If You Build it Will They Come?
How to evaluate and validate your business idea in a competitive market
This is a past research paper that I wrote for my entrepreneurship and technology module during the final year of my computer science degree.
The great Steve Jobs stated “You’ve got to start with the customer experience and work back toward the technology - not the other way around.”(Akhter and Rahman, 2015, pp.1)
Whilst that many other entrepreneurs hold a contrary view and would rather follow the mantra of Kevin Costner in the film, Field of Dreams, this is if you believe and follow your inner voice and build it, then they will come.
“What products do customers really want? How will our business grow? Who is our customer? Which customers should we listen to and which should we ignore?”(Ries, 2011, p.182).
These are the questions that plague the minds of many budding entrepreneurs and in the following sections of this research paper, I will seek to discuss and understand the various entrepreneurial theories that have tried to answer them.
The focus of this paper will be centred mainly on entrepreneurs and not on small business owners and by entrepreneurship, I mean “the intentional creation or transformation of an organisation for the purpose of creating or adding value through organisation of resources.” (Kanungo, 1998, p.119)
Thiel (2015) highlights the fact that many entrepreneurs hold the belief that salespeople and other “middlemen” supposedly get in the way, and distribution should flow magically from the creation of a good product. He argues that this is wrong because customers won’t come just because you build it, the entrepreneur has to make that happen (Thiel, 2015).
Paul Lipton an entrepreneur that I interviewed at Google Campus London, agrees with this: “I think it depends on how you get your product to the marketplace. Obviously, you’re developing a product, you need to identify who your customers are and once you identify your customers you need to identify how to make them aware of your product.
Furthermore, he added: “I think it’s about understanding your customers. Creating something that they need, finding perhaps a gap in the market and servicing that gap, and if you service that gap and your customers see a valuable product and then hopefully they'll flock to you.”
These thoughts contradict the common assumptions held by many engineers and novice entrepreneurs who believe that a phenomenal product or excellent business idea is all that is needed to achieve success and fame in the world of business.
Fahyn (2005) argues that few entrepreneurs are innovators and risk-takers instead, entrepreneurs say:
“Let others innovate. Let them take the risk of testing the market. If it’s a success, we’ll copy.” Although he doesn’t fault this as a strategy, he thinks these people are missing out since very often the first in the field takes the advantage and stays there (Fahy, 2005).
Johnson (2013) builds upon that theory and he further adds that there are two types of entrepreneurs: the revolutionary and creative entrepreneur who creates markets and on the other hand there’s the ordinary entrepreneur who doesn’t create markets and instead competes in well-established markets. According to him, research has shown that the revolutionary and creative entrepreneur is in a better position to be successful (Johnson, 2013).
Paul Linton argues that successful entrepreneurs such as Steve Jobs cannot be considered innovators: “If you take Steve Jobs as an example, he was never the first to produce any product. Steve Jobs always took a product and developed it better than his competitors. He never created the first computer.”
Hence in Paul's view, although Jobs was a successful entrepreneur he wasn’t an innovator but a good businessman.
The process of launching a successful business requires a phenomenal amount of time, energy, planning and effort.
According to Rob Adams (2010) who is an active investor and author, 65% of new products fail and the failure rate of startups is even greater peaking at 90% (Adams, 2010).
From my wide research and readings, the following are the key points of how to validate and evaluate a business idea in a competitive market.
Firstly the entrepreneur should outline effective, objective and simple market validation strategies and then test these strategies. He will as well improve the prospects of success of his startup if he diligently and quickly gathers information on competitors. (Adams, 2010).
This is, the entrepreneur should figure out what the market really wants to buy and create it or figure out what customers say they want and build it, with the features customers will actually use. (Adams, 2010). Chell and Baines (2000) argue that besides market validation, the entrepreneur should also invest in a good network.
This view is further supported by De Carolis, Litzky and Eddleston (2009) who claim: “Knowing that one has a network of people and resources to rely on augments one’s illusion of control and makes taking the “risk” of new venture creation easier. On the other hand, an awareness of this influence should also help entrepreneurs to understand the criteria upon which they base their decisions.”(De Carolis, Litzky and Eddleston, 2009, p.15)
Chell (2004) highlights the importance of a business being sensitive to its situation and environment.
She argues: “But this is not to develop a ‘sense of place’, rather it is to develop both a tacit knowledge and a basis for making informed judgements about the future goals and strategic direction of the enterprise. This knowledge will enable the firm to position itself strategically and decide how it should best deploy its resources to gain competitive advantage. ” (Chell, 2004, P.42)
Adams (2010) adds that the key to success is fast failure and that it is a positive outcome when an entrepreneur objectively and diligently evaluates and validates his business idea and the results are non-satisfactory and follows a completely new path.
This view is supported by Eric Ries (2011) who says: “Successful entrepreneurs do not give up at the first sign of trouble, nor do they persevere the plane right into the ground. Instead, they possess a unique combination of perseverance and flexibility”.(Ries, 2011, p.113)
However other entrepreneurs disagree “If I had to write a handbook for the American entrepreneur and put everything in one sentence I’d say, ‘Persevere, no matter what the pain, persevere.’ ”(Perry , 1990 , P.69)
Secondly, the entrepreneur should refine his idea and concept before he pours time and money into the business venture (Adams, 2010).
