Validating Your Startup Idea: Sell Reduced Risk, Solve a Real Need

I was reading Amy Hoy’s Unicorn Free newsletter the other day and was struck by a point she highlighted: every successful business is in the business of selling reduced risk to their clients. If you’re not doing that, you’re not selling the right product. 37 Signals commented on how this thought relates to people working at startups back in 2003 with the pithy and apt message:

 

“We’re not designers, or programmers, or information architects, or copywriters, or customer experience consultants, or whatever else people want to call themselves these days… Bottom line: We’re risk managers. Designers who sell “design,” programmers who sell “code,” information architects who sell “diagrams” are selling the wrong thing. The thing to sell is reduced risk for the client. That’s what people want.”

I couldn’t agree more with 37Signals or Amy – humans want comfortable lives so we can focus on things we enjoy. I mentioned the idea to a few of my friends who are in the very early stages of starting companies and the degree to which they were able to easily identify how their companies sold reduced risk was staggering – while obvious for some, I’m left scratching my head on how others do this. It was a concept many of us hadn’t thought about before.

So, how do you tell if your product reduces risk and thus, is more likely to succeed?

One way to think about how different products sell reduced risk is to recognize that reduced risk can be sold for many levels of needs. I’m quite fond of Maslow’s hierarchy of needs (I probably refer to it too much) and think it is applicable here as well. Some companies sell reduced risk to solve physiological problems (breathing, food, shelter). Others target higher levels of need such as self-actualization and esteem.

Maslow’s Hierarchy:

Maslow's_hierarchy_of_needs (1)

The farther your product is from directly selling reduced risk, the more assumptions you’ll have to make about your audience and the current economic climate, the more you’ll have to work to convince people they should buy your product, and the more likelihood that you will initially have a smaller target audience than you think. What do I mean by directly selling reduced risk? Take a look at Maslow’s hierarchy (above) and quickly identify what category of needs your product solves. Can’t do that? You’re farther from directly selling reduced risk.

Curious how this plays out in the real world, I quickly looked at the “Unicorn Club“: a group of the 39 software-based companies that have had billion dollar exits since 2003. Aileen Lee’s Cowboy Ventures pulled together data on these companies and wrote a TechCrunch article I found myself reading over the weekend. Without going too deep into the data (B2Bs made this hard and this was no scientific study), by my categorization 90% of companies in this group reduce(d) risk for needs in the area of Safety, Esteem, and Self-Actualization. The “Love and Belonging” group is  actually fairly small but included the breakout exit of the decade: Facebook. It seemed that about half of these companies directly reduced risk meaning that it was obvious how they reduced risk for a customer.

On a personal note, all of this really made it clear to me why I’ve always said I prefer working for a company that is tackling “a real problem.”

Bottom line: Risk management is not just a part of your business, it IS your business. Reducing risk means solving real needs.

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