Rebels Click Here: A Framework For Creating And Validating Business Ideas
“Here’s to the crazy ones, the misfits, the rebels, the troublemakers, the round pegs in the square holes … the ones who see things differently — they’re not fond of rules, and they have no respect for the status quo. … You can quote them, disagree with them, glorify or vilify them, but the only thing you can’t do is ignore them because they change things. … They push the human race forward, and while some may see them as the crazy ones, we see genius, because the people who are crazy enough to think that they can change the world, are the ones who do.” – Steve Jobs
So you’ve come up with a hair-brained scheme that you think will be the next unicorn company, or maybe you just want to make a few extra dollars on top of your wage, i.e. a good ole side hustle. Well, you’ve come to the right place.
In this guide, we’ll show you step by step exactly how to validate business ideas.
But first a few hard truths.
I’ve been the guy creating a side hustle and the guy trying to change the world and I’ve failed at both enough times to know that business ideas don’t mean shit. The only thing that matters is what the market tells you matters.
A good idea at the wrong time will amount to nothing.
A good idea in the wrong location will likely amount to nothing.
A good idea that costs too much to make is a fast way to go broke.
So what do you do? There’s a long road ahead, and the more complex your idea is, the longer that road will be. You want to be damn sure it’s a road worth travelling.
Thanks to the many who’ve tried and failed before us, there’s now a known, proven process that you can follow, that I have followed to find out what the market thinks of your idea and whether it’s worth pursuing. This process is called validating business ideas.
Business idea validation is how you confirm that more people than yourself and friends or family see value in your idea.
Ideally, these ‘other’ people have a couple of common characteristics.
• They don’t know you
• They have the problem your idea solves or a need your idea fulfils.
The goal here is to validate your business idea with these people, using effective communication and distribution channels to understand if it has merit and value.
PART 1: THE BUSINESS IDEA FRAMEWORK
A simple way to share new ideas is with the person, problem, solution framework.
• Person – Who’s the person we are solving a problem for or fulfilling an unmet need?
• Problem – What problem or unmet need are you solving?
• Solution – What solution will fulfil this problem or unmet need?
— If you want to get fancy, you can add a benefit at the end. Like ‘by taking this supplement daily, we guarantee you’ll get an extra hour of sleep per night.’
I’ll explain how to do this with a project I was recently working on.
A while back, I realised there might be a demand for a tool that helps people set up a company with automation.
I shared my idea with my friend Kale to see what he thought. He suggested I talk to a few people about it to see if there was any interest.
As I’ve introduced, the best way to share ideas is by articulating them in an easy to understand sentence.
Going back to our idea framework. I needed to identify a person, their problem and a potential solution.
The Person
I needed to find people looking to start a new business and used basic criteria to qualify them.
1. Gender
2. Age
3. Location
4. Income
I guessed that first-time New Zealand business owners are the most likely to want help setting up a business.
In this case, I thought gender was irrelevant.
However, I thought the location, age and income was relevant. My guess was most people looking to start their first business are between 25 – 34 years of age and earn an average to high income ($50k+).
Simply put. “Young adults, starting their first business with a decent income”.
The Problem
I know starting a business can be confusing, as I’ve been through the process a few times myself. But I wasn’t sure if people would be willing to pay me to make it easier or if they’d be happy figuring it out as they go.
What I needed to know was the biggest barrier people face when they’re starting their business, and the only way I can find that out is by exploring all the problems they face while going through this process.
‘What challenges are people facing when they start their first business?’
I came up with a few.
1. Setting up a business takes too long, and they don’t have enough time
2. Setting up a business is confusing, and they don’t know what to do in what order
3. I don’t want to waste heaps of money on accountants and lawyers if I don’t have to
• There are two assumptions here; First, people can see these are issues before they go through the process, which might not be the case. Secondly, they think these challenges are big enough to look for a solution.
I thought the most common problem would be how confusing people find the process of starting a business. So my problem statement was, “setting up a new business is confusing, and I don’t know what to do next.”
The Solution
Finally, I wanted to know if my idea was the right solution for potential customers’ problems.
So what solution would excite my customers’ and would they be willing to pay for it?
I thought software that automates the process is the best solution and one they’d be happy to pay for.
The Hypothesis
Combining these three elements: Person, Problem and Solution, I formed my idea.
• Person = Young Adult living in New Zealand with a medium to high income
• Problem = Starting a new business is confusing
• Solution = Automation software
Hypothesis = “First-time entrepreneurs find starting a business confusing and would pay to have this process automated for them by software.”
