Angel Investing

Kevin Learned: Test your business model with a modest initial product

KEVIN LEARNED, director of the Venture College at Boise State and an experienced angel investor.December 17, 2013 

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Kevin Learned

Stanford Professor Steve Blank says “a startup is a temporary organization in search of a repeatable, scalable, profitable business model” (steveblank.com). You may recall from my last column that he believes an initial business plan is a series of unproven assumptions, and the entrepreneur’s initial task is to test those assumptions quickly and cheaply.

He sees this happening in two stages: 1) customer interviews, and 2) bringing minimum viable products to the market place. Both are designed to gain feedback from those who might purchase the product or service. In the first stage, the entrepreneur interviews people who may be able to give feedback on the assumptions such as potential customers, suppliers, and channel partners. .

In the second stage, the entrepreneur further tests the business model by offering the marketplace an actual product or service, but the minimum necessary to find out if the market will pay for the product and how the customers will use it. In other words, it is a mistake to try to bring a full-featured product to the market before learning what features the market values. And the best way to learn this is to bring out a modest model.

Steve Jobs was a master at this. Think back to the first iPod, iPhone, or iPad and the iterations since they were released. These early versions had just enough features to learn if the market was interested. Then Apple could watch how the products were used and modify them accordingly.

We use this approach at Venture College. All fall the student-entrepreneurs have been out interviewing prospective customers. As they gained insight from potential customers they modified their assumptions about their business model — in some cases radically.

Several of the entrepreneurs in our first cohort are beginning to bring modest products or services to the market, still in a test mode. For example, one of our entrepreneurs has a passion for teaching financial responsibility to teenagers. Through her interviews, she learned that teenagers want to know how to afford to move out of home when they are ready to go to college. But teenagers can’t pay for such knowledge.

Further interviews with the parents of teenagers led her to the insight that parents also are interested in how their children can successfully move out when the time is right, and at least some parents are willing to pay for this information.

So now she is creating her service, a seminar to teach financial responsibility to teenagers. Initially she is producing a low-cost brochure that sets forth the content of her seminar. The brochure is the minimum viable product. She will use the brochure to try to obtain paying customers for her seminar. Should sufficient customers sign up, she will then proceed to develop the seminar itself.

Local angels often fund companies just as they are ready to bring the initial version of their product or service (the minimum viable product) to the market. This allows us to invest modest amounts and give the company an opportunity to refine its business model. Once the business model is proven, the risk is reduced and it is generally easier for the company to then raise substantial capital to execute its business model.

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kevinlearned@boisestate.edu, kevinlearned.blogspot.com, 426-5540

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