Testing & Validating Your Market Assumptions
There are three distinct phases of risk in a startup's life-cycle: Product, Market, & Growth.
Product Risk - can you build it?
Market Risk - does anyone want it? can you get it to them?
Growth Risk - can you scale it and make lots of money?
The cost and challenge of mitigating Product Risk is dropping. I believe the cost and challenge of getting through Market Risk is increasing proportionately because of the relative ease of building a product.
The majority of pitches I am seeing these days make the leap from having a product to assuming that the market wants your product. This assumption that there is market demand for your product is not tested and validated using Lean Startup Customer Development principles. Many founders are talking Lean Startup, but very few pitches I'm seeing have hard data on things like Customer Acquisition Costs and clear distribution strategies for their product. In the absence of testing & validating, you're proposing a field of dreams strategy - if you build it they will come.
In the diagram above, I refer to this as the Field of Dreams Gap - an unvalidated customer acquisition & distribution strategy. In the new world where developing a product is no longer difficult, the challenge is going to be: does anyone know about it? and do they care?
One place to start is validating this strategy is understanding Growth Hacking, and a great starting point for that is Thomas Knoll's answer on Quora. The diagram above on the stages of risk includes data from Dave McClure's post, Moneyball for Startups.