Toolkit: Market – The Myths and Truths of Customer Validation
The Myths and Truths of Customer Validation” is a multi-part Entrepreneur Toolkit series based on Rev1 Ventures Customer Validation Learning Lab. Part 2 – Tool: Target Customer Identification Worksheet is posted here.
Market validation is the foundation of every successful startup. However, as early-stage investors understand only too well, market validation is just the first step in a startup’s journey to revenue. The best market validation models are just models, until potential customers begin writing checks.
To attract seed-stage investment, successful entrepreneurs demonstrate that customers, real people, have the problems and pain points that the startup’s products or services were created to solve. When startups can reference early customers who value the startup’s solution enough to pay for it, investors take notice.
Here’s a roadmap to validate customers and gain investors’ attention.
Customer Valuation: The Micro View
The primary goal of customer valuation is to confirm that the business model is economically feasible. This is accomplished by drilling down, understanding the individuals who will buy at a very specific detailed and personal level.
When it comes to customer validation, there are smart moves, but there are no shortcuts.
- No entrepreneur ever knows all there is to know about their customer. That’s what makes working with customers so interesting, intriguing, and challenging.
- No entrepreneur ever knows as much about a customer as they think they do. The more you work with customers directly, the more you will learn to validate and re-validate your assumptions. Business needs changes. So do human beings.
- Markets don’t buy. Customers do. The most successful approach to understanding customers is to learn about them as individuals.
The desired outcomes of customer validation are specific and tied to the economic goals of the business plan.
- Define a path to secure the first one or two paid customer commitments. Create a sales funnel prototype. What are the steps you envision from leads to sales? How long do you think each step in the sales cycle will take? How many contacts do you think it will take to close a sale? Record your assumptions and improve them with experience.
- Gather specific insights about the target customers. Beta customers are a learning opportunity, not a strategy to achieve revenue goals. Start with “warm” leads. Use your network to meet people inside the companies you might want to serve. For example, consult former professors, industry contacts, and mentors. Collect contacts from trade shows. Be intentional about the information you want to gain and about how you gather it. Interview. Survey. Stay curious. People like to talk to good listeners.
- Set milestones for customer traction over the next 12 months. Match those milestones to the steps in your prototype sales funnel. Where do you need to be more realistic about time and resources? Where can you make the process more efficient?
- Seek advice from mentors and other entrepreneurs. Learn about market surveys and lead generation. If you’ve never constructed a sales funnel before or developed customer personas, seek help from someone who has.
Successful Startup Founders Are Always Selling
Convincing other people is a requirement of being an entrepreneur. Startups usually cannot afford an A-player sales leader. Comfortable or not, founders must learn to wear this hat.
Successful founders welcome the opportunity to listen to customers describe their goals and challenges–and then to talk about innovative solutions that could help. Selling to customers teaches founders realities about the business that they may not learn any other way.
Here are four tips for entrepreneurs who haven’t sold before.
- You can sell before you have built a product. Ask a target customer what their problems are. What would they gain if these problems could be solved? Do they have ideas about what a solution could look like? Invest a little time in a “blue sky” conversation....but
- Avoid time-wasting signals. Your time is limited. After a few conversations with different individuals, you can learn to recognize talkers and tire-kickers. Be open to ruthless disqualification.
- Is someone else selling to your desired customers? What do those sellers say about the people they are selling to? How do they advertise to them? What customer personas are represented in the photos on their websites or in their marketing materials?
- Validation is as much about closing as it is discovery. The goal of customer validation is to create a path and a plan to sign up early adopters who eventually become references and paying customers.
Finding the Right First Customer
The best beta customer will come from your initial target market. The more specifically you can define the market demographics of that population, the more efficient and productive your efforts will be. In every sale, there will be influencers, informers, evaluators, and, ultimately, the decision-maker.
Ask these questions. Your answers will shape your sales funnel and your success.
Are you being specific about who you want to reach?
- What company will be your first customer?
- Inside that business, which division, departments, locations?
- Key titles, roles, personas?
- Who is the user or champion?
- Who is the buyer?
- Who can get you in the door?
- Who can stop your deal?
Do they have buying power and what’s the process?
- Is there a budget for solutions to the problem?
- Who controls that budget?
- Are requests for proposals required (RFP)?
- What is the approval process? Who is involved?
- What decisions need to be made and by whom?
- Is a buying cycle already underway?
What do you need to know to validate a beta solution?
- Problem environment
- Technical environment
- Financial/budget environment
- What is the competition — products or inertia?
- Are you replacing an existing solution or solving a new problem?
Creating a First Meeting Success
First meetings with customers are all-important. Plan ahead for what you want to accomplish. Set expectations realistically. DO NOT show off technical knowledge, perform a demo, or expect to get a signed contract or non-disclosure agreement. DO gather information.
Ask questions like these to validate the customer’s problem. Use what you learn to shape your sales funnel and your success.
Does the problem exist?
- Is it urgent?
- Who owns it?
- Is there a solution in place? How does it perform?
- Is funding for a solution already there or readily available?
- Is another call appropriate?
- Has the prospect earned your time for a demo?
Lead vs. Qualified Opportunity?
- Where should you spend your time?
- Where do you need to stop spending time?
- Rank your opportunities with intellectual honesty.
In advanced technology startups, there is usually a shared understanding of technical roadmaps, minimum viable products, and feature sets. Founders often have less experience in building a foundation of customer validation that leads to an efficient and effective sales pipeline. Successful entrepreneurs develop this expertise.
Be deliberate. Network with other entrepreneur teams who have experience in building a sales funnel and closing deals. Convincing other people to buy is a requirement of being an entrepreneur. It is also fun.