The early life-cycle of a startup is all about validation.
Especially for first-time founders, the struggle is often to figure out what’s missing or what can be done to convince an investor to take a chance and invest. Validation is also significantly more difficult for non-technical founders (see Paul Graham’s point #6). Whether looking for funding, or convincing a prospect to become a customer, or locking down a key engineer hire, founders must provide outsiders with ‘reasons to believe’.
Unfortunately there are only a handful of ways this can be achieved…
Above I have made an attempt to highlight a hierarchy of validation points for startups during the fundraising process based on my own personal experiences. It’s my belief that this is roughly the rank order by which people (particularly investors) will evaluate the worth and/or potential of an early stage company.
As you move up the pyramid, the degree of validation increases. Also note that the product itself is not really ever the focus; a key concept in the process of customer discovery. InÂ today’s world, a quality product is really second to eyeballs, revenues and relationships. A weak product can always be made better â€“ Twitter is proving this right now as it actually has outsourced the redesign its entire product and continues to raise venture funding despite a lack of revenues. Also, for first time entrepreneurs its important to note that business plans are only a very small piece of the overall validation process necessary to secure funding.
Are these validation points the only things that matter to an investor? No. However, they should serve as a good reality-check for the milestones a startup should focus on in order to get that investor(s) to emphatically say “yes.”
Update: Good post on getting validation on the localglo.be blog. Hopefully this becomes a meme because it’s a critical discussion for first time entrepreneurs