• I’ve found the simpler you can make your idea/hypothesis, the better. No jargon or technical terms, no pointless adjectives and so on. Clear and concise works best.
• Try not to overthink this exercise. Instead, just put something on paper and, as Paul Graham likes to say, ‘get out of the building’ and talk to people.
PART 2: FINDING A MARKET
A market = two factors; Audience + Economics = Total Trade Value or Total Market Value
This step is critical in validating business ideas. Because not only do you want to be able to sell your idea, but you want to be able to sell it to enough people that have the economic means to buy it, to make this worth your while.
Roughly speaking, this is what I call the finding the ‘market’. Which is the number of interested persons multiplied by the budget they have to spend on your solution. Which equates to the total market value of your idea.
You also need to be able to sell your solution for more than the cost of production and supply. And sell enough units at that margin to achieve your desired income.
In reverse, If you can’t sell something to someone for more than the cost of production and supply, you don’t have a business. If you can’t sell enough of something at more than the cost of production and supply, then you still don’t have a business.
Martin Jetpacks is a famous kiwi example of this scenario. While their idea was exciting, generated a lot of press, interest and investment, they couldn’t find a way to produce and sell their jet packs at a price point above costs that enough people were willing to pay for them to build a viable business.
FINDING AN AUDIENCE
So ,first, we’ll find an audience. Then we’ll see if the dollars add up to make financial sense.
Using the people, problem, and solution framework I walked through above, my idea is; “First-time entrepreneurs find starting a business confusing and would pay to have this process automated for them by software.”
The customer is obvious: people starting a new business.
I also need to know how many of them there are and where I can find them.
Widely available internet means this is no longer a geographical question but instead a question of attention. Where does our potential customer spend their attention, and how can we cypher off some of that attention.
Can I reach them on Facebook, is there a particular newspaper that these people read. What podcasts are they listening to and so on…
I always start with Google. Google is synonymous with search, and when people are searching for something, they have intent. In our case, I can use google to find people who intend to start a new business, my perfect audience.
For a small fee, I use a tool called Keywords everywhere that shows me how many times a particular term is being searched in Google and suggests several other relevant search terms.
Alternatively, you can use Google Trends and Google Keyword Planner for free as long as you have a google account.
I can see from the results below that 1,300 people per month are searching ‘how to start a business and another 1,000 per month searching for ‘how to register a business or ‘how to get grants to start a business.
There are also a couple of similar search terms people are using, which you can’t see from the screenshots, such as ‘how to start a business’ & ‘how to start a business in NZ generating a further 1,200 hits per month.
All up, it looks like there are ~2,500 New Zealanders looking for help to start a business every month.
How much search traffic you need to validate an idea depends on the economics of what you want to sell, which I’ll explore shortly.
• As a rule of thumb, I like to see at least 500 monthly searches; otherwise, I take a step back and look for a different channel.
Other avenues you could try to find an audience on are Facebook, Facebook groups, outreach to friends, or community groups you’re involved in.
At the very least, find one person facing the problem you’re trying to solve. Talk to that person, get a bit more context about the problem and where others facing that problem are spending their attention.
For example, perhaps your idea is related to new Mums and not something they’re searching for on Google. Instead, you could get a warm intro to a prenatal group and speak with them to find out what their go-to‘ preparing for parenting’ resources are. There’s probably a blog, an Instagram page or a youtube channel you’re not aware of that many of them frequent.
MAKING DOLLARS AND SENSE
Let’s say you want to generate enough money from your idea to quit your day job.
Given the average salary in New Zealand is ~$50k, I’ll use that as my income target here.
From our previous google research, I know roughly 2,500 people per month looking to start a business in New Zealand. I also found a government article that stated 65,930 new businesses were created in New Zealand in 2017.
The question is; can I sell enough units to this audience at a profit to generate a $50k profit per annum income?
Setting up a business in New Zealand is free for sole traders, an unknown amount for partnerships, as they need to create a partnership agreement and $115 + GST to register a company.
Because it doesn’t cost anything to start a business as a sole trader and the legal requirements are very low, I’m going to assume that they won’t want to pay for a tool to help them set up a business as they can do it quickly, for free themselves.
From further research on the New Zealand government site (screenshot below), I found roughly 50% of all new businesses created are set up as companies.
These people already need to spend money to form a company, and it’s a lot more complex than starting as a sole trader. I’ve been through this process myself enough times to know that’s true.
I’m guessing people will be willing to spend $50 to have this taken care of for them. I know I would have been for my first company.
