Week 7 Recap: Finance and Operations
In Week 7, we worked on the bread and butter of running a new venture: Finance and operations.
- We had a quick look at the three financial statements, and took a deep dive into the income statement, a.k.a. profit and loss statement (P&L).
- We looked at elements of entrepreneurial operations, including legal considerations and back-office systems and processes.
- We explored why we develop pro-forma income statements and used a SaaS case study to learn how to develop a 5-year forecast.
- We demystified entrepreneurial finance once and for all. Look past all the complexities and it is really just arithmetics – anyone can learn it.
Week 8 Focus: Testing Purchase Intent
This week we will reprise what we learned about hypothesis testing in Week 4, and apply the same techniques to testing purchase intent.
The importance of testing purchase intent
Thus far, you have done customer discovery to understand your customer’s needs, wants and expectations. Hopefully you have also done user testing on your proposed solution. All this is focused on validating your assumptions about the problem and the solution.
As discussed last week, the best solution will not go far if nobody will adopt it or pay for it. We mentioned a variety of survey techniques, from Monadic to Van Westendorp to Conjoint analysis. We also mentioned that the only real way to test purchase intent is to offer to sell your solution to your target customers and see if anybody bites.
This is the art and science of testing purchase intent. In the last section of Module 3 in our learning center, we present a variety of tools to help you test your MVP. These include pro tips on a variety of topics.
- How to write a good hypothesis
- How to think about your riskiest assumption test
- How to design and run a lean experiment
Testing offers to sell and collecting “currency” or “payment”
Here’s how you apply Lean Experimentation techniques to test for purchase intent.
- You will set up an experiment in which you show your target customer some sort of product concept description – it can be a landing page, a sketch, a description.
- Then you make the customer an offer to test their interest and likelihood to convert to a paying customer.
- You can design a sequence of tests starting with low commitment, low stress offers, and culminating in actually offering the solution and attempting to collect payment.
With each offer, you are asking for the economic buyer to give you some type of “currency” or “payment”. At the lowest level of commitment, an email address is a type of currency since no one wants junk mail. At the highest level of commitment, you actually collect money from your customer which goes into your bank account.
Example currencies: B2C and some B2B
Following are some examples of offers and corresponding currency that you might try to extract from your potential customer for B2C businesses and increasingly B2B / B2G businesses that has a self-guided due diligence and fulfillment option.
- An offer to sign up to learn more – the currency is the email address.
- An offer to sign up for an infosession – the currency is again the email address. If the person actually attends the infosession, you have just validated the person’s interest and they have become a qualified lead.
- An offer to join a free private beta – the currency is their email and time. Note that free betas tend to get less engagement than paid betas because the customer does not have skin in the game.
- An offer to pre-order your product – the currency is their email (and if you can make it happen, you can collect their payment information. The commitment level is much higher if you can collect the payment information.
- An offer to join a paid private beta. The currency is email and payment. This is often the first true indication that the new venture has a financial future – if the value presented to the customer is high enough they will gladly pay to try out your product.
- An offer to buy your product at the correct price. This is the ultimate test. If you offer the product at the target price and you can get people to buy it – congratulations, you have acquired true paying customers and you are well on your way to building a viable business.
Example currencies: B2B
For B2B, a lot of times it takes months to close a deal. For that reason, the following intermediate steps are important indications of validation of purchase interest and intent.
- Being introduced to your economic buyer’s administrative assistant. For B2B businesses, this is often the first sign of potential purchase intent – because nobody wants to book meetings with people they don’t want to see.
- Getting a meeting scheduled with a major stakeholder. Succeeding in negotiating a meeting time is a big validation point.
- Actually scoring the meeting with the stakeholder. If your stakeholder does not cancel on you and made time to see you – that is a great indication of interest.
- An offer to sign a letter of intent (LOI) or memorandum of understanding (MOU). This largely applies to B2B businesses – getting your prospective economic buyer to put down their intention to do business with you on paper is a huge validation point.
Be careful about crowdfunding
Many new tech ventures have successfully launched a crowdfunding campaign on Kickstarter and Indiegogo and validated that they can drum up interest from the backers on these types of platforms. This can work to your advantage – there are case studies where startups raised a big round with a good valuation after exceeding their crowdfunding goals by a large margin.
However, you need to be aware of two things.
First, crowdfunding is almost never a good first source of revenue for a new venture.
- This is because the money raised typically comes with perks that generally involve delivering the product or service in some finite time frame.
- If you run a campaign and then try to bring your solution to market, your timelines can be very delayed from your backers’ expectations and this could backfire badly.
- The best time to launch a crowdfunding campaign (especially for tangible products requiring mass production) is AFTER you secure initial funding, built your supply chain, and are about 6-9 months away from being ready to fulfill a first order in the expected quantities you need to distribute to your backers, if you were successful.
- If you run into unexpected delays (which happens about 100% of the time for new ventures) and run late, your backers will get angry and that is never a pretty picture.
Second, a successful crowdfunding campaign simply means that your message resonates with the backers on these platforms. These backers are typically from the tech sector, and they trend young, male, highly educated and tech savvy. If your target customer does not match this demographic, one of two things can happen.
- You may not meet your campaign goals and you would have spent all that energy for naught.
- Worse, you could garner interest from backers and exceed your goals – thinking that you have validated purchase intent from your target market – and then fail to replicate that outside the crowdfunding platforms, because you have not done the work to validate purchase intent in your real prospective customer base. In that case you will have moved some units but you will not have built any knowledge that helps you build a viable business.
Crowdfunding, like VC funding, government grants, credit card debt and the like, is one of many ways to raise cash and run experiments. As long as you know what it is good for, you can use these platforms to your advantage.
Less than 3 weeks to go – step up the gas!
In the past few weeks, you have made tremendous progress. There are less than 3 weeks left. That is not a lot of time! Here are some tips to step up the gas.
As you complete your weekly retrospective and planning ritual, also form a habit of reviewing the end-of-summer goals, and course-correct as needed.
- Knowing what you know now, do you feel that the goals you set out for the summer are still the right goals?
- If so, where are you with regard to these goals – and how might you take action today to go beyond your goals by the end of the summer?
- If not, how might you reframe your end-of-summer goals – and what actions can you take today to move your venture towards your goals?
In addition: If you have not done so recently: Definitely take time to redo your Lean Canvas, Business Model Canvas, or Mission Model Canvas. You have learned a great deal about your market and customer. Your canvas should look far more developed than what you were able to create in the beginning of the summer.
Remember – these canvases are there to help you see your whole business at a glance. Use them well and they can help you keep on track.
To learn more, check out our Knowledgebase section on testing purchase intent.