The firm CB Insights recently surveyed over 100 founders about why their startups failed. Their research found 12 common reasons. Running out of cash was the top reason, with 38% of founders citing it as a reason for their failure.

But right behind it, at 35%, was that their startup didn’t fill a market need. In other words, over 1 in 3 founders failed because they didn’t validate their startup idea before launching.

Every early-stage entrepreneur imagines turning their dream into a fast-growth startup. But despite the limitless potential they see in their plan, the challenge of entrepreneurship is really about deciding which ideas can actually become a viable product. That’s why taking the time to thoroughly validate your ideas is one of the most important early steps for startup founders to take.

As an entrepreneur, you may already know that 1 in 5 businesses fail in their first year, and 45% fail within 5 years. So it’s worth taking the steps necessary to make sure your great idea truly meets a market need, and that people would actually pay for your product.

In this article, we’ll guide you through four essential steps to validate your startup idea: 

Step 1: Document key assumptions about your business idea

Have you ever seen Shark Tank? In the popular show, founders hoping to raise funds for their startup get grilled by a panel of would-be investors, who then decide whether or not to invest by buying equity in the company.

The investors (sharks) don’t bite unless they get satisfactory answers to basic – but crucial – questions about their venture.

“Why are you different from your competition?”

“What are your projected sales?”

“Do you have a proof of concept?”

Early stage entrepreneurs who hope to get funded must be ready to answer a wide range of probing questions about their business. But if you’re just getting started, you’ll first need to clearly define your business idea and identify the key assumptions underpinning your decision to launch.

The process is similar to asking yourself the kinds of questions about your business idea that the sharks ask founders on the show. These assumptions will serve as the foundation for your startup validation process, helping you identify areas to test and gather feedback on. To document your key assumptions, consider the following questions:

• •What problem are you trying to solve for customers? Make sure the problem you're addressing is real and significant enough to warrant a solution.
• •How will your startup address the problem? You will need to be able to describe what differentiates your solution from competitors already in the market.
• •What’s your target market? Who are you solving this problem for? You must clearly define your target market’s demographics (age, gender, location, income) and psychographics (attitudes, values, interests, lifestyle).
• •What’s your unique value proposition? Put another way, what makes your solution different and better than existing alternatives?
• •How do you plan to make money with your product or service? Identify your revenue model and the revenue streams that will drive your business, such as sales, subscriptions, advertising, or partnerships.
• •How will you reach your target customers? Determine the marketing and distribution channels you'll use.

If you don’t have an answer to any of these questions, you may need to conduct additional market research or reassess your startup’s direction. But once you’ve documented all of your key assumptions, you’ll have a solid foundation for the next steps in the startup validation process.

Step 2: Talk to your potential customers

You’ve got your great idea. Maybe you’ve convinced your family and friends with an impressive pitch. That’s a nice start, but you’ll need to branch out in order to truly gauge the demand for your product or service.

Find opportunities to speak directly with your potential customers. It’s one of the most effective ways to validate your startup idea. By engaging in conversations with people who fit your target market, you’ll get valuable insights into their needs, pain points and preferences as consumers.

To make the most of your customer interviews, consider the following tips:

• •Develop a list of open-ended questions (ones that can’t be answered with a simple ‘yes’ or ‘no’) to guide your conversations. When you’re developing your questions, go back to your key assumptions and any areas where you need more information.
• •Approach your interviews with an open mind and a genuine interest in learning from your potential customers.
• •Don’t just interview as many people as possible in one place or on one day and call it good. Conduct a diverse range of interviews, speaking with a variety of people within your target market.
• •Record and analyze the feedback you receive. Keep detailed notes from your conversations, and look for trends, common concerns or suggestions that can help you validate your startup idea.

The point of these interviews is to test your assumptions and gather insights that will help you improve your business idea. Be prepared to revise your idea based on the feedback you receive, and consider reinterviewing people after you’ve made adjustments to see if their opinion changes.

Step 3: Show your prospective customers a prototype of your product, if you have one

Does your startup have a Minimum Viable Product? Sharing some sort of prototype, even if it’s just a mock-up of your product or service, will give your potential customers a better idea of your vision and help you gather more specific feedback.

If your product is an app or cloud-based service, consider rolling out a bare-bones version that only has the essential features enabled. It’s OK if it’s a bit buggy at this stage. Providing a tangible representation of your solution will help you elicit more detailed and accurate reactions from your target audience. 

Consider offering multiple iterations of your product – each slightly different based on your assumptions of what potential customers are looking for. If you don’t have a prototype, at least be able to explain the differences in detail during your interviews. Presenting these possible alternatives lets you see which concept resonates the most with customers.

Be sure to note any difficulties they face while using your product. And encourage honest input. Remember, negative feedback will provide you with insights to help you improve your product. Be open to that criticism, and be prepared to iterate on your design based on it.

Step 4: Figure out what people are willing to pay

So you’ve tested your assumptions, you’ve interviewed people, shown them your prototype. And they like your idea. Great! But, will they actually open their wallets?

Determining how to price your product or service is essential for your startup validation process. Pricing too high may deter potential customers, while pricing too low will leave crucial revenue off the table. To figure out what people are willing to pay for your offering, consider the following strategies:

• •Research the prices of similar products or services in the market to understand the competitive landscape. This can help you identify pricing benchmarks and establish a reasonable range to charge.
• •Consider conducting surveys with your potential customers to gauge their willingness to pay. Ask them to provide price ranges or specific dollar amounts they'd be comfortable paying. You can also incorporate these questions into your customer interviews.
• •If you have a prototype or early product version, consider testing different price points with a small group of potential customers. Monitor their purchase behavior and feedback to determine the best price to settle on.

By understanding what your target market is willing to pay, you’ll take an important step toward validating your startup.

A simpler way to validate your startup idea

While startup validation can be condensed into four steps, that doesn’t mean the process is necessarily short or easy. Each stage can take a tremendous amount of time and effort to get right. And there’s always the possibility that your idea just won’t stick and you’ll have to go back to the drawing board.

If you embrace the need to plan, review and revise early on, you’ll not only be prepared to make adjustments but will know how to do so without wasted time or effort. Luckily, LivePlan is built to help startups find traction and grow even in this early stage. Learn how it simplifies these validation steps and teaches you to embrace growth planning even when your business is just an idea.