When I started my first successful company I spent a great deal of time validating my belief that I had found a big problem, in a big market, with customers willing to spend money for the solution. Still, it took me almost two years to start seeing real traction and predictability in my revenue.
It wasn’t until years later—as a mentor and entrepreneur-in-residence at JumpStart and the Youngstown Business Incubator—that I realized one of my biggest mistakes. I didn’t fully understand my market.
Now. I know what you’re thinking—didn’t he just say two sentences ago that he worked super hard to find his market? You’re right, I did say that. However, “finding a market” is just the tip of the iceberg. That’s where so many companies go wrong; they don’t do the deep analysis it takes to actually create a sustainable business in their market once they’ve found it.
Over the years, I have observed six key dimensions of market validation that every successful company must understand in order to build a successful business. It’s really too much to cover in one blog, but I’ll highlight three examples here.
In the beginning, validation has absolutely nothing to do with your product; you’re simply looking for problems and inefficiencies that can be expressed and quantified in terms of time, cost and revenue. Only then will you be able to measure the impact your product or service could have. The problem is, most startups don’t do this correctly (many don’t do it at all). Instead, they get blinded by their idea and dive in head first.
Remember, your friends don’t want to hurt your feelings and every company you ask will tell you they’ll buy what you’re selling if it makes or saves them money. If this was the extent of your “validation,” then you are off to a rocky start.
Market Maturity Validation
The advent of text messaging was a game changer, but would you invest in a text messaging technology in a market that was still using mostly landline telephones? Would you support an analytics company working on population health if the government data they needed was not accessible? If you answered no, then you can see the problem when entrepreneurs start companies too far ahead of their market.
I’ll give you a real-world example. In 2001, I launched a mobile service that provided directions to the nearest restaurant. This was revolutionary stuff at the time. We had read reputable studies claiming this technology was already available from the major cellular carriers. Unfortunately, that information turned out to be misleading. You actually had to be a member of law enforcement to triangulate locations using cell towers. Public access to this technology wouldn’t come until years later.
So, we had a great idea, built a product and even received seed funding—but we died on the vine because the market wasn’t ready. I cringe at thinking about how much time and money I could have saved with just a bit more market maturity validation.
If new revenue cures all ills, then neglecting this type of validation can send your business to the grave. Sales become critical right at the point of market entry, usually when you already have a team and a sizable monthly burn. At this point, a typical startup has about three quarters to demonstrate traction before their situation becomes desperate, forcing them to either raise money at a down round or close the doors.
Ironically, getting revenue during this period without understanding what is driving that revenue can actually do more harm than good. It creates a sense of false hope—like you are just about to magically turn the corner, only you never do.
Fortunately, if you’ve followed the previous steps correctly, sales becomes a kind of formula. I’m not saying it’s easy, but it’s mostly about understanding the mechanics of how your customer purchases— their budgets, decision makers and acknowledged value (ROI). Of course, a good salesperson is also a must. At this stage, you should also be able to cross-validate your approach with other successful companies in your market. As long as you are not direct competition, they will likely tell you what you need to know.
Remember, no matter what stage your company is at, there are always benefits to continuing to validate the dimensions that drive your business. In fact, it could mean the difference between growth and failure.
This article originally appeared on LinkedIn.