Author: Jorge García-Luengo 
(The second part of this post will be published next week)
Product Validation can take many paths; some can exhaust your cash and kill your project, extenuate the teams’ morale, or take too long to accomplish making you lose momentum. To avoid this, start-ups must be smart, they must challenge some aspects of what is often considered “common sense” in corporate management, adopt a scientific approach to business development, and follow a business sequence.
When your product finds “fit” in the market and you have finally Validated your idea, you will then have another challenge, to Grow. It’s important to understand there is a logical sequence here: first validate your product, and then make it grow. Accepting and respecting this process requires patience, which might be hard to find in a very dynamic and passionate environment. We will discuss how trying to achieve validation and growth simultaneously will end up confusing the entrepreneur and obscuring the learning process.
Some of these aspects of how you manage resources on this early phase are counterintuitive and surprise many entrepreneurs: don’t search to be profitable, don’t put your whole business model in place, don’t spend on marketing, and don’t try to serve the whole market. If you come from the corporate environment some of these statements might surprise you, but a start-up is not a small version of a big company, it’s something else, it’s an experiment, a laboratory.
Why should you be doing things this way? Well, limited resources is why. You can’t really know how much time you’ll need to achieve Product Validation. It could take years, like for the Nestlé guys with Nespresso, or months, as for the team behind Twitter. You really can’t tell, but if you play the game long enough, you might get lucky.
You don’t need to be profitable
“What? I don’t need to make money with my start-up?” Yes, but not with your MVP. Its purpose is not to make you rich, its purpose is to test your product or service, guide you through the process of discovery and innovation that will hopefully take you to the promised land of greater utility for your customer.
You do need to design a Business Model that will be profitable once all the pieces of the puzzle are in place. But that is different from creating a profitable MVP. Your MVP can very well serve its purpose even if you lose money with every product you sell.
This means that it is ok to have a non-profitable product to test with, as long as it helps you learn and validate your product, and as long as it is profitable once the complete Business Model is in place.
You don’t need to be scalable
Some products or services can serve many people at no extra cost, and some need to be scalable if they want to be competitive. These ones will want to be able to scale, and their foundations should include those principles when possible. The question here is: Does your proof of concept need to be scalable to do its job?
For example, the usual dilemma for tech companies, especially if they are in cloud computing, is: “If I make it scalable right away I’ll have the job done. If I don’t I’ll have to redo lots of stuff.” Here you must do the maths and be honest with yourself. That’s very much all you can do. When doing your maths think of three things: how much does it take to make a non scalable version, how much does it take to make a scalable version, and most importantly, how much time do you have left. These three factors, if taken into account with honesty, will tell you what’s the right path to take.
Lets see all this through an example. We’ll use an imaginary start-up called Web Diamonds. They sell diamond jewellery online. It might look like the kind of product no one would buy on the web, but we’ll give it a try.
Their business model is based on a few principles:
- Not having to own “brick and mortar” stores on expensive locations, having few security overheads and insurances, and needing less human resources will save on production costs, so they can sell at a 30%-60% discount compared with competition
- Partnerships with designers to create jewellery for them, imitating the big players on the industry, very much like Zara does
- Partnerships with financial institutions that will help finance these expensive products (even a low-cost diamond is an expensive product)
- An attractive return policy, “no questions asked” on the first 20 days, and adjustments in size are free
If Web Diamonds wants to be profitable they must buy their own raw materials. To create their own products they must partner with designers and other craftsmen. That requires lots of negotiation, volume in purchases, lawyers, etc. Doing all that is time demanding and expensive, and Web Diamonds doesn’t have time or resources to waste. For now, they just want to validate their idea so, what do they do? They find a contact that works in jewellery and they ask him to let them take some pictures to the products. They need the pictures for the website, right? They also need the web, but hopefully today it’s quite easy to open a store online, and you don’t need programming skills to build one.
Here are some of the unknowns they want to figure out: Are people willing to buy jewellery online? What is a good discount when benchmarked against traditional jewellery? Do people want jewellery that resembles the kind of product that luxury firms are doing (like Zara does for clothes)? Or do they want original designs (like Ikea does). Will they trust the certificates handled by Web Diamonds on the products quality? What’s the price range that will sell well on this channel? Etc.
Web Diamonds doesn’t need diamonds to validate most of its assumptions. They don’t need a payment gateway; they don’t need designers or financial partners for this purpose.
If they want to test further, lets say they want to test the return policy or the distribution channels, they could even buy the products from their contact in the jewellery industry at retailer price (for example 1000 $), even if their selling price on their website is cheaper (e.g. 700 $). They would lose 300 $ on each sale, but that would still be cheaper than investing on building all the value chain and waiting for everything to be in place to start the tests.
I hope this illustrates why you don’t need to be profitable to validate your product, and also that trying to be profitable from the start, even if it makes sense in mature industries, can be counterproductive when you are testing value innovation.
You need to own your core competencies
Some assets and skills you’ll need are easy to acquire, to replace or to learn, others are not, and these might be essential to develop your business model. If this is the case, the start-up must find a way to own these core competencies. The classic example is business people with an idea that needs technical expertise.
Web Diamonds, for example, might need someone in the organization with the necessary skills to purchase diamonds, someone that knows where to find them, how to assess their quality and negotiate their price. This is the kind of competence that can be purchased at a high cost and that is key to this business and should not be externalized.
If your value proposition is supported by some competency that is expensive in the market, you need to find a way of owning it. If your website has a complex and dynamic customer experience you need a web developer and a U.X. expert in the core team, if you’re selling diamonds you need a certified expert. If you don’t own these competencies your Value Proposition will suffer.