive affirmation for being wrong. Stay true to the lean process. Fail fast and reduce uncertainty. Either the hypothesis is valid or not. An entrepreneur will do an injustice if they try to justify their results to meet expectations.

In an educational setting or classroom, the focus of BMC tends to be on the product market fit because many individuals going through the program are not ready for the strategic partners, activities and resources sections. This may be true in the classroom, but in our accelerator companies must be ready to launch. All nine components of BMC are important. There two basic section of BMC: The front end deals with product market fit and the back end deals with startup operations and activities. The product market fit must be established and validated before contemplating the operations and activities of BMC. Based on my participation in this workshop, I can see how a two section approach to teaching the BMC could be valuable.

There were other lessons learned as well and will be incorporated into our next cohort. A few improvements will be adding videos for client portfolios, an increased focus on understanding customer archetypes and graduating our clients with an eleven item portfolio.

Start with the Business Model Canvas – Not Yet

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We at the Oregon State University Advantage Accelerator are big believers in the Business Model Canvas methodology. We use the Canvas, we also use software for the Canvas, and we make our clients read the books by Steve Blank and Alex Ostervalder. However, the fact is that Canvas may put a technology entrepreneur at a disadvantage before he or she gets out of the lab.

Our clients at the University tend to be in the early stages of their development. Most of our researchers are doing cutting edge research. The entire set of potential opportunities for these clients have not yet been examined. Under normal circumstances, using the Canvas, clients would start with one or two potential target markets then try to validate the opportunity.

I suggest that this may not be the best way to begin. One of the tools, we use at our Accelerator is the opportunity matrix. The founder or Principal Investigator (PI), my co-director, mentor(s), intern(s), and I brainstorm on the possibilities of applications and industries in which this innovation can be productized. We also look at the numerous variables that could affect market entry. This tool was originated by the strategist Igor Ansoff and there are many versions found online.

The matrix provides focus and guides decision making prior to a long course of validating tests as required by Canvas methodology. Along the y-axis, we list the potential products and/or industries in that the innovation may be successful. Along the x-axis, we list variables such as size of market, ease of entry, competitive response and so on. The list of variables can be quite large and is on my version. The purpose is to determine through online research, phone calls with industry experts, which industry or market should be the top areas of concentration, which then becomes the business focus. This leads to a much clearer start on the Canvas.

The technology also needs to be checked for the opportunity as well. We have a great spreadsheet that checks on the viability of commercialization for the technology. It is similar to the opportunity matrix in that the various markets or projects are listed on the y-axis and a number of strategic questions about commercialization of technology are listed with weighting scores along the x-axis. This is another easy way to envision the technology side of the opportunity. Send me a note and I will send you either matrix.

These pre-cursors to the validating steps in Canvas will shorten the steps from hypothesis to validation testing.

It is highly likely that an entrepreneur will save time and money by doing the secondary research up front. This also creates a more focused entrepreneur who can easily begin the primary research work on Canvas.

There are a number of other activities that we take our clients through before beginning to work on Canvas. But overall, in the early assessment stages, we are seeking feasibility. Is the technology feasible within the means of customer wants? Does the business proposition make sense both in terms of its ability to succeed and financial viability?

Overall the big questions in this stage are:

  • Do I have a technology that has potential applications in the commercial market?
  • Are there customers and a market of sufficient size to make the concept for this technology viable?
  • Based on estimates of sales and expenses, do the capital and other resource requirements to start make sense? And;
  • Can you create an appropriate start-up or management team to execute the concept?

Just like in the Canvas, the answer to all the above questions is not that you believe the response, but rather, I know my response is true and here is why.

This early work provides sufficient data to understand the industry, examine an early value chain and process flow, understand your potential first and/or second market, organize yourself for validation of market(s) and get an early justification of pricing.

As I stated above, the secondary research requirements will enhance the primary research efforts required by Canvas. Go in smarter and ask better questions in order to obtain better results.