Milestone Group Quarterly: October 2004
Articles
By Invitation:
Rob Adams, Bullseye! The Strategy of Market Validation
Let me lay down a provocative question that no one has really successfully answered: Name me a company that has failed for technical reasons.
Let me guess… the first reaction you have is there are many of them. Then you'll think some more and have a hard time coming up with even one concrete example. Finally you'll say give me some time and you'll come up with them.
There has yet to be a successful response to this question because there has yet to be a company that has failed for technical reasons. On the flip side, if you change the question and ask for some that have failed for market reasons, you can rattle off dozens, maybe even some you've worked for. From the Edsel, to New Coke, to Iridium, to the deals gone awry in every good venture capitalist's portfolio, even the best writers of Russian history can't re-position what killed these companies.
Through this disarmingly simple question there's a nugget of wisdom here that can increase your company's probability of success. And surprise, surprise, it's not rocket science. It just takes a little forethought and some careful planning. If you're scowling that you can't take time to think and plan because the competitive markets you're in move too fast, stay tuned, you're about to get some compelling proof. Yes, markets do move fast, and at an ever accelerating pace. But this provides all the more reason to do a little work up front; think of Ready, Aim, Fire instead of Ready, Fire, Aim…
New companies starting from scratch, new versions or extensions of established brands, and companies launching either tweaked products or into new markets all need to pay attention here. Let me walk you through the process and, critically, give you some compelling examples you're sure to remember.
The strategy of market validation is all about figuring out the answers to some basic questions before you build a thing. Obvious you say. But if it is, why do some many companies skip it in the heat of battle? The premise is deceptively simple; you've got to know the answer to these questions before you build anything:
- What is your target market?
- How big is it?
- Who buys your product?
- Why do they need it?
- Who pays for it?
- Who uses it?
- How do they fix the problem you do today?
- How much are they willing to pay?
- Why would they buy from you?
- What problems are more important to them than this one?
Regardless of how much you know, you don't have the real answers to these key questions until you've talked to 100 people in your target audience. Once you've done this it will be pretty clear whether you've got a real product or not. Don't sweat if you don't. Some of the most successful companies I've worked with had to go through this process two or three times before getting it right. But the key advantage here is it's straightforward and inexpensive to do. You're not testing your product by building it, shipping it, and then trying to fix everything after the fact. You know who's going to buy and why, and with any luck, your first customers come from the people you've already contacted.
Let's cover some examples.
Waveset, a company that I seed funded as part of AV Labs back in 1999, was just purchased by Sun for a publicly reported $153 million. Back in 1999, it had three assets; two ex-Tivoli executives and some PowerPoint. They were good, really knew the security and systems management space, but also knew the market was changing so fast what they knew today would be stale fast.
Not only did they embrace a validation strategy that answered all the above questions before any developers were brought on board, they adopted it as their absolute roadmap -- their Bible. They hired marketing folks first during that period to validate and re-validate their product based on market needs. They didn't just talk about it and do the perfunctory work, they embraced it. And not until the work was done did they start building anything. In fact, they were able to get such incredible market and competitive feedback that the company continued their validation strategy up until the time they were purchased by Sun.
Two guys starting from scratch at the height of the Internet bubble. All they had was a desire to succeed and a belief in market validation. Today they both have the option of working or not for the rest of their lives. If you want to see more of the process, or learn more about the company, check them and their process out - long before they were purchased in Chapter 1 of A Good Hard Kick in the Ass (Random House/Crown 2002).
That's the good story, let's look at the other side.
Iridium was a 1990's era phone company that developed a satellite based, worldwide phone service. Think of all the technical problems to overcome. The name of the company was drawn from the periodic table element Iridium, with 64 electrons circling it, representing the original plan for 64 satellites needed to circle the globe for worldwide coverage (the actual number of satellites was later increased). The tough technical problems were daunting, but solved. The huge and expensive undertaking of building and launching the satellites was knocked off. Expenses ran into the billions. Smart money was brought in, including Bill Gates and Craig McCaw, the cellular phone pioneer. The service was turned on. And no one bought. No one.
The issue? A very fundamental one some basic market validation would have solved. It turns out, even though the service was built in the time of portable cellular phones, the phones themselves were the size of World War II era walkie-talkies. The use charges were astronomical, more than 4 times what cellular charges were. And for the grand finale, the final nail in the coffin was the simple fact that the phones could not send or receive calls indoors. Yes, in the 1990's the "minor" inconvenience of having to walk into a clear sky to send and receive calls was overlooked.
Imagine the very simple market validation that could have been done. Ask 100 consumers the questions listed above. The investment would have been one afternoon in a typical mall, one clipboard, a pen and 100 sheets of paper. A simple set of Yes/No questions like: Do you want a headset as big as a brick? Would you pay 4 times the cellular rate to get global coverage? Do you mind stepping outside to send and receive calls?
Because any self respecting executive or entrepreneur would have wanted more than 100 data points before telling Bill Gates and Craig McCaw they were pulling the plug on their investment, picture this quick and easy follow up prototype study. Take ten cellular phone users and offer to pay their cell phone bills for thirty days. In exchange, they have to tape a brick to their cell phone, see their bills (that you're paying) that are marked up by a factor of 4, and step outside to send and receive calls. If you were lucky enough to get any takers, they would have been driven nuts in a matter of hours, and the answer would have been clear.
Think of the power of market validation. If you were Iridium, one afternoon in a busy shopping mall with clipboards and pencils could have saved billions. If you were a Waveset, a little more than three years of effort and if you choose to work again, it's at your option.
What will you do?
Rob Adams is a Managing Director and founder of Tejas Venture Partners, an early stage technology venture fund in Austin, Texas. Prior to entering the venture world, he was a software operating executive with Lotus Development, Business Matters and Pervasive Software. He is a nationally recognized speaker and writer on the venture capital process, company formation and marketing strategy. He is the author of A Good Hard Kick in the Ass: Basic Training for Entrepreneurs (Random House/Crown, 2002), and is currently working on his next book, Bullseye: The Strategy of Market Validation.
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