Growing up, for as long as I can remember, my dad talked about quitting his job and starting his own business. My dad is a baker by trade and has worked in many different positions in and around the field for his entire career. He would (and still does) often proclaim that people don’t know good bread anymore. He has had many ideas for baking-related businesses and thoughts about how he would do things differently. He, at some point, even got as far as making a large binder with a fully fleshed-out business plan ready to take to the bank to procure a business loan. The problem was that his ideas would usually require him to quit a job with a stable income and take on significant debt to cover the cost of starting a business. With two kids and a mortgage, it was simply too risky — At least, according to my mom. And she would have been right. The truth is that more than ninety percent of new businesses fail within the first few years of operations. Maybe an even sadder truth, unknown to us, is all business ideas that were never even tried for similar reasons as my dad’s.
Don’t build it; they might not come
You might think those businesses failed due to poor execution, a lack of skills, or bad management. That is true in many cases, but you would be wrong as to why most businesses fail. Of course, businesses fail for many different reasons, like running out of money, being in the wrong market, lacking research, bad partnerships, ineffective marketing, and not being an expert in the industry. To name a few. Here we will take a more naive view of why business ideas fail to get off the ground. While the details matter, the answer almost always boils down to; that maybe the idea wasn’t that great, to begin with. Most of the time, it’s simply because it wasn’t the right idea, at the right time, place, or for the right people. Bad luck. It just wasn’t the right it.
We also tend to think of ourselves as exceptions to this rule and think that if we were to build a business around one of our ideas, we would get it right. The product or service we would create would become a success because we would grit our teeth and put in the effort, acquire the skills to build it, and manage it right. Most of us are hopelessly biased toward optimism regarding our future endeavors. This brings me to the first principle of testing business ideas: Don’t build it; they might not come. This is my retort to the mantra “if we build it, they will come” that still permeates start-up and business culture today. To illustrate this point, we will use one of my dad’s latest business ideas as an example. We will be coming back to this example throughout this article.
My dad believes that there is nothing more inviting than the smell of freshly baked bread in the morning. And because people who would buy fresh bread live increasingly in the suburbs, they no longer have the experience of walking past their local baker Sunday morning and being drawn in by the luring smell of freshly baked bread. He believes there might be a great business opportunity by recreating the local bakery experience in people’s homes on weekend mornings. His idea is for a baking business that would deliver high-quality ready-made dough that people could easily slide into their oven Sunday morning, thereby filling the house with the smell of freshly baked bread. All the potential customer would have to do would be to follow the simple instructions provided with the order.
Undoubtedly, my dad would have the skills to build a business like this. He loves the art and craft of making delicious bread and has over three decades of experience in the field. Additionally, he has already been responsible for building many novel baking concepts at scale for the various companies he has worked for over the years. So he clearly has the skill and knowledge to pull a business like this off. We could even imagine having market research reports from fancy consultant companies like McKenzie backing up this idea like recent data showing a growing trend in consumer willingness to have food and groceries delivered at home. So if he has the skills needed and the idea is great, why shouldn’t he do it? The answer is that it’s simply too risky. Realizing this idea would require a substantial financial investment in equipment, facilities, and labor. Let alone the time investment in getting everything up and running. It would again require him to drop everything and risk an uncertain financial future.
Additionally, it would likely take weeks (if not months) before he could even be ready to serve the first customer. It would therefore be great if we could know beforehand if anyone would actually be interested in using a service like this. The fact is that our skills and execution will matter little if there is no one willing to buy your product, use your service, or invest in your business.
Invest a little before you invest a lot
What’s the alternative? Are we doomed to either take on the risk that could ruin us or never act on our great ideas? The answer is of course, no. This brings me to my second principle of this article: Invest a little before you invest a lot. This principle is lifted straight out of Alberto Savoia’s book The Right It. It stands to reason that if what I’ve just told you is true, we need a different approach. If it’s true that most business ideas will fail, even when executed perfectly, then betting too big on any single idea is likely to land you in trouble. Therefore, we should want to invest as little as possible into our ideas while still being able to get a good indication that other people would be interested in us realizing them. That means that we should strive to achieve this with barely spending any money, little time, and crucially without writing a single line of code.
How could we help my dad figure out whether his self-bake delivery service would be an idea worth pursuing? Hint: It doesn’t involve making a business plan. Instead, we want to be testing our idea against the real world before committing to it. One of the best ways to get started is to rephrase your idea as a hypothesis that reflects your belief about your business idea. This exercise will help you by forcing yourself to confront your inherent assumption about your idea. An easy way to get started making the hypothesis about your business idea is to follow this simple formula: If (we do something), then (something happens in response), to (achieve a result). The hypothesis for my dad’s self-bake service could sound something like this:
Business hypothesis: I believe that if we offer suburban families a self-bake delivery service, then they would pay a monthly subscription fee to get freshly prepared dough delivered every Sunday morning.