Audretsch, Litan and Strom(2009) argue that when an entrepreneur creates a new market that is innovative itself because it leads to new uses of existing products while that Kamien and Schwartz (1982) highlight the link between the rate of imitation of an innovation and its profitability.
Products that are quickly imitated, usually yield smaller profits hence resources for innovative activity are often directed towards innovations that are harder to replicate (Kamien and Schwartz, 1982).
This view is completely supported by Ries (2011): “As you consider building your own minimum viable product, let this simple rule suffice: remove any feature, process, or effort that does not contribute directly to the learning you seek”. (Ries, 2011, p.110)
Ries (2011) adds that this should be done because customers don’t care how much time something takes to build. They care only if it serves their needs.
Thirdly, discuss the steps to quickly understand the viability of the market, evaluate product ideas and find out how to gather relevant data, and how to find customers (Adams, 2010).
Sarasvathy (2001) argues that an entrepreneur explained to her that at one time in his company, he ordered people not to think about competitors. Just to do their job and think only of their work. The main goal of the entrepreneurs was the induction of customers into strategic partnerships.
On the other hand, Chahal (2008) disagrees with that approach and states that the entrepreneur should never lose sight of the competition while building up his customer base and gaining traction for his business.
The prospective entrepreneur should figure out what the market really wants to buy, versus what customers say they want and assess the market, this is to find and understand a specific target market (Adams, 2010).
Adams (2010) further adds: “After you examine the source of your idea and evaluate its validity, it’s time to move on to analysing the industry you’re contemplating. What is the size of a market, how fast is it growing, and why do these factors matter? It’s imperative that you answer these questions as part of your new venture”. (Adams,2010, p. 45)
In addition (Adams, 2010) believes that it is essential to determine the market’s size and growth rate since it is an indication of whether the market can support a new entrant while that the growth rate predicts whether there’s room to manoeuvre toward success. Entrepreneurs need to be always alert to new business opportunities and ventures as Bolton and Thompson point out: “The opportunity-spotter realises where there is a gap in the market, and has or sees an idea to fill it. The project champion grasps the opportunity and builds the business which successfully fills the market gap. The entrepreneur, of course, accomplishes both.” (Bolton and Thompson, 2004, pp.101)
Nevertheless, not all entrepreneurs are avid supporters of market validation, for instance, Henry Ford the founder of Ford Motor Company once stated: “If I had asked people what they wanted, they would have said faster horses.” (Johnson, 2013)
As I have shown there are numerous entrepreneurial theories and strategies which discuss the best ways of evaluating and validating a business idea.
These strategies vary from outlining effective, objective and simple market validation and testing strategies to figuring out what the market really wants to buy.
The entrepreneur should have an open mind and be willing to try different strategies until he finds one that fits well with his business model.
References
Adams, R. (2010) If You Build It Will They Come?: Three Steps to Test and Validate any Market Opportunity
New Jersey: John Wiley & Sons, Inc.
Audretsch, D.B, Litan, R and Strom, R. (2009)
Entrepreneurship and Openness: Theory and Evidence
Cheltenham: Edward Elgar
Akhter, S. and Nayem, R. (2015) "Building a Customer Inquiry Database System." International Journal of Technology Diffusion (IJTD) April6.2 pp. 59-76.
Bolton, B. and Thompson, J. (2004) Entrepreneurs: Talent, Temperament, Technique. 2nd Edition, Oxford: Elsevier Butterworth-Heinemann
Chahal, G. (2008) The Dream: How I Learned the Risks and Rewards of Entrepreneurship and Made Millions
Basingstoke: Palgrave Macmillan
Chell, E. (2004), Entrepreneurship: Globalisation, Innovation and Development 2nd edn
London: Thomson
Chell,E. and Baines, S (2000) ‘Networking, entrepreneurship and microbusiness behaviour’, Entrepreneurship & Regional Development: An International Journal November 12.3, pp.195-215
De Carolis, D., Litzky, B., and Eddleston, K.
(2009), ‘Why Networks Enhance the Progress of New Venture Creation: The Influence of Social Capital and Cognition’ Entrepreneurship Theory and Practice,March 33.2, pp.527-545
Fahy, D. (2005): 'Edward de Bono: Thinking about thinking’ pp.24-25
Johnson, K. (2013) The Entrepreneur Mind: 100 Essential Beliefs, Characteristics, and Habits of Elite Entrepreneurs
Atlanta: Johnson Media Inc.
Kamien, M.I. and Schwartz, N.L.(1982) Market Structure and Innovation
Cambridge: Cambridge University Press
Kanungo, R.N. (1998) Entrepreneurship and Innovation: Models for Development
Delhi: Sage Publications
Perry, L.T. (1990) Offensive Strategy: Forging a new competitiveness in the fires of head -to-head competition
New York: Harper Business
Ries, E. (2011) The Lean Startup: How Constant Innovation Creates Radically Successful Businesses London: Portfolio Penguin
Sarasvathy, S. (2001), What makes entrepreneurs entrepreneurial? pp. 1-9
Thiel, P. (2015) Zero to One: Notes on Startups or How to Build the Future, 2nd edn.
London: Virgin Books