Sometimes it’s better to throw out the business plan and talk to prospective customers instead.
That’s what Jim Semick recommended Thursday afternoon during a Catalyst for Thought event on market validation at the University Club of Santa Barbara. He said entrepreneurs have a lot of incorrect assumptions around a business they have or want to create.
“I see people pouring their heart and soul into a business plan, and in the end the document is wrong,” Semick said. “There is no business plan, even if you were to execute it perfectly, that is the right thing to do. I advocate burning your business plan, unless you have to go after traditional financing that requires one, and talking with customers because that’s the real way that you’re going to find out the truth.”
Market validation is a process to discover what a customer is going to buy before someone spends the time and money building it.
ExpertCity was a technical support company that would help customers troubleshoot their machine through a screen-sharing tool. Semick said the company initially offered the service for free as thousands of people logged on and chatted with IT experts.
“The day came to go live and everything stopped; we were literally watching dollars trickling away everyday,” he said. “We burned through $10 million only to find out no one was ready to pay for technical support like that.”
But the company still had $10 million left. Semick found out, through multiple interviews, that people had a need to telecommute and retrieve data from their office computer, which became GoToMyPC and eventually GoToMeeting.
The first step is writing a product hypothesis, then getting it in front of potential customers as soon as possible, listening to their feedback and finally iterating and revising, Semick said.
“What I’m trying to figure out is what is their problem,” he said. “What is the thing that keeps them awake at night? If they were able to walk through their day, where are they spending their most time, and what frustrates them the most?”
Semick also analyzed the computer support company Make It Work, which put the brakes on its red Mini Coopers last month after 11 years of operation. He said that while the company received excellent customer feedback, it didn’t have a scalable business model.
Asking open-ended questions to dozens of potential customers will help an entrepreneur determine the best way to reach them, customer acquisition, potential revenue and how long customers will pay for a service or product, Semick added.
Most important, he said, find out what frustrates potential customers and actively listen to their feedback.
“You’re trying to find out the real problem,” he said. “Because it’s those real underlying problems that are the motivators behind buying a product.”