Using that information, I can calculate the total potential value of my addressable audience (market). Thirty thousand people registering a new company each year, paying $50 to take care of that process for them equates to $1,500,000 in annual revenue. Which easily meets my target of $50,000.
Of course, capturing 100% of this market is not realistic. Some people will prefer to register a company themselves or use their accountant/lawyer rather than pay for my tool.
However to generate a $50k income, I only need to capture 3.33% of that market. I’m confident that’s possible and worth exploring further.
• This is a stop/go moment. There are no hard and fast rules here. If you’re facing established competitors, I’d be hesitant about proceeding if I needed to capture more than 10% market share. If there were no competition, then I’d be confident I could capture 50+% of the market.
What we just walked through only looked at top line economics and didn’t account for production and distribution costs.
Your idea might require materials to produce, or you might need to spend $x amount of advertising dollars to acquire each customer. You need to consider these costs when you’re working out the economic feasibility of your idea.
If you have a gross margin of $1 per unit, you’ll need to sell 50,000 a year to earn an average salary. If it costs $1 to acquire each new customer, then you’re only breaking even.
If you have a gross margin of $100 per unit and a $1 per customer acquisition cost, you only need to sell 505 units per year to make your $50k salary.
My idea is a software tool that has a one-off building cost and a low cost for delivering each additional unit for sale, so I’ll have a high margin on each sale.
Summing up, so far, we’ve identified a potential customer and found a possible audience of 30,000 people per year that we can reach on Google. We’ve also learnt we only need to capture 3.3% of that audience or sell 83 units a month to meet our income goal of $50,000.
So it looks like I’ve found a viable market for my idea.
Remember, these are all assumptions and theories, not yet tested in the market. Which is the key premise of validating business ideas.
My intuition backed by research says my idea will work, but I don’t know. So let’s find out.
PART 3: TESTING FOR TRACTION
‘Traction is basically quantitative evidence of customer demand. So if you’re in enterprise software, initial traction may be two or three early customers who are paying a bit; if you’re in consumer software, the bar might be as high as hundreds of thousands of users’ – Naval Ravikant.
In our case, we want to find traction to prove enough people see enough value in our idea’s to make it financially feasible.
But before we get to that, I think it’s worth looking at the yin and yang of traction.
MERIT & DISTRIBUTION
You can view traction as a marriage of two equally important parts; Merit and Distribution.
Balaji Srinivasan, former CTO of Coinbase and venture capitalist, often talks about this idea of merit and distribution.
On his recent podcast with Tim Ferriss, he said, “So here’s a one-liner that took me a very long time to understand. So the product is merit, and distribution is connections. And so, for example, a great blog post that nobody sees is a great product with the terrible distribution. Conversely, a dumb article, or whatever, that is a piece of content that is in a feed that is seen by millions is a terrible product with great distribution, right.”
Peter Thiel even said, ‘poor distribution is the key reason most startups fail’ in his book ‘Zero to one.
TRACTION GOAL
Gabriel Weinberg, the author of ‘Traction’, suggests your traction goal should be a goal where hitting the mark would change things significantly for your company’s outcome.’
I would add, the traction goal should always align tightly with the end outcome you’re trying to achieve. Such as ‘create an income to support me, so I don’t need a job’.
Without a traction goal, we have nothing to aim for and no pass or fail mark to assess our idea against.
Setting a traction goal is critically important to assess both the merit and distribution of an idea. It’s too easy to get a couple of signups or sell a few products and think you’ve proven your business case and charge ahead. More often than not, doing so leads to failure.
So far I’ve made many assumptions about my customers, their problems, the number of customers with that problem and the price they’d be willing to pay to solve it.
To build a viable business that will achieve the outcomes we hope for, our theories and assumptions need to be proven true. It’ll only take one assumption to be false for our business to fall over before it starts.
Continuing the case study. The significant outcome I’m shooting for is enough customers and sales to generate a $50,000 income. Assuming I can sell my product for $50 per unit, I need to capture 3.3% of relevant google search term traffic or 1,000 sales per year.
It makes sense then that my traction goal should be a 3.3% conversion rate and or 84 signups in a given month.
If you’re struggling to come up with a traction goal, Dave McClure’s conversion table below might help.
OUR TEST
With my traction goal set, it’s time to start testing.
We can use what’s known as an MVP to communicate our idea and test merit, and we can use an acquisition funnel to drive attention and test distribution.
What Is An MVP?
It’s an acronym that means Minimum Viable Product. Eric Reis offers a good explanation “that version of a new product which allows a team to collect the maximum amount of validated learning about customers with the least effort.”
