A method for validating your business model for your online startup

A method for validating your business model and increasing the likelihood of success for your online startup

Fase de búsqueda del modelo de negocio de una startup

Using the right product development and business model validation methods can make the difference between success and failure for a startup.

Internet has ushered in an age of entrepreneurialism unlike any other. The countless possibilities at our disposal and the low barriers to entry in many sectors has led to an incredibly high number of online startups and entrepreneurs.

But what it a startup? Are you sure you know? Let’s take a look.

A startup is an organization created to LOOK FOR a business model that is repeatable and scalable.

This is the key, a startup looks for a business model. If you already know how to attract your customers, how to sell to them, serve them and make a profit while you do so, then you are not a startup. Size is irrelevant when it comes to being a startup or not.

The difference between a startup and a company is that a startup looks for its business model, while a company carries out its business model.

Entrepreneurs are faced with a depressing statistic which says that 9 out of 10 startups fail. Why is this? The main reason is that they make products that nobody really wants. There is no market-fit for the product they have developed (however good it may be).

Besides, 66% of startups change their plan A. This is why the lean-startup, which is the predominant form at present, focuses on creating a method that enables a startup to alter its plan A until it finds one that works. It goes without saying that the faster it can make these changes, the less its finances will suffer. This is the motto of Lean-startups

Lean-startup: Fail quick, fail cheaply.

The less money you have to invest to discover than your business idea won’t work, the better. The more trials you can carry out by modifying your business model when you using little of your budget, the more time you can buy yourself to find the business model that will be a success.

There is yet another definition of a startup which is good to keep in mind:

A startup is an institution designed to create new products and services under UNCERTAIN conditions.

This uncertainty will be a constant feature of a startup. Practically everything that we might put forward as part of our business model is a mere hypothesis that the market will be sure to evaluate. And remember… No business plan ever survives the impact of the market. In other words, following a business plan religiously, step by step, when you are setting up a business is not the best way to go about it.

There are other more dynamic methods based on continuous learning that we recommend for any entrepreneur. 

When it comes to recommending a process of creation, preparation and management of startups, we are in favour of following the methodology put forward by Steven Blank, which was the basis for the later development of the Lean-startup by Eric Reis.

Steven Blank’s method is clear, straightforward and specific enough to be followed by any entrepreneurs wishing to increase the chance of success with their startup. The initial stages of the process are those that we apply in Flat 101 when contacted by entrepreneurs in the online sector, to act as a support agency for launching their business idea onto the market.

Steven Blank’s client development process is a process of testing the original business model that you defined for your startup. The idea behind this is that your project’s business model is a series of hypotheses to be tested.

Steven Blank divides the process of client development into two different blocks: the search for a business model and the performance of the business model. The first of these is when the hypotheses about the business model we defined for the market are validated and adjusted, altering the model when necessary. Once the business model has proved that it is repeatable, profitable and scalable, we can pass to the second block, in which this model is carried out. We invest to attract a continuous flow of clients and build the company up around the model.

 

Steven Blank’s client development process
Steven Blank’s client development process

Each block is divided into different stages. Each of them has an objective.

1. Client discovery

During the search for the business model, in client discovery, the startup team must focus on understanding the problems and requirements of the clients by getting out of the office and asking them face to face. Each hypothesis of the business model must be validated by listening to your customers. The idea is not to draw up “the list” of requirements from your customer’s lips, nor to run endless focus groups. The specifications of the original product derive from the founder’s vision.

The idea is to ensure that there are clients and a market for your vision of the startup.

You can consider this phase finished and move on to the next one when you can answer these questions, based on what your target customers have told you in your conversations with them:

  • What are your clients’ problems?
  • How must will they pay to solve them?
  • Does your product concept solve their problem/need?
  • Does the client agree?
  • Do you know who your users and buyers are?

It’s worth reminding ourselves that we can work with just a simple Power Point presentation at this stage. There is no need for major investment.

