What we’ve learned about validating startup ideas during a crisis

At PSL we validate ideas and work with founders to transform them into companies. We believe deeply that many of the toughest questions facing a business can be answered before there is even an MVP. But, over the last few months, COVID-19 has led us to push even harder into our validation activities. Everything feels riskier now. If that’s true, we need to push right back with our de-risking activities. The headwinds are real: selling is harder, customer preferences are changing overnight and the investment climate is harsher.

In light of these challenges, we have found this set of tactics particularly helpful to us in our own validation activities. If you are a prospective founder, we hope they will be useful for you too.

Accelerate and emphasize customer discovery. Fortunately it just got easier.

As we validate, we talk to customers early and often. If we are fortunate enough to have someone in our network, we can pull that card, but other times we result to the cold, hopeful email. Naturally, results are mixed.

Last month, we were about to kill an idea based on a technical innovation to allow for cheap, ubiquitous marketing personalization. Despite a promising technology moat, we simply couldn’t find customers that were ready to make a bet on new tech with their precious performance marketing dollars. All of the sudden, unanswered