In many instances, including our case study, the MVP isn’t the finished product itself; but rather a prototype.
When Drew Hudson ‘launched’ dropbox, he leaned on an MVP to put his idea into the world. His version was a one-page website with a video explaining how Dropbox could work. That video alone got him accepted into Y-combinator, helped him find his co-founder and launched what is now a $15 Billion company.
The MVP for Air BnB was a simple website Brian Chesky created to rent out a room in his flat.
When Joel Gascoigne came up with the idea for Buffer, a social media scheduling tool, his MVP was a 2-page website that described the product features and included an email signup form for interested persons.
These internet MVP’s often don’t offer a working product, simply a description of an idea and a way for people to register their interest, in the form of an email signup box.
You can see from those examples how very minimal you can get. The point here is to invest as little effort and resources as possible.
CREATING A LANDING PAGE
Another name for those internet MVP’s is a landing page. That’s what I’m going to build to validate my business idea.
There’s plenty of tools online that can help you build one with no previous coding or design experience. They come with hundreds of pre-made templates that make creating a compelling landing page easy.
I used Unbounce’s free plan, which offers more than enough features to get you through this exercise.
Unbounce offers a single sign-on with a google account. Once signed up, all I had to do was verify my email address to start building.
I liked the Maia, and Radius & O-Coming Soon themes best and went with ‘O-Coming Soon’ for my test.
It took me roughly 20 mins to build and launch my first landing page, MVP. See below;
I sent this first version to Kale, who wrote a great post on creating a high-converting landing page for feedback. It turns out I had some work to do.
Consistent and Simple Design is Effective
I tried to get clever with colour schemes and imagery, which, as you can see, made the landing page messy and not compelling.
The best landing pages make the copy pop and the call to action prominent. The examples below use one colour for the font and one font type + a different colour for the call to action button—no need to get fancy.
• If you don’t have strong images, you can find plenty of free stock photos at Unsplash.com or Splitshire.
Copywriting Help
I’m a long way from being a good copywriter, and Kale suggested I was compensating for my lack of clarity with a volume of words.
As you might have picked up, I like to find and follow frameworks and generalised advice where my skill set is lacking. After browsing around Google, I found the below tidbits from Scott McLeod which helped me get the clarity I needed.
If your idea is strong enough, you don’t need to be a world-class copywriter to pitch or sell; in fact, you just need your idea to be understandable and relatable.
The 30-second rule
In 2020 the average time spent on a page before bouncing was 30 seconds, which google suggests is roughly 100 words.
As you can see above, I used well in excess of 100 words, and a lot of it was fluff. So taking on-board Scott’s pointers and after reviewing other successful landing page case studies like that of Dropbox, Mint & Buffer (see below);
I found a common copy format to follow that works;
HEADING
SUBHEADING
PROBLEM
SOLUTION
BENEFITS
CTA
I drafted a couple of versions (pasted below) and used Mum as my crash test dummy.
Here’s my first attempt at the copy;
“HEADING: The Only Way To Automatically Register Your Business
SUBHEADING: No knowledge, no problem, BEN will do everything for you
PROBLEM: So you’re about to get married, wait what… Starting and registering a business in NZ is like getting married except to the Government.
You need to do it, it’s frowned upon not to do it, but the process of getting married can be a pain in the a**
SOLUTION: Leave it in our hands, and this will be the easiest thing you’ve done since snoozing your alarm clock this morning
BENEFITS: We’ll take care of the whole process for the exact cost and a fraction of the time that it would take you to do yourself
CTA: Resiger Your Interest Here”
HERE’S ANOTHER ATTEMPT
“HEADING: The Only Automated Business Registration Tool
SUBHEADING: Don’t like admin? Ben does; let him set up your business for you.
This will be your quickest yes, since your morning coffee.
Registering a business is a headache you shouldn’t have to deal with.
For the same cost and a fraction of the time, we’ll do everything for you. + we’ll even help you set up all the other stuff for free.
Things like opening a bank account, registering for GST, registering for payroll, getting a trademark and so on. It’s all boring and annoying admin that we make easy.
It’s easy; give us 15 minutes of your time and be on your merry way. We’re sure you’ve got other important things to do.
(Email Capture)
OKAY, IM IN”
AND ANOTHER
“HEADING: The Cheapest and Quickest way to register your business
SUBHEADING: Let BEN take this headache off your hands
So you’re about to start a new business, Epic.
Registering and setting up your business is a bunch of admin you shouldn’t have to deal with. We’re sure you’ve got other stuff you’d rather be doing, right?
What if we told you BEN can do it all for you, for the same cost and a fraction of your time.
