Always De-Risk Your Market First
The other day I ran into a graphic on LinkedIn that rather shocked me. It was from a partner at a VC firm, he had +80k followers and had published a "go-to-market handbook". He (of course) specialized in B2B SaaS, so how is this relevant to us?
Well, while there are key differences between hardware and software, the general broad strokes of product strategy are quite universal and transferrable across markets and disciplines. So what has me so hot and bothered? It's the fact that a renowned VC was sharing his guide on what should be de-risked at each funding stage and the first thing he mentions is to focus on technical risk…
Come again?
Even during pre-seed, he's already talking about "building and MVP" and "proving that the technology works". And while that sound alluring for a lot of founders to just start building, I can assure you it is the fastest road to failure and an empty wallet. Here's a little secret: technical feasibility is never the riskiest part, even in hardware; but it is the most expensive, especially in hardware. Let me be clear: I'm not saying one is harder than the other, but the overall risk to your venture is different.
My point of view is that the market, and financial traction in that market, should always be de-risked first and to great extent before even thinking about feasibility. The reasoning is quite simple if you look at the relation between risk and cost in the development cycle of consumer hardware.
It's relatively cheap to de-risk key assumptions about your idea by talking to your customers and immersing yourself in the market you're targeting, it might take some time, but even that is relatively short as compared to the actual engineering and manufacturing cycle that will follow. The same is true for cost, at first you're not spending as much yet as you're holding out on building prototypes in favor of stakeholder research, which is again simply talking to a lot of folks and understanding your market deeply.
Now consider risk: you have a much greater ability to reduce the risk of your venture if you can prove desirability (i.e. do people need and value this?). If we follow the famous "three lenses model" as popularized by IDEO, you can see they advocate for three things that need to be addressed for a successful product (desirability, feasibility and viability), but also stress how important it is to start with desirability.
The Three Lenses of Design Thinking
Why? Because if no one wants what you're building, it doesn't matter if you can make it work and it sure as hell won't allow you to build a viable business on top of it! It's really just that simple! Studies have shown time and time again that 70-90% of all new business fail (consumer hardware takes the cake with 93% in some studies). The main reason is always the same: "building something nobody wants": there is no desirability!
So coming back to risk, the greatest risk of all is that no-one wants what you're building and you've dumped all those development dollars down the drain over the course of two years because no-one is buying your product. Moving further down the development path, you're still de-risking, but the focus shifts to feasibility. And again, there are great ways to do that without breaking the bank (at first!), but when push comes to shove, you're spending will start to go up considerably the further you move down the development track. As you're locking into a design more and more, your ability to reduce risk goes down with it as the cost of change keeps rising and you better be damn sure that those requirements are the right ones locked in scope creep is a real thing and it does not come cheap in the later stages!
Business Risk vs. Development Cost
And if we're talking cost, there's no way around the Big Kahuna that shows up at the end: CAPEX spending for setting up manufacturing: I'm talking injection molding tools, investing in a manufacturing line, quality control, test benches and the likes. This can be wildly expensive and your design is literally set in steel, making your ability to reduce risk (by changing design as a result of changing requirements) becomes almost non-existent. Very small changes can be made, but at a disproportionately high cost, let alone big changes.
I've seen scenarios where entire molds and tooling had to be thrown out and redone, I can assure you: “ouch”. An OEM partner I once worked it said it best: "manufacturing is a one-way street and you're sure as hell gonna get hurt making a U-turn into oncoming traffic".
So what do I see way too much? People skipping the market validation stage since they "know what the customer wants" and because they need to "move fast" thinking it'll save time and money, while in reality it saves only a fraction of money and time, but you trade it for a huge amount of risk reducing ability. That way you end up with marginally lower cost but much higher levels of risk and I can assure you the cost will actually be higher if you don't do any market validation and requirements discovery before diving head-first into engineering.
This is what dummies do
Quickly addressing the bit about "moving fast", a lot of founders feel they should be first to market since it will give them a "head start" in capturing market share and being a household name. This is known as the First Mover Advantage, but I like to refer to it as the First Mover Fallacy.
