Bottom Up / Top Down Validation
As we are gearing up for the launch of our inaugural accelerator cohort here at Singularity University, I had the pleasure of reading through literally hundreds of pitch decks and business plans from the startups which applied for our program.
For the startups we rejected — one of the things which stood out to me was the lack of a proper bottom up / top down validation in their business model.
Let me explain:
In a bottom up validation you take your assumptions and validate those against real business needs (you turn conjectures into actuals). Say for example your startup idea is to build a way for individuals to very easily set up a website to showcase their skills, achievements and interest. In the bottom up validation part of the process, you go and speak with as many potential customers as possible, take their feedback and iterate until you find a solution which your customers consistently love.
In a top down validation you look at the overall market and see if your solutions has a viable market opportunity. You look at market data, trends and changes which might favor you and your solution (or not) and try to figure out if you have a solution which has a big enough market (for the price point your selling at — if you’re selling $10M software installations you obviously only need a few customers to make it work whereas if you’re selling a $0.99 iPhone app you better have millions). You also try to figure out how hard it will be for you to get these customers — one thing to have a big market in front of you, a completely different thing if it will cost you more than you can make per customer to acquire these customers. Lastly you look at the competition — here it’s important to not only look at people doing the same thing as you but everyone who competes for the same mind-share and share of wallet.
A good pitch deck / business plan makes me see that you did this work and that you have figured this out (again: conjectures trump assumptions). Sadly a bunch of entrepreneurs get so carries away in either the bottom up part (they believe so much that they have an amazing solution that they ignore the fact that their market might be minuscule) or the top down part (they see the huge market ahead of them but haven’t figured out if their solution makes sense).
Spend some time with these pieces. It’s worth it and will make you a better entrepreneur.