With just a few clicks of your mouse and a few taps on your keyboard, he’ll make sure your i’s are dotted, your t’s are crossed, and you’re ready for business before the cows come home.
(Email Capture)
“INTRODUCE ME TO BEN”
After reformatting my design and re-writing my copy I came up with this second version. Now it’s time to put this thing in front of an audience.
CREATING AN ACQUISITION FUNNEL
If you remember, I found my audience on Google, so that’s the channel I used for my acquisition funnel.
I’m not here to teach you about PPC advertising, and frankly, you can find plenty of how to’s online from folk way more competent at this than me. So I’ll keep this part brief.
I went back to my keyword search volume research from before and picked the 3 – 4 keywords with the highest search volume and lowest competition. These were:
I wanted my ads to be to the point and offer people exactly what they’re looking for.
A copy framework to use for these types of ads is.
1. Give them the solution
2. Give them the benefits of your solution
3. Show them how you do it
See examples below;
We promised a solution, i.e. company registration we promised a benefit, i.e. save time + save money we told them how, i.e. software to handle the process for you.
Here’s another one
And another
As discussed, we want to prove merit and distribution in the least time possible for the lowest cost possible. So I decided to run this test for as long as it took me to get ten signups.
I know I stated our traction goal was 85 signups in a month. However, I wanted to iterate and improve both my ads and my landing page as I went. The quickest way to do that was by talking with interested persons to understand their problems further and what part of my ads or landing page copy resonated with them.
I set my ad budget to $10 per day and a $1 max per click.
It took ~3 weeks to get ten registrations (see google ads summary below). I spent $192 to generate 402 clicks, and my conversion rate for the campaign was 2.69%, not far off the original 3.3% target.
• I stupidly had one variation of the ad running to the wrong landing page – I got one conversion there. However, the ad copy and landing page didn’t match, so it performed poorly. The conversion rate was <.5% for that page.
Stretching those numbers out, I’d get ~200 sales per year with an ad spend of $4,000 and generate $10,000 of revenue. I still have a lot of work to do here to hit my traction goal.
However, because the product isn’t ready and most people registering a company or setting up a company want to do it that day, my test was handicapped. If I had a working product, I’m confident the registrations and registration rates would be a lot higher.
Remember, you don’t need to use Google Ads for your acquisition funnel. Just find out where your audience spends their attention and get in front of them.
I watched someone do this recently using LinkedIn. She created a landing page using Mailchimp then posted it to her feed. The post got 105 likes, 14 comments and drove 200+ signups. Last I heard, using just Facebook Groups and LinkedIn, she got 1600+ signups.
TRACKING RESULTS
Unexpectedly I was able to get reasonable results straight off the bat. I planned to test many landing pages, ads, and traffic channels to marry the happy couple of Merit and Distribution.
The chances of your first test being successful are low. Because of this, Gabriel (traction book) says tracking your results as you go is a must.
There are three outcomes Gabriel thinks we should be tracking as we’re trying to find traction.
1. User acquisition cost for each channel
2. Audience size for each channel
3. Customer fit for each channel
This is where my traction test ended. I didn’t explore this idea any further than what you’ve read here. However, If I were to, I would set up a google sheet and track my results week to week using the three categories noted above.
Mint.com’s Noah Kegan did this when they were launching mint; this is what his results tracking sheet looked like.
Over time you’ll learn valuable insights about how to acquire customers for your idea. Not only will this information help you iterate and improve your validation process but it will also be helpful further down the line when you have a product or service ready to sell.
PART 4: PROCEED OR FAIL
At some point in time, you’re going to need to decide whether you should proceed with your idea or not.
You can only iterate your landing page and acquisitions funnels soo much; sometimes, our ideas just aren’t as good as we think they are. Sometimes your timing isn’t right. Maybe you’re in the wrong country or culture. Perhaps the numbers just don’t add up.
I like to spend a maximum of $1,000 or 3 months testing for traction. This is a rule I picked from learning the Bullseye technique for gaining traction, which you can read about here. If you can’t hit your traction goals within that budget and timeframe, it might be best to rethink your idea or move on to a new one.
However, If you can’t prove your idea wrong, then it might just be right.
That’s how I validate business ideas and how you can to. Best of luck!
Comments: 8
great stuff! very helpful! thank you!
Thanks for the comment Vanessa. Glad it’s useful.
It’s been one of the most helpful and practical articles I’ve read in the past 2 months in the search for information on how to test for business ideas! Thank you for creating and sharing this content.
Awesome Natalia – glad its helped!
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