Validating your Startup
Updated: Apr 2, 2019
It is very difficult to know which startup will succeed, no matter how experienced one is, though it is sometimes possible to recognize when a startup is lacking basic elements for success, and what can be done to improve its chances. There are many elements that combined may lead to success, as are check lists and models for validating them. The 7 + 1 model by Dr. Patric Berbon, as described in a medium article by Stéphane Nasser, offers a quite comprehensive model for assessing a Startup, focusing on 7 dimensions: Market Pain, Solution, Business Model, Team, Timing, Scalability, and Capital Efficiency.
In this article we will use this model, with slight modifications, as a tool for an entrepreneur to validate his startup and his readiness to raise funds from investors, by going over the concerns an investor might have. By grading each point (1-5) you can assess your readiness on each point and recognize what needs to be improved.
1. Large Market Pain
Clear Pain Identification
Is the solution addressing a clear pain point? Can you identify the one value it brings the market?
Clear market segment
Who are the customers feeling that pain? Do you know the exact segment, persona? Is the pain confirmed with real customers willing to pay for your solution?
Pain intensity & Pain awareness
How painful is the pain point? The more painful, the better. Sell painkillers, not vitamins.
Are you addressing a conscious pain? Are your customers aware of their need for your solution? Educating the market on an unconscious pain is costly.
Current pain relievers
How is the pain point addressed today? Study your direct and indirect competitors in all aspects: cost, performance, speed, etc. Do you approach things differently?
How big is the addressable market? For VC funding it has to be above 1B dollars. In any case aim for big markets.
How fast is the market growing? Markets early in the growth stage may grow over 30% a year, meaning you may still have a chance to become market leader.
2. Superior Solution to the Pain
What is your solution? As funds are scarce, how well can you prioritize critical features for the MVP?
Does your solution solve the pain point? Many times, technologists look for a pain for the solution they developed. Starting from the pain is better.
How is your solution better than your competitors’? To overcome resistance to change it has to be 10 times better in at least one dimension: cost, performance, speed, etc.
Do you have a Proof of Concept? POC will help sell.
Potential for market leadership
Can your solution become the market leader? Niche projects can interest some, but VCs look only for potential market leaders.
3. Profitable Business Model to apply solution to Pain
Clear BM description
What is your Business Model (BM)? Is the way you will generate revenue clear?
What is your competitive advantage? Can you defend your profit in a sustainable way?
Can you reach monopoly profit? From either proprietary technology, network effect, economies of scale or branding.
CLV and CAC
What is your Customer Lifetime Value (CLV) & Customer Acquisition Cost (CAC) ratio? is CLV significantly larger than CAC?
How do you reach the customers? Can you reach them effectively by either complex sales, direct sales, marketing & advertisement, or viral marketing?
4. Team that can implement the business plan
Who are the founders? [A founder has shares (dividends + decisions) and an operational role in the organization.] How well are they suited for the venture?
Founders’ track record
Have they achieved hard goals before? Having a founder with a track record (Exit, technology wiz, successful business, etc.) is helpful. If not, assess their ability to thrive in front of adversity.
Have they achieved hard goals together before? Having a team that has worked together under pressure for a while is important. Team implosion is a top cause of early stage failure.
Board of advisors
Who is in the board of advisors? Advisors offer an easy way to build credibility and avoid beginners’ mistakes. How well can they support you?
Personal alignment to project
Is this really what you want to do? This is the most important question! Without an alignment between what you genuinely want to do in life and your actual daily activities, it will be extremely difficult to persist.
What are the skills of the team? Do they have the required complementary expertise: marketing, finance, sales, technical, etc. Personality types must also be matched with the various functions.
5. Timing that answers “Why now ?”
What has changed in the last years to justify that now is the right time to invest in this venture? The strongest and most common answer is that this need, or the particular technical solution was not available until now!
Was this business model not applicable before? Can you show a good reason why you will be successful where others have failed?
6. Scalability allowing to expand easily and for cheap
“The capability to handle a growing amount of work, or its potential to be enlarged to accommodate that growth” Leading to easier expansion into new markets.
Is my production scalable? Service is barely scalable, software is very scalable, physical products are somewhere in between.
Is my marketing scalable? SEO and emailing can usually be scaled easily.
Is my distribution scalable? How easy is it to deliver your offer anywhere in the world, regardless of regulation, language, culture, distance or local partnerships? A pure SaaS model is easier than distributors in each country.
Is my workforce scalable? Airbnb is a good example of workforce scalability, as hosts and rooms are “outsourced”.
7. Capital Efficiency offering high return for low investment
The productivity of capital. Divide the output by the capital involved to produce it. That’s how much money you make for every dollar you invest in a company or a project.
Return on capital
What return on capital can an investor expect? Based on comparable projects, what capital efficiency can you offer investors. The earlier the stage, the higher the return, to cover for associated uncertainty.
Capital to break-even
Can you become cash-flow positive with a small amount of money? From the investor point of view, it is a lot easier to make a 10x return on capital on a company that has only raised $10m than it is to make a 10x return on capital when a company has raised $100m.