As a start-up, money is tight, so the name of the game is being lean. Eric Ries wrote a very good book, ‘The Lean Start-up’ on how to ensure that you don’t waste money.
There are several examples of companies who have invested thousands of pounds in a start-up without first proving the concept. There are a few key principals which can be followed in order to ensure that you start your company in the leanest, most cost effective way:
- Eliminate uncertainty. Business is based on your assumptions; you have created a product or service, and you’re assuming that there is a demand. Maybe customers don’t believe that there is a problem which needs solving, meaning that there is no demand in the market. The first step in doing this is defining what your assumptions are in your business model. Quantify these and then prove them. For example, if you believe that there is a need for a car which floats on water, before creating this product, undertake market research and prove that there is a demand and that you can make money from this. If you can’t prove your assumption, don’t waste your time on it.
- Work smarter, not harder. It may sound like common sense, but focus on the important aspects of your company which add value. These are the parts of your enterprise which will generate demand and create money. Don’t waste your money investing in items which boost your ego: a fancy office, company car, personalised stationary, etc.
- Validated learning. This is a process by which you learn by testing your idea and measuring to validate the effect. Each test is one piece of the larger puzzle, so each piece of your business can be tested to prove the concept as a whole will work. The basic premise behind validated learning is to specify a goal, act to achieve this, analyse the response and then improve it and try again. A good example of effective validated learning is when building a website. The goal is building a site with content generating x number of hits. You act by building a website and you can easily analyse the response using web analytics and statistics. You can then take this data output information, learn from it and improve your product.
- Develop a Minimum Viable Product (MVP). This is essentially the most slimmed down version of your final product that you can create. You then produce this is small quantities to test the response of the market. If you don’t receive sufficient demand, you can alter your product or move to a different idea. If your MVP proves a success, you know that you have more chance of generating revenue, and therefore can go through the expense of developing your product further.
The above are 4 very simple steps in ensuring that there is a market and demand before spending a lot of money on a product or service which may not take. A further development on the MVP is to create a ‘pre-totype’. This is measuring demand before even embarking on a prototype. For example, you could test the validity of demand by setting up a website selling a product without actually selling it. If you receive a great deal of interest: go ahead, if you don’t you can drop the idea. Crowd funding websites such as Kickstarter are another great way of doing this by gaining investment and measuring demand.
Whichever path you choose to follow, ensure that you test your assumptions and your product on the potential market before investing huge sums of money in your start-up.