Funding your start up, part 2: Market Validation

Outside of the likes of angel investors and venture capital firms, seeking funding for your venture is not an easy task to accomplish.

"It is a full time job and often more of a distraction than a blessing for our start ups", says Massey University's Innovation Centre business strategist Sabrina Nagel.

Running a start up is very different to running an existing business. Start ups operate in conditions of extreme uncertainty, making investors less willing to take risks. But since it's difficult to get funding, it's difficult to get established, grow, and become stable. It's a catch-22 situation.

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. This is something of an intangible definition. Think of it this way: you will know when you have it, like when the phone doesn't stop ringing, when customers storm through your door, or when people are devastated when you talk about taking your product or service away.

This sounds pretty idealistic, and you are right in thinking that surely not every company in the world has achieved this. You can have enough customers to keep the business alive and maybe even live comfortably, but unless you have a huge marketing budget, this approach is not sustainable and 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 start up owners to show tangible results and reduce the uncertainty. This 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)," says Nagel, who also co-runs the ecentreSprint market validation 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's 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.

"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... it's about understanding the tools and methodologies to be customer centric and take an idea from garage to global.