2. Client validation

During client validation our energies are directed towards developing a repeatable sales model. In this stage we can use a simple Beta version of the product for sales to obtain feedback from our first customers. This version of our product is what is called the Minimum Viable Product (MVP). 

The MVP is the version of the new product that allows the team to learn the most amount of valid information about our clients with the least effort. Creating the minimum viable product will prevent us from creating a complete product that nobody wants to buy. Testing our market with the MVP gives us maximum learning for every penny invested.

 

How do we create a suitable Minimum Viable Product to test the market with?
How do we create a suitable Minimum Viable Product to test the market with?

In this process we use agile product development methods that allow us to make changes to the product based on what offers best value to the customer. Client and product development are parallel processes and each benefits from what they both generate.

This point is especially critical when the entrepreneurial team is engaged. They usually want to go to market with a complete, finished product. One of the biggest problems that Flat 101 has had in its collaboration with startups is whittling down the list of functions in the initial list to give priority to those which can create a product to learn from. At the end of this exercise, though, the entrepreneurs come to appreciate the merit of approaching the market this way.

As before, we set ourselves some validation questions to show that the business model works and we can move on to the next stage.

  • Is there a validated sales route plan?
  • Do you have a body of sales that validate your route plan?
  • Does the financial model make sense?
  • Have your sales cycle and processes been validated?
  • Can you teach another person to replicate the capture and sale so that they can do it too?

If the answer is NO, then we must PIVOT our business model.

In other words, if you have a replicable group of customers through a replicable sales process, and these clients can support a profitable business, then, and only then, can you move on to the next stage. If not, WE PIVOT.

Remember that pivoting does not mean abandoning your idea or vision. Pivoting means changing one element or hypothesis of your business model (customer segment, value proposition, sales channel, source and method of payment, etc.).

Pivoting is the result of learning about the business, not just the product. We must pivot until we find and validate a suitable business model.

If you have made the right changes, your sales effort (capture, sales, service) will be successful, becoming profitable and repeatable, and we will be ready to take the plunge.

3. Client creation

In the stage of Client creation in the model performance stage, we have to focus on creating demand and driving it constantly towards our sales channel (with different marketing campaigns).

This is when we will make our investment in advertising, to create demand and usher it towards our company’s sales channel. The idea is to prove that our business is actually scalable.

It is important to remember that the major investment in advertising comes after client validation in order to defer large outlay on marketing until after the startup has won its first customers, thereby controlling the rate of spending.

4. Creation of the company

The creation of the company consists in making the transition from an organization focused on learning and discovering, to one that is focused on carrying out its business (once settled on). It is in this last stage when you start to hire workers and create departments dedicated to a specific mission.

What matters now is to create departments with a function aimed at exploiting the success created so far.

One very important part of this client development process is to keep the startup in low-spending mode (low investment) until the business model has been validated by finding paying customers. This is the point that marks the transition between the blocks which make up the client development process (search and performance), and is the difference that ensures that a larger number of startups manage to carry out their project successfully.

For entrepreneurs and founders, pivoting the business model is a delicate moment because they feel as though they are betraying their original business idea. I think that the worst thing we can do as entrepreneurs is to be so enamoured with our product and business idea that we completely reject the idea of making even minimal changes to it.

Pivoting does not mean giving up your idea or vision, it means fine tuning it to make it profitable.

Do you want examples of companies that pivoted their business model in the past?

Facebook, which started as Facemash, was a site similar to HotOrNot.com, where two photos were shown and you voted which of the two persons was most attractive. The first name given to Twitter was Odeo, a service for sharing audio files centred on personal podcast content. Paypal used to be called Confinity and was a company that developed cryptography software designed for exchanging money between Palm Pilots. It didn’t work too well, but it revealed the opportunity that existed for online payment. Google started as BackRub, a tool that indexed academic publications, awarding greater relevance for the number of references made by other publications.

If you know of other cases of companies that had to pivot their business model to become successful, or if you want to share your own experience as an online entrepreneur, please tell us about it! We would love to know what worked in your startup, and what didn’t.


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