The Simple Question That Can Make Or Break A Startup

Posted: Aug 16, 2018



Kyle Young August 13, 2018 Source: HBR.org

There’s an unassuming restaurant in Dallas called Chop House Burger, home to handspun milkshakes, truffle parmesan french fries, and six innovative burgers. It’s an eight-year-old restaurant in an industry where 80% of new entrants fail in the first five years. And stitched into its origin story is a clue to why some products (and businesses) succeed in the market while most wither and die.

The burger place spun out of a The Dallas Chop House, a high-end steakhouse two blocks away. The Chop House was known for its ribeye, filet mignon, and flat iron steaks, dry-aged in the restaurant with Himalayan sea salt. In an effort to diversify their menu, the owners also offered a gourmet burger. Despite how good the steaks were, the burger became one of the most popular items on the menu. So the owners decided to build a restaurant around it.

Most of us aren’t in the restaurant industry. We don’t all have an established business to test ideas in. Yet the value of establishing demand before you launch the business is just as important for us, whether we’re launching a new company or simply a new product.

In February, venture capitalist database CB Insights conducted an extensive review examining what contributes to the failure of new businesses. After analyzing 101 startup post-mortems, the reviewers found that 42% suffered from a lack of demand for the product or service being offered. They used a harsh phrase to describe this cause of failure: “no market need.”

This one flaw harmed significantly more companies than well-known startup challenges such as cash flow (29%), competition (19%), and poor timing (13%), to name a few.

The findings raise the question: How can entrepreneurs or new product developers test their ideas before investing the significant time and capital required to actually bring them to life? How can we spot the ideas that are likely to succeed instead of wasting our efforts on those that are prone to failure?

Here are three strategies worth trying:

Look for successful competitors. When it comes to establishing demand, thriving competitors are a good sign, not the red flag many entrepreneurs view them to be. Being the first mover in a space can produce situational advantages, but showing up late gives you the benefit of added perspective.

Today, if you were to release a new photo editing software, beer, or car rental service, you could be confident your offering would be understood and in-demand at some level. Yes, you would still have to get the attention of your target customers. You would also have to differentiate yourself from competitors. And there would still be plenty of ways your product or business could ultimately fail. But you would at least be in charted territory.

The food delivery industry contains terrific examples of established companies following the demand validated by early movers, such as Seamless and Grubhub. To better leverage its foodie customer base, Yelp purchased Eat24. Uber applied its successful driver model to meals and created UberEats, which is outgrowing the ride sharing service in some markets. And payment platform Square acquired Caviar, giving restaurant owners a simple way to accept credit cards and deliver meals.

Getting outcompeted is the obvious fear associated with entering a space that’s already home to successful companies. It’s a real risk. In the food delivery space, companies differentiated by finding new restaurants to partner with, expanding to new locations, and offering distinct pricing models. But those opportunities won’t exist in every industry.

Ultimately, it’s worth considering the numbers. In the CB Insights study, only 19% of the analyzed postmortems claimed their startup had been outcompeted, less than half the number that blamed failure on a lack of demand.

Check for search traffic. When people are searching for a product to solve a problem they’re facing, they type what they’re looking for into Google. Through keyword research, entrepreneurs can learn what people are searching for and use the findings to gauge demand for a product or service idea.

According to the keyword research tool Ahrefs, 27,000 people per month are searching for “Photoshop alternatives.” 4,000 are searching for “automatic lawn mower.” And 100 are searching for “truckers’ bookkeeping service.”

Each of these terms has similar variations that increase the total number of monthly searches. You could also gauge potential demand by looking for broader searches that don’t focus on a specific solution but prove the existence of a problem you can solve.

For the examples above, “How to edit photos,” “Don’t have time to mow my lawn,” or “Bookkeeping guidelines for truckers” could be searches worth exploring.

There’s no standardized amount of search volume you can use to validate healthy demand. You will have to interpret the data in the context of your specific industry and business goals. But confirming that people are searching for a product or service like yours is a good sign, and through Google AdWords campaigns or SEO, you can work to get in front of these very people if you decide to launch the idea.

Test your marketing promise. People don’t buy products. They buy promises. Generally speaking, customers don’t truly know what it’s like to own a product until after they’ve purchased it. They don’t spend money because of any realized benefits. They’re paying for the benefits promised in the sales copy and testimonials.

This is a crucial insight for anyone looking to test a new product or service because it suggests that you don’t need a finished product to validate demand for an idea.

You can create the marketing copy for your hypothetical offering and test it through surveys or interviews with targeted prospects. Of course, the most accurate test of demand will involve customers getting out their credit cards. Pre-selling models such as Kickstarter are one way to do that.

There’s no perfect system to pre-validate demand for a product or service, but that doesn’t mean you shouldn’t do your due diligence. Business failures are costly. They can result in lost capital, wasted time, and damaged confidence. Some of the challenges uncovered by the CB Insights study will be hard to predict — such as timing, whether you’ve hired the right people, and if you’ll make necessary pivots after launching the business. But demand is one key ingredient you can pre-validate, at least partially.

Had they done a better job of gauging demand in advance, 42% of the companies in the CB Insights study might have chosen to pursue more reliable ideas, which could have better prepared them to avoid business failure and reach success sooner.

After all, the fewer detours we take, the faster we arrive at our goals.



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