For starters, more often than not, the thing they're developing is already an improvement on existing product categories, I've very rarely seen a case where founders are actually introducing a brand new category (but hey all think they are). And if you look at the facts, those who we think we’re first in their category were often not first movers at all!
Google was the 10th ever search engine (depending on what you count as a search engine) at a time people thought nothing was wrong with “Yahoo!” the way it was. Everything Apple has ever done had been done before: smartphones, tablets, smartwatches, … among first movers were giants like IBM, Microsoft, Nokia, Blackberry,… It's second movers that gets to learn from the mistakes of the first. It's the smartest companies that let the others figure things out and fail - and then double down when risk is lower.
The truth? It's often a status thing that some founders and execs need to feed their ego or a result of paranoia and acting upon it wreaks havoc on your teams, budget and chance at succes. While in truth: if you create a superior experience for consumers over that of existing competitors: you can take down giants.
On the importance of willingness-to-pay
Sometimes the visual of the three lenses is show to follow a particular order, with feasibility often coming in second place. This is not only dead wrong, it validates our action-biased tech founders in their building-bias.
The very next thing that you need to figure out is viability, and more specifically in terms of willingness-to-pay. For those unfamiliar with the term it is literally just that: the willingness of your target audience to pay for the product you're building. Paying being a broad term here: it can be buying, renting, leasing, … and it even holds up for non-profits: sure you don't need to make a profit, but your operation needs funding by people who are willing to pay for it!
Beyond that, it's often the first thing investors will look for: a smart investor doesn't really give a shit about feasibility (at first), they do care about evidence of financial traction in the market. And in the age of the internet, generative AI and photorealistic product renderings (thing CGI for industrial designers), … it's easier than ever to do. (Check out “How to Prove Willingness-to-Pay” if you need more info)
When does it make sense to de-risk technology first?
Honestly? Never. Especially for consumer hardware we need to be frank: 99% of new developments are a repackaging of very mature, very proven hardware technology. And obviously that can happen in new and interesting ways that can add new types of value, but unless you're trying to break the rules of physics: the reality is often: "we'll figure it out".
Even if you're in deep tech like climate and energy tech where feasibility takes the main stage, that's because there's already a very obvious market for what these guys are doing. And honestly if you can succeed in nuclear fusion or hyper-efficient carbon capturing and bringing it to a scale where it is commercially viable, you know there will be a market for that (and I'll give you a pass).
Only in research driven institutions we see this reversed and rightfully so: the main purpose of universities and technology centers is to push the boundaries of what's possible, unconcerned about finding a market application at first. And that's great! That's what science is for! But even for them comes a day of reckoning when that technology needs to find an application, and most don't: I've seen loads of useless technologies developed at these institutions, but I remain certain they've always furthered the field in some way and that's the main goal of research as far as I'm concerned.
Are there no exceptions?
Alright, I'll bite: all of the above is assuming high levels of linearity in your development process and reality is often much different. If you have more time than cash, I would always advise the linear route: it's safest en de-risks gradually. But what I do see happening often is that de-risking technology and the market happens in parallel. Typically when the team does have a noteworthy feasibility challenge (e.g. lab-on a chip) where they have a strong hunch that the technology in question will be used in the problem they need to solve. They often start to validate the market in parallel with the technology.
But to be clear: this is a choice and comes down to risk management and risk tolerance. They should be fully aware that if they don't find market traction, the tech research has been for naught, but if they do: they've got a hell of a head start.
Time is traded for risk
Higher risk, but higher reward. But keep in mind that the value of that head start is relative (see First Mover Fallacy above). And I've seen this go horribly wrong as well in the form of overfunded med-tech startups hammering away at their tech before even thinking about their market (the Blood in Silicon Valley documentary on Theranos and Elizabeth Holmes gave me some chilling flashbacks to this particular project).
And again, when this happens, it's so often in the grey zone of spin-offs-to-be coming out of a university or research center where — as discussed — of course they're looking at the tech first. But to bring it back to you, the consumer hardware entrepreneur, it's not worth the trouble and its best to stick to the basics: de-risk your market first: start with desirability, and then prove willingness to pay before even thinking about engineering.
Your wallet will thank me.
