Written by: Neal Taparia, Entrepreneurs Contributor, Forbes,
December 30, 2020 - 2:52pm EST
Most of the time, entrepreneurs choose to launch startups based on the perceived strength of their product or idea. They might ask their peers for input or talk to their target demographic to assess their idea.
Although these might sound like reasonable ways to judge a new startup concept, they can produce misleading results. Wanting to avoid conflict, peers might be hesitant to pick apart an idea or be fully transparent. And potential customers may have little idea what they want until they start using a real, live product or service. For example, there were an army of critics when the first iPhone was released predicting no one would want a touch screen experience.
To get a more reliable read on how viable a startup idea is, you need hard data. Fortunately, today it's easier than ever for entrepreneurs to gather data from a variety of sources to validate ideas. Moreover, they can also use that data to help attract investors to back their startup.
Types of Market Data and How to Use Them
When approaching a new startup, it’s critical to get background data and conduct market research that best reflect real-world business operations. The following three sources are a great place to start.
Social Media Data
If your startup aims to improve on an existing product or provide a service that's lacking in the current market, social sentiment analysis can be a useful tool. According to Nicholas Beugg, an entrepreneur who has used data mined from social platforms to help bring to market three startups in the past decade, it's a great way to get unfiltered consumer opinions.
He explains, "Social sentiment analysis allows you to gauge what consumers are thinking without injecting any bias or distortions into the equation. Questions can be leading, and they might answer them in ways that may not reflect how they would react in real life. Social sentiment helps you tell the difference."
Direct Sales Testing
A great way to get some real-world data is by conducting what's known as smoke testing. In practice, this involves building a mock website for your startup's product or service, and driving targeted traffic to it. The idea is to see how many people will go through with a purchase of your potential product or service. In the end, you can let the buyer know the item is back-ordered or otherwise unavailable.
You can take smoke testing to another level by using tools like Smartlook, which allows you to view recordings of how users interact with a website. You can see what prospective customers pay most attention to, giving you additional insight.
While smoke testing might create some annoyed potential customers, it can provide you with proof that your startup concept is a good one. Plus, you'll gain market insight and a list of specific people to market to as soon as your startup is up and running.
Keyword and Search Data
Another important way to test the viability of a startup idea is to conduct keyword research to see how easy or difficult it might be to connect with potential customers. You might find that people keep looking for the very solution you aim to provide.
For example, let's say you're trying to build a startup focused on helping people prepare for retirement by connecting them with the highest-yield investment and savings vehicles. If you see a high volume of searches asking what are the best online banks, this may reflect a trend of people looking for high-yield savings accounts.
Google Trends is a great resource to understand what people are searching for. You can then use these keyword insights to drive traffic into your smoke test to measure market potential.
Using Data to Understand Go-to-Market Strategy
Even if you’ve validated your product concept, you have to look at other data and factors to gauge how successful your idea can be. Make sure you research:
Marketing intelligence – A snapshot of how and where competitors are advertising their products, to identify opportunities to reach untapped audiences.
Industry norms – Data on the way competitors do business, like in-person vs. online, to create a picture of the status quo your startup aims to disrupt.
Competitor data – Information on the size, strength, and capabilities of your competition.
Market potential – A projection of the total size of the market you're entering and how much of it you expect to capture.
Building a Data-backed Presentation
Once you've gathered enough market data to validate your idea and overall opportunity, you can use that very same data to make a powerful argument to investors to convince them to back your vision.
Use the data to support your pitch. Having data without a story or a story without data simply isn't compelling. When you create your presentation, always look for opportunities to integrate your research where it makes sense to do so.
This is especially true if you've conducted successful smoke testing, which you should highlight early and often. There's no better way to convince a potential investor than to show them actual proof that people already want to buy what you plan to sell. And wherever possible, use your market research to demonstrate how you plan to exploit weaknesses in your competitor offerings.
Off to a Solid Start
Starting a business is risky, but using data to validate your product idea can significantly mitigate risk and improve your chances of success. It helps you avoid bias which often comes with surveys and peer responses. Your worst case scenario is you learn your idea isn’t a good one, and instead of investing time and resources into it, you move on to the next one.
Neal Taparia writes about entrepreneurship and hard lessons that drive success. He is cofounder of SOTA Partners, where they invest in companies changing the future of work and food. They also rapidly experiment and incubate new business ideas. Previously, with a friend, he built an education software business without investment called Imagine Easy Solutions that reached 30M users yearly. He sold the business to a NYSE public company called Chegg, where he was in a leadership role for three years. From being a scrappy entrepreneur to an executive within a public company, He's had his share of failures and wins that has given him insight into what it takes to drive a business forward.
LPF's Takeaway
Data, data, and more data. Data is the gold rush of the 21st Century. Most people when starting out don't have a budget, don't have a plan, and certainly, not much data reviewed. As Neal explains in this article, you can avoid lots of wasted effort, time, and money if you properly conduct research prior to opening your checkbook.
The only thing I worry about is smoke testing, which in my opinion, should be last on this list of steps. I am hypersensitive about lying and potentially making enemies, even at the cost of doing business.
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