How to test a B2B startup idea
Over the last few years, I’ve had many conversations with startup founders who want to apply Lean Startup-style strategies to their businesses, but think they can’t because they’re not targeting consumers. “We only have a few target customers,” they complain, “so we can’t experiment with them. They’re too valuable.”
Of course they can.
The Lean movement is about reducing the risks in a business model carefully and systematically. For a B2B company—assuming you’ve identified a target market and a possible need—that means deciding whether you can satisfy that need in a sustainable, repeatable way.
First: Offer it as a service
Even if you’re making a technology product, you should offer it as a consulting service at first. This has a number of advantages:
- It tests whether you can actually get ten customers to pay for it. There’s a huge difference between “beta participant” and cold, hard cash.
- It puts you into contact with the customer earlier in the process, and you can identify any mis-set expectations or problems.
- You can use humans and manual processes to supplement the core technology offering, letting you go to market sooner.
- When you launch the product, you’ll have reference customers.
- It also has the side benefit of bringing in some money, which reduces dilution and eases cashflow problems.
Imagine, for example, you have a new kind of security product. You identify ten companies, and close them as consulting customers. Along the way, you have to adjust your marketing message, your pricing, and your support program. You also have to tweak the feature set.
Second: Standardize everything you can
While the customer thinks it’s getting a consulting service, behind the scenes you’re almost maniacal in your focus on standardization. Every email customers get, every report, every parameter is standardized. Whenever you deviate from these standards, you document it.
This makes the service easier to deliver (because it’s consistent.) But it also shines a spotlight on the places where you need to make your product configurable, or automate something.
In our hypothetical security company, perhaps there is a set of reports that each customer wants a different way—this becomes the roadmap for a new reporting feature. Or perhaps you have to set a baseline by observing access patterns before launching your product—which could be a machine learning algorithm.
Third: Will it blend?
After a few months, assess how things are going. Look at the places where a standard offering isn’t working (i.e. where you need to keep adjusting something, or calling the customer directly.) Can that stuff be automated? Distributed? Handled by a crowd? This is where you can sprinkle on emerging technology that becomes your core differentiator:
- A process can be patented, giving you IP.
- A customer interaction can be automated through chat, an expert system, or even a machine learning approach.
- A customization can become a configurable parameter, or a special version of the product (i.e. a version of the software for governments.)
- An activity that requires human interaction can be linked to Mechanical Turk, or tracked through a distributed ledger.
Again, you need to be ruthless about tracking this, at all levels of the company from acquisition to onboarding to delivery to support. In Lean Startup, you’re building a product to figure out what product you should have built in the first place, and this is how you do it without making your precious B2B customers suffer.
Fourth: Gut check
It’s time to decide whether you have a startup. You now have the information you need to make a good decision, and it’s one of these conclusions:
The business isn’t working.
You can’t reach enough customers, and they won’t pay enough to offset your costs. Time to pivot or shut down.
You can’t standardize.
This means that, for the time being, you have a consulting business. Maybe that isn’t for you. But it’s probably a timing issue, and as a result, you should watch for the following things:
- Automation is too hard. You need to watch emerging technologies such as self-service interfaces and machine learning that could do this for you in the coming years, and be ready to introduce them.
- The market’s too broad. Pick a vertical (in our example, maybe you find that you’re able to standardize if you limit your target market to Law firms, or Telecommunications companies.) Narrowing the scope of your market and its needs may make standardization possible.
- Customers aren’t ready yet. Moving from a consulting relationship to a standardize product requires compromise—more features from you, more work from the customer. This takes time. As the market matures, companies will be more likely to adopt automation. So waiting and watching customer attitudes may tell you when it’s time to make the switch from consulting services to standard product.
You’ve found a real product.
Congratulations! You still have a few things to do:
- Sell your automated offering to new customers (to prove you got the offering right.) This also provides you with spare capital, which you’ll need for the next step.
- Go back to your initial buyers and offer them a product in the place of their consulting service (you don’t want to run a consultancy and a product company.) This will reduce your revenues somewhat, which is why you needed to build up other customers first.
- Burn the bridges. Consulting revenues are one hell of a drug, and you need to quit. Make the consulting business your new professional services department, but be ruthless about severing anything nonstandard. Comb through support agreements for anything customized, and figure out how to shed it, even if that means firing the customer.
Consulting is a gateway
In startups, the biggest risk is whether anyone will care. By starting your product company as a consulting service, you sidestep the initial uncertainty and test the true risks earlier, without annoying prospects or sacrificing key relationships. You also finance your growth and build a stable of satisfied, referenceable clients you can use for fundraising and acquisition talks.
But unless you’re incredibly disciplined about this process, consulting is also a trap. It’s easy to rationalize yourself into little more than a consultancy, forgetting your startup aspirations. Never forget that the initial consulting approach is an experiment, a way to quickly find a sustainable, repeatable business model.