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How do you validate a startup idea when a network effect is critical to the value proposition?

When validating a business idea for a product before spending all the time and money to create it, it's relatively easy to show pictures, or at least describe what that product can do to a number of people, help them understand what the problem is that it solves and find out their opinion. Then you hone the idea and / or the pitch and do it again.

But what if the value can't really be understood by a typical user without understanding the network effect? If you consider different businesses that require a network to be valuable, from the telephone to Facebook (which had an offline analog), they seem obvious now, but when they were first being created I'm sure many people couldn't understand the value without seeing the possible future and without multiple prototypes in a small network.

If anyone has an example of how they validated a difficult to validate business that would be great too.

5 Replies

Jason Ball
1
0
Jason Ball Advisor
Director, Business Development Group at Pactera Consulting Japan
Excuse my absolute never don it perspective... but I can't see past "how do I know this will work?"

The 'network effect' is nothing but an imagined narrative or label of why it might work...

Sorry, I'm a nobody who also just had ideas, but aren't you just saying what we all would love to know; will this work?

Rob Gropper
4
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Rob Gropper Entrepreneur
Director at PetHero, SPC - Member at Eastside Incubator - Principal at Tuxedo Technologies Group
1. if you have to "help them understand what the problem is that is solves" you are fighting an uphill battle. Educating a market is hard. Find a way to articulate your solution to a problem they are already intimately familiar with.
2. Find a way to provide value from day 1. My first tech startup was a 2-sided market (this was in 1997, long before the term "social network" had been coined so we didn't have a short-hand descriptor for what we were building). The value proposition for users was clear and relatively easy to articulate, but people didn't want to pay for it until there was a 'critical mass' of users. It was clear that we needed to come up with a way to provide tangible value to users from day 1. The light bulb went on one day and adoption took off - the growth rate was scary back then. Find a way to provide immediate, tangible value to users even if they are the only one to use the product. Users will get the added value of a large network, but they won't put forth the effort to help you build that network unless there's something in it for them from day 1. Focus your efforts here.
3. start small. Find a way to partition your market to build small, valuable networks first. As you mentioned, FB started with 1 university at a time.
4. The network effect should be gravy on top of some core value. I don't know of a way to accurately predict viral growth. If it happens, great, but don't bet your business on it. My current startup also includes a 2-sided market, but we didn't even consider investing significant time and $$ until we figured out how to provide tangible value for 1 user at a time from day 1.
Steven Wolk
0
0
Steven Wolk Entrepreneur
Principal, Strategic Investment Consulting
Thanks for your answers. Let me be clear, I'm not talking about viral growth, I'm talking about the network effect (i.e. many people having the product / service and do or can interact because they do) being very very important to having and understanding the value of the product.

Rob, Your thought about starting with a segment is very good and I agree that's a good way once it's built. However, before creating the product and trying to sell it, my client would like to try to validate or invalidate the idea.That will help hone it or shut it down - which really is the best way to create a new company.

For example, I started a company a few years back that had provided a service to small businesses. We called small businesses with the original idea, before having a product, and interviewed them about it. Based on their responses, we modified the product. Then we called them and tried to actually sell it as if we were real salespeople with a product. Only when they said yes they'd like to buy it and were taking out their credit card did we tell them there really was no product like that yet, but when it was created, we would give them 6 free months. When we were hitting high percentages of "YES" we had our design and created the product - and it sold well.

If I had tried to create the product first based on our initial hypothesis, I would have wasted a lot of time and money.

So the question is, how can I do this same thing but where it's hard to validate without people understanding the value with the network effect? Put a phone in front of someone and if no one else has one, it's worth nothing. If one other person who you might want to call has one, it's worth something. If every person and every company has one, it's worth a lot.

(I guess I'm no longer anonymous)


Rob Gropper
4
0
Rob Gropper Entrepreneur
Director at PetHero, SPC - Member at Eastside Incubator - Principal at Tuxedo Technologies Group
@ Steve; Hopefully it goes without saying that every startup should validate product/market fit prior to building anything - although that is still far less common that one would think. without knowing the market, problem or solution it's hard to offer concrete suggestions and i'm not sure i would spend much time trying to dissect the difference between "network effect" and "viral growth". You have to get to the network somehow, either via brute force (costly) or viral. People need to clearly and easily understand the problem (they need to have this problem themselves). Once they do it seems a rather simple abstraction to get to "OK, now imagine what this will do for you if everyone you know has one". The next question out of their mouth is going to be "sounds great, how do you get there?". The answer is going to be either 1) "we plan to raise $5B and give one to everyone" or "the growth will be viral and here's how that will happen...". Again this gets back to finding a way to add tangible value to a user base of 1 and then, preferably, value to that user to spread the word. Nothing enlightening here i'm sure.

Don't try to boil the ocean. I would boil my market down to the ideal prospect - the user for whom my solution solves the most pain - the 1 or 2 or 3 companies (if b2b) or 1 very tightly defined consumer ("male CPA's between the ages of 24 and 35 who have 2 or more kids and live in zip code 99555"). Once you ID this ideal prospect then come up with a way to get their true reaction - something similar to what you did in your prior company.

If it's 1880 and you are trying to sell this new invention called a telephone you first explain that it's an improvement on the telegraph - something they already understand and know the problem it solves and the problems it does not solve. They understand the concept of the telegraph office - a place in town you travel to, pay money and send a message to another telegraph office far away where the message gets translated and delivered to the other person/company. You don't go to the average Joe who doesn't currently have a need (pain) to call other average Joes - he doesn't have enough pain to justify the cost. You go to the richest 10 people in town who frequently sent telegraphs for business purposes. Make sure your solution compliments the current solution. They have the money and understand the need. Now they can simply call the telegraph office from their home/office. They want to be the first rich guy in town to own one. As soon as the other rich guys hear about it they will want one - who care about cost. Now the 10 richest guys in town A have this cool new device and they are all sending a bunch more telegraphs to their rich buddies across the country in town B and soon you can sell them an upgrade that allows them to bypass the telegraph all together and call the other 9 rich guys in town. Segment your market.
Henry Valk
0
0
Henry Valk Entrepreneur • Advisor
Entrepreneur | Innovator
Identify your target market right down to the actual users, then go find some and ask them, "if I did this, would you buy one" (Primary market research).

If your idea can already be done by other means then there are already metrics for adoption and potential customers for you to do your primary market research.

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