I hope you can see that this is an excellent tool to concretize our business ideas. We can already start defining our assumptions about which group of people we believe this service would be for. We can even include guesses as to how we could imagine best to monetize the idea. Our goal is to make it easy for us to come up with different experiments that will test our idea. As in science, we want to find ways to falsify our hypotheses. This is where the testing part comes in. We essentially want to prove to ourselves that it’s a bad idea to start a business based on this idea. Both so we don’t risk financial ruin, and so we again can sleep at night instead of thinking about what might have been.
A further step you might want to take is making the hypothesis even more concrete. We can do this by asking ourselves questions about the assumptions in our first hypothesis. E.g., For what percentage of suburban families do we believe would be interested in this service? Do we think they would be more likely to have a specific level of yearly household income? Do they have kids? What would the subscription price need to be to break even? How many pieces of dough should be in a single order? etc? The more you can narrow the scope of your hypothesis, the easier it will be to come up with ways to test it. This is extra, so don’t worry if you aren’t quite able to specify your hypothesis this much already. We will be specifying it anyways when we get to the actual testing.
Dream globally, test locally
Before we finally start looking at how we could test my dad’s business idea, I want to introduce my third and final principle of this article: Dream globally, test locally. What we have done up until now is think about the idea as if it would work in a dream scenario. As if it could work anywhere. It’s entirely theoretical. We need to get practical. We want to use our hypothesis to come up with tangible experiments that we could start testing tomorrow if we wanted to. We want these experiments to be as cheap as possible while generating real commitment from our target market. Usually, the most inexpensive way we can achieve this is by running the experiment locally. By locally, I don’t necessarily mean your geographical area, although it could be. I mean finding a single instance of our target market that we can leverage for our experiments. E.g., if you have an idea for a mobile app that aims to help university students track their assignments, you might choose to present a prototype of the app to students at a nearby city university. We do this because it’s going to take a long time to figure out if your app would be something university students generally are interested in. However, you could spend an afternoon testing whether the students at a nearby university would be interested in your app. You’ll be running multiple tests in different settings, so failing one setting shouldn’t worry you. Nor should succeeding satisfy you. The point is that you should always strive to start small and then expand from there, i.e., it’s better to start with something that works at a small scale or for a specific market or segment than something that works poorly at a larger scale. To emphasize the importance of this and bring this back to the business world for a moment. The serial entrepreneur and venture capitalist Peter Thiel points out the importance of this approach in his book Zero to One where he credits Paypals’s early success to it. Annalougsly, Facebook, where Thiel would later become an early investor, had its first success at Harvard University before expanding to other universities and eventually becoming the advertising giant we know today.
Let’s again return to my dad’s self-bake delivery service idea and use it as an example of how we can come up with a way to test the business hypotheses. There are many ways to approach this, and in essence, it’s about being creative. We want to develop a test that is cheap to run and target a market that is easy for us to reach. Conveniently my parents live in a suburban part of Denmark near the city of Vejle, where many middle-income suburban families live. This fits our described target market pretty well. So it would be easy for us to go and knock on people in our target markets’ doors, get access to their mailboxes, or reach out to their local communities, bulletin boards, etc. So this is probably a good place to start. The cheapest way to test our idea could then be to spend a weekend knocking on a few dozen doors to explain our business idea and ask people if they’re interested in it. We might opt for something even less time-consuming, like pinning a flyer to our local community bulletin board explaining our idea. The page could have a QR code that will direct the reader to an online survey, where they tell us whether they would be interested in the idea. It should be evident to most that something is missing. Even though we are targeting the right target group of people. Knocking on doors and getting verbal confirmation or someone spending a few minutes answering a survey is not the level of commitment we are looking for. We want to know that they would eventually pay for the service. While people doing this does show that they’re interested in our idea, it’s a far cry from making us able to justify starting a business based on it. It simply doesn’t mimic the kind of commitment we would want to see if the business was real. We care little how much they like the idea. We care about if they would be willing to pay for our service or product enough to make it financially viable. In the case of our self-bake delivery service, we want to know if they would be willing to pay a monthly subscription fee.
It’s therefore important to think about the level of commitment people are willing to offer your idea. The more commitment, the better evidence you have that your idea is worth pursuing. E.g., people are more likely to be willing to give you their burner email address than their phone number. This is because people are more likely to want to receive things they are not really that interested in on their burner email address, where they already receive a bunch of junk mail, than on their personal phone they use all the time and get messages from their mom on. Therefore, you should rate getting a phone number as a higher level of commitment than an email address like hotpants420@hotmail.com. Of course, someone giving you a phone number doesn’t automatically mean that they will pay for your product or service. So if your test is all about getting phone numbers, you should want to get a lot of phone numbers.
We want people to show they have skin in the game, i.e., are committed to our idea and their interest in genuine. Most people are kind and curious and don’t want to discourage you. That of course great for society, but works against what we are trying to achieve. The best evidence we can get is when people are willing to commit things that have a high degree of personal value and comes as close as possible to mimicking the eventual commitment needed for the product or service you want to build. If you can get people to pay for the cost of the imaginary product without receiving the product, you can have a high degree of confidence that you are on the right track. Here is a list of things that you can consider a high level of commitment:
- Money. E.g., Pay to sign up for the waiting list.
