ecentre Massey

I need funding!- but have you validated your business opportunity?

17.2.12 posted by Sabrina

A lot of people we meet with, tell us in their second sentence:

“I need funding.”

And that is fair enough, because at the end of the day we all need money to survive (the amount we need might vary ). What entrepreneurs often overlook is that before being able to attract funding, there is a lot that needs to happen. I have written the below article for TechDay.

Seeking funding for your venture, is not an easy task to do. “It is a full time job and often more of a distraction than a blessing for our start ups”, says Sabrina Nagel, business strategist at Massey University’s Innovation Centre.

Running a startup is very different to running an existing business. Start ups operate in conditions of extreme uncertainty which means investors are less willing to take risks. This in turn makes it very difficult to raise funds to scale and grow the business, as investors want reassurance for their investment.  It’s a catch -22 situation.

But it doesn’t have to be that way. Too often, people become discouraged if they cannot get investment straight away. They start focusing on the wrong things, such as the lack of investment capital available and the need to improve term sheets or investment pitches. What entrepreneurs tend to overlook is the root cause.

Investors need proof that their investment will pay off and yield an adequate return. How can you provide that?

Simply by showing customer numbers and adoption of your product or service. If you don’t have adequate customers and you can’t show growth, most likely you haven’t achieved what we call “market fit” .

Market fit is explained as offering the right product for the right market, which is at the point when you move from refining your product and business model to scaling and growing the business. This is somewhat of an intangible definition. Think of it this way: you will know when you have it; when the phone doesn’t stop ringing and customers storming through your door and once the majority of your customers are devastated if you were to take your product or service of the market tomorrow.

This sounds pretty idealistic and you are right in thinking that surely not every company in the world has achieved this, so why should I? You can have enough customers to keep the business alive and maybe even live comfortably but unless you have huge marketing budgets, this approach is not sustainable and definitely not advisable.   And it definitely won’t help New Zealand’s economy.

Instead, what entrepreneurs need to do is validate the market for their product before even considering approaching investors. It means engaging customers and validating every single assumption made about the venture.  It is a way for startup owners to show tangible results and reduce the uncertainty. This is in turn, de-risks the whole process of starting a venture as success or failure of the product or service can be determined very quickly.

“Based on customer feedback, the entrepreneur ends up reducing the offering to very limited features, a minimum viable product (MVP).” adds Nagel who also co-runs the ecentreSprint programme. “This is achieved quickly and cheaply, and early adopters are already eager to test it and give more feedback. Isn’t that a lot easier than creating a product with elaborate unnecessary features and then spending tens of thousands of dollars on marketing something to a market that has no need or desire for it?”

It is important to note that customers don’t always know what they want, so entrepreneurs need to identify what their real problems are, sometimes without customers being aware of it. It is not about market research but about understanding the environment of the customer: what substitutes do customers currently have, how do they behave right now and how would this behavior change after using your product.” adds Nagel.

“Market validation is an iterative process and is not something you can just tick of the list. It can take months or even years but it saves time, money and effort in the long run. What distinguishes successful start ups is that they are able to iterate quick enough before running out of money.

“Even though the practical notion of achieving market fit can take months or years, becoming competent in using the right tools and putting yourself in the right mind set, can be learned in a 12 week programme such as ecentreSprint. It is about learning the tools and methodologies to be customer centric and taking an idea from garage to global. “ Nagel concludes.

Files under Sabrina's space, ecentre news, ecentreSprint

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