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Market Validation – ‘False Positives’, by David Gilgur

Market Validation is one of the touchstones of Blue Lake Accelerator and whenever I hear stories of when Market Validation did not work I am always curious as to the reasons behind.

I wanted to share why, in our experience, market validation may yield misleading results.

Friends and Family

I was recently listening to a prominent CEO who when describing his early struggles credited his friends and family for believing in his company’s product when no one else did. This is a rather typical story and, after all, that’s what the friends and family are for, to support you when no one else does, it is pretty much in the job description. The problem is that some times there is a good reason as to why the rest of the world is not supporting your idea. The people who are nearest to you may (with best possible intentions) provide quite misleading feedback.

This is of course not is always the case, and there is nothing wrong with running your ideas first by your inside circle but care must be given to the certain inevitable bias that comes with this feedback.

‘Love the idea! Will not pay for it…’

A more insidious issue is the initial positive feedback from the seemingly perfect audience and a reluctance to pay for the product once it is ready. I have recently met a startup that was aiming to save a lot of time by automating an activity for which traders typically used one-off excel spreadsheets. Traders questioned as part of the validation process were happy enough with the prototype and assured that they are ready to start using the full production version. The problems started when the time came to push for this new software at the annual budget meeting. Time and time again the product was dismissed as a nice to have but not essential feature amongst many other things they wish they had but would go without.

There are a few key elements to this story but the main one is that while your potential client may like the product does he likes it enough to pay for it? With large organisations and incumbent products, there are further complications. Every new development no matter how useful involves not only the upfront but also the switching costs that can be far more significant. And while (as was the case) a trader may quite genuinely say that he would love to replace ad.hoc excel spreadsheets with a dedicated product, the cost of change was greater than the value-added and the decision-maker quite reasonably took the view that excel will do for now.

Show me the money?

The last case highlights the importance of differentiating between the end-users and purse-string holders. In the previous example while investment bank traders certainly have a lot say as to what software they see on their desktops it can be Market Data, IT, Compliance or other departments who actually make the final decision. Where this is the case Market Validation has to adopt a two-prong approach with both types, actual end-users and the decision-makers to be identified and their individual and often very different feedback gathered.

David Gilgur, Partner at Blue Lake Accelerator

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