- Reputation. E.g., Share products with their professional network.
- Personal. E.g., Spend significant free time testing the product.
Here is a list of things that you should consider as a low level of commitment:
- Burner email
- Verbal commitment
- Social media likes
Other commitment types in between:
- Time spent or committed
- Personal phone number
- Personal email address
- Home address
- Friend referral
So how would I test my dad’s business idea? We will keep the target market of families living near Vejle as they are easy for us to reach. For my test, I don’t want to spend a lot of time talking to people and explaining the idea. Instead, I want to create a flyer campaign pitching the idea. I could use a free-to-use web app like Canva and find a suitable template for flyers. I write some text that pitches the idea in a way I believe fits the motivation of our potential customers and include a Venmo address with the description “Pay $75 get a delivery every Sunday of July” (the $75 comes from our hypothesis as will be shown below). I also include a friendly picture of my dad in a bakery, a phone number to contact, and even our home address to make sure people don’t think it’s a scam and can call to get things clarified if they want to. This will cost us no more than the time it takes me to set up the flyers in Canva, and the cost of getting 1000 flyers printed-which should only be around $20. We can now plan a weekend where with help from some family friends, we can distribute the flyers to people in the neighborhood’s mailboxes.
A quick comment on test ethics here. Because we don’t necessarily intend to deliver dough to families that sign up through our campaign. As we are just trying to gauge whether they would be interested enough in the idea to pay $75 for it. We should return the money with a message thanking them for their interest and explaining that we were just testing an idea for a business, and if they like, we’ll keep them informed about if and when the real service becomes available. So unless you plan to deliver, which you could include as a later test if the first one is a success, you absolutely have to return any money received, delete emails, personal details, etc. We are not trying to scam people here.
Now that we have a plan for the test, it’s helpful to create a hypothesis for it. We can do this by plugging it into our business hypothesis from earlier. Here we also want to put some numbers to our test that will define the success criteria for the test. The best way to find these numbers is by thinking about the minimum number of people that should be committed to the idea that would justify you investing additional time or money in testing it. The test hypothesis for the self-bake delivery service could then be:
Test hypothesis: I believe at least 100 suburban families living near Vejle exposed to our 1000 flyers campaign, would pay $75 on Venmo to get freshly prepared dough delivered every Sunday morning in July.
I’ve made these numbers up, but you should use this as an opportunity to make sure the price (commitment) and reach that would be enough to cover the cost if you were to go through with delivering the service.
Once we’ve set our test hypothesis, there is nothing left to do except run the test. We will now spend a weekend distributing the flyers near the city of Vejle. We wait two weeks for all the potential payments to roll in.
Now, let’s imagine that at the end of the two weeks we had 42 families who were willing to pay us $75 for the promise of getting ready-made dough every Sunday of July. Not nearly the amount we had hoped for in our test hypothesis. So we return the money to everyone and thanked them for their interest. So what now? The idea failed; does that mean we shouldn’t start a business based on this idea? Not yet. If you still have faith in the idea, you want to evaluate the test and decide if you should try to test the idea again in a different way or run the same test in a different setting. E.g., we could run our test in another city. The great thing about the testing business ideas approach is that as you test your business idea, you get invaluable feedback from the market about what works and what doesn’t. You should never be afraid to adjust or make changes to your idea or test as you learn from the different tests. It’s also important to know when to stop testing. There is no perfect indicator, and you’ll have to rely on gut feel a lot of the time. You will often hit a saturation point at around 3–5 successful or failed tests, where running additional tests will not generate new or surprising outcomes. As a rule of thumb, you can stop running additional tests when you are able to predict the results.
What to do If all your tests succeed? Congratulations, now the hard work begins. You’re not out of the woods just yet, there is still plenty of other risks in making your ideas come to life, but you should now have a high degree of confidence that you can keep investing in your idea. If you have the skills yourself, you could justify spending more of your own time building the business, product, or service. If you don’t have the skills, you could now start looking into the cost of paying for a contractor to help you build it. Additionally, if your test was a success with a highly committed target market, you might already be able to start generating money or raise funding.
Everything summed up
- Define your business idea.
- Rephrase it as a hypothesis using the If, Then, To formula.
- Come up with an inexpensive test that could generate a high level of commitment.
- Define your test success criteria.
- Run the test.
- Evaluate if the test was a success
- If yes: Run the test again in another setting or iterate on the test so it would generate higher levels of commitment.
- If no: Good, get used to it. Run the test again in another setting.
Other things to consider:
- One of the lesser thoughts about risk which people rarely think about is whether you would even want to run such a business. You will quickly learn through the types of experiments described here whether or not you actually have the passion for running the business you had an idea for.
- You might have thought reading this, “Well I’m not a graphical designer or website developer. I couldn’t make flyers, posters, QR-codes, or a landing page”. The beauty is that you don’t have to there is plenty of free or low-cost tools and resources available. A good place to start is by diving into the no-code movement where there is plenty of easy-to-use website builders and design tools that could serve your testing needs.
