Are You Guilty of Self-Validation?

This is a big bias entrepreneurs tend to have when starting up. I have been very guilty of this.

How do you know your business idea is good? Do you feel it or do your potential customers say that? A lot of the times we feel that there ‘should’ be a need which our product/service caters to. This should can be quite risky. Before proceeding with the idea, a proper validation is a must. Self-validation, i.e. validating the idea yourself, is a trap entrepreneurs often tend to fall into.

A proper and adequate validation involves doing the following:

Assessing whether a need exists: Some good ideas to do this are

- Talk to/survey potential customers

- Identify whether customers are interested in your product by analysing their current behavior

- Create a MVP and test out your hypothesis

- Conduct a comprehensive research (including primary and secondary research)

Is the market big enough: Try to estimate the potential market size the idea is catering to.

Will the customers be willing to pay for your product/service: Analyse whether your business idea has advantages and customer would be willing to pay for it.

This is very crucial as following up on an idea which has not been adequately and appropriately validated can result in waste of time, energy and resources.

Top Reasons Why Startups Fail

Startup Failure is considered a taboo in many parts of the world. However, it is a phenomenon which is highly prevalent and cannot be avoided. Nearly 90% of startups fail within the first 3 years of operations. Top 20 reasons why start-ups fail include the following:

#1 – Building a solution looking for a problem, i.e., not targeting a “market need”

#2 – Ran out of cash

#3 – Not the right team

#4 – Get out-competed

#5 – Pricing/Cost Issues

#6 – A “User Un-Friendly” Product

#7 – I got this product. Now I just need a business model.                

#8 – Poor Marketing

#9 – Being inflexible and not actively seeking or using customer feedback

#10 – Release product at the wrong time

#11 – Lose Focus

#12 – Disharmony with Investors/Co-founders

#13 – Pivot Gone Bad

#14 – Lack Passion and Domain Expertise

#15 – Location, Location, Location

#16 – No Financing or Interested Investors

#17 – Legal Challenges

#18 – Do not use your connections or network                

#19 – Burn Out

#20 – Failure to pivot when necessary

Source: CB Insights via Seraf Investor

Learning from Failure – Scalability of the Product

One of the important features of a product/service is that it should be scaling friendly and can be replicated in different geographies and markets. A startup product which does not have this attribute will find it difficult to grow beyond a certain threshold.

37coins was a SMS based Bitcoin remittance wallet. Despite targeting a big market of around 2.5 billion underbanked adults, the startup failed to assess the reliability of SMS as a medium in many countries. This led to a bad product market fit for a large chunk of the market and hence resulted in the startup shutting down.

Advice – Assess the scaling potential of a business idea before proceeding with it. All attributes of a product must be taken into consideration to assess its scalability.

Learning from Failure – Don't Put All Eggs In One Basket

Dine In was a restaurant delivery app whose founder was very focused on getting acquired by a larger player. An incident with an investor led to their downfall.

The founder Evan Graj says in an article - “We knew acquisition was the best course of action,” says Graj. That eventually led to Dine In being approached in February by a major Internet company active in the online food space, and it’s my understanding that by April — and significant legal fees later — a sale had been agreed. Then at the eleventh hour the deal unexpectedly fell through, leaving the restaurant delivery startup “high and dry” and its unnamed acquirer a “no-show”. Adds Graj: “They backed out leaving us with a huge legal bill both for Dine In and myself personally, a huge debt to note holders, and no VCs to turn to. A hard lesson to learn and one I’ll be taking into my next venture.”

Advice – The startup and its growth should be the prime focus on an entrepreneur at all times. Ignoring this for things like funding, getting acquired etc. is a bad practice and must be avoided at all costs.

Learnings from Failure – Infographic

A study was conducted by CB Insights by analyzing more than 101 startup failure postmortems to find out the top reasons for startup failure.

The top 3 reasons found to be a part of failing startups were – The Absence of a Market, Running out of Cash & a Wrong Team. These indeed are the 3 most important components of running and growing a startup (along with having a Business Model, which ranks at no. 6).

Learning from Failure – Regulation Issues Need to be Dealt With

When thinking of your business, it is important to also consider how and to what extent Govt. regulation and policies can affect the same. There can be and have been cases where a good and innovative startup idea has been curbed and has eventually failed because of regulation issues.

Flytenow was a startup which closed because of this. It was a startup which was looking to connect aviation enthusiasts with pilots and go flying together. The Federal Aviation Administration in the US banned this startup and other flight sharing websites. Flytenow had to shut down eventually.

Advice – As a startup, you would not want to get on the wrong side of regulation. Keep that in mind if it can potentially affect your startup.

Learning from Failure – Decisions Should be Data Driven

Although gut definitely has a role to play in startups, data should always be the driving factor in decisions. In the early stage of the startup when data volume is low, intuition plays a more significant role. But as the startup grows and we have more and more data at our disposal, the data should be utilized well to make any further decisions for the company.

Emjoyment was a startup looking to be the Tinder for jobs. The founder says – “The Lean Startup tells us to be data-driven, and so we werewith our initial sample size of 100 homogeneous Penn friends. Not smart.”

Advice – Data driven decisions should drive a startup. Also ensure that the source of the data is accurate and relevant for your startup.

Learning from Failure – Have a Plan

Having a plan helps the team move forward in a proper manner. Not having one results in different members of the team putting energies in different directions, thereby resulting in a loss of time, effort and money.

Boo.com was an ecommerce company which went bust despite launching on a big scale, in multiple countries. Besides the other challenges they faced, the biggest factor for their failure was the lack of a project plan which resulted in a complete lack of communication within the team. As was said after it went bust, Boo did not fail as an ecommerce company, it failed as a company in general.

Advice – Do not start investing time and money without having a plan.

Learning from Failure – An Idea Should be Explainable in 1 Sentence

If your startup idea cannot be explained in 1 sentence, it lacks focus. A few words for the business model and a few for the market targeted. If either of these are not certain, we tend to go into explanation mode which tends to make the idea statement longer and lacking focus.

Amiloom was one of those ideas which lacked focus. In an article by the founder, he acknowledges the same – “We believe that Amiloom is an extremely innovative product better than anything currently available for helping you meet the people most likely to become a part of your life. Amiloom is a connected device that forms a network of people with common friends, shared tastes, and who only need to go as far as the device was handed to meet up with each other.

The problem is that no one knows this. When you see a picture of Amiloom you have no idea what it is. In 2 lines of text there is no way to explain both why and how it works. We have built it and are telling the world, but no one can hear us, few people understand us, and the masses are not coming to us.”

Advice – Stop and write your idea statement. If it does not fit into 1 sentence, you need to think and focus further.