Does the following story sound familiar?
Bob has an entrepreneurial spirit and always dreamt of launching his own company. After a couple of years working for a corporation, Bob comes up with an idea that he really believes in, and is ready to take the leap. He identifies a product/market fit and starts crunching the numbers to figure out its potential. After assessing the market size and competitors, he sharpens his idea into a value proposition, unique in its market segment, and devises a plan to bring it to life. He pitches it to investors and gets funded because, among other reasons, it was a great business case. After some refund rounds, Bob’s venture failed. The product wasn’t adopted by the market as expected, and they burned through all the funding before ever reaching the promised targets.
Although a business case is ideal for exploring your future company’s financial potential, it’s not the sole cornerstone on which investors base their decision. Sure, it's an essential document, but they too understand that it’s just a file with hypothetical numbers. In this article, I’ll explain what investors ARE looking for and how you can create more convincing business cases for your risky endeavors to come.
Plans work fine when the right information is available and all you need to do is execute. If a company wants to roll out a new product/service that addresses a market they are familiar with, business cases are the way to go.
Example: 10 years ago, Fuze tea was active in 37 countries and selling 11 million cases per year. It was then bought by Coca Cola for $250 million, one of their largest acquisitions since they acquired Odwalla Inc. for $186 million back in 2001. The move was seen as a strategic effort to expand the company's portfolio of non-carbonated beverages, specifically to compete with PepsiCo's SoBe.
Coke wouldn’t have paid $250 million if success wasn’t almost guaranteed. The product was already popular, all they had to do was unleash it in their massive distribution network and see the return of their investment roll in. Simply put, they were certain of a product/market fit. But this isn’t how disruptive ventures are funded and run. By definition, a venture is a “risky endeavor”. That’s where they thrive, in highly uncertain environments. And fixed plans based on high uncertainty are plans that fall apart. Allow me to quote serial entrepreneur and Stanford Professor Steve Blank:
“No business plan survives first contact with a customer. A startup is not the execution of a business model, it’s a company in search of a business model.”
A study that followed 3200 funded startups for 3 years shows that 92% failed. Remember, these were already funded. Meaning they too had a very solid business case, thoroughly reviewed by many investors. Yet they still failed. There are many reasons why, like running out of cash before gaining enough traction, bad team composition, competition and premature scaling. But if you start digging, not having a good product/market fit is the #1 reason, often intertwined with the other causes.
Steve is a colleague of Bob. Steve has the same entrepreneurial spirit. Go Steve! He discovers a unique product/market fit, assesses market size and competitors, makes a good profit/loss statement and defines his key assumptions. Let’s say his idea is an app that helps you understand your spending and saving behavior, creates transaction categories, like alcohol consumption on weekends, and allows you to set financial goals. (I know, nothing revolutionary, but it serves the exemplary purpose). He builds a business case to convince his superiors to invest in it, and it looks stunningly similar to Bob’s: it’s a financial framework that explains what he needs to do to get the product in the market, how many customers he’ll get every year and how much profit he’ll make and loss he'll experience. Nothing new.
Here’s where Steve does it better: he goes out into the world and verifies if there actually is a product/market fit. In this case, Steve creates a landing page that explains the app and provides a download button. He places an ad in a financial magazine and voilà, people start visiting the website.
Why is this so relevant? Not because of the few hundred downloads Steve has already gathered, but to convince investors that for every 1000 people that see the app, 50 will download it. All they have to do is extrapolate the numbers. More importantly, they see a positive market reaction to the product. If you don’t go out into the world and validate interest, your idea is just a story on paper.
Remember, you’re a startup. Resources and time are limited, so these approaches are quick and dirty. But the results are very objective, since users are “observed” in their natural habitat. No biased, time-consuming exercises like user-interviews or elevator-pitches to random people on the street.
I also presume that, just like Steve and Bob, you already have an idea with a unique selling proposition and 3-4 key added values, when compared to competitors on the market. But there’s no need to build a product, or a prototype, just yet. All you need is a computer and some crafty creativity, and you are ready to go.
These tools all offer a 30-day free trial period (more than enough time to test) and are fairly easy to set up:
To track behavior on the site (like how many people click on your CTA): Hotjar
Examples of good landing pages (pay close attention to the problem - solution - added values -credibility format!):
Online advertisements are another really easy way of testing if people are interested in your product. Go to Facebook Ads and create a few banner designs with a problem/solution statement to test your selling proposition. Select your target group and launch the ad for 2 weeks, no more than €5/day per ad. If people click it, it means they recognize your problem/solution and are interested. If you already have a landing page, even better, because you can measure the amount of people reached via these ads all the way to your Call To Action. This is numeric proof that you can show to investors.
Be warned, however: creating banners and setting this up is easy, the tricky part is filtering your target group. You should start with a broad audience to generate traffic to your website. Then install Facebook Pixel on your landing page while the ads are live. Pixel identifies the Facebook profiles that clicked your Call To Action and saves them to your Ad Manager. You can now target Facebook Audiences similar to the ones that clicked your CTA. Advertise to people who are “very likely to be interested” and measure your product/market fit on a bigger scale.
You might think this is outdated, but an email can get you a ton of insight. While working for a large energy supplier in Belgium, we came up with a new energy-saving package where consumers could easily subscribe for green energy at home. To test if there was an interest, we got access to the company’s newsletter email list. These were a staggering 150,000 emails and we were allowed to contact 10,000 random addresses to test if people would convert to our landing page. What’s more, our idea was not yet entirely defined, as we were in a dilemma between two different combinations of added values. We decided to let the masses choose and did an A/B test. We created two emails, both with the exact same layout and selling proposition, only the added values varied. The email ended in a CTA that we could track using Mailchimp. In the end, the results on mail A were much better, so that was an easy choice!
Keep in mind that you need a LOT of emails to do these kinds of tests. You’ll notice that people rarely open random/branded emails, so experiment with appealing and personal email subjects.
Good question. Your case is going to contain numbers to which you can easily find the answer: development cost of your product, shipping costs, the salary of your CEO, etc. But the difficult numbers, the ones harder to assess, the ones your future investors will be sensitive about, because they symbolize uncertainty, can be answered with these experiments. What’s your Customer Acquisition Cost? What’s the conversion rate from advertisement to buy button? What is your customer’s lifetime value? Using digital tools and smart experiments will help you make more accurate assumptions, so don’t be afraid to get your hands dirty. Quantify your results and integrate them in your case: they hold the answer to the product/market fit every investor is looking for.
Do you have questions concerning this topic? Feel free to send an email to firstname.lastname@example.org. I’d be happy to assist you in finding the ideal experiments to validate your product/market fit.
If you enjoyed this content or found it relevant, I highly recommend reading the book “Get Backed”, written by Evan Baehr and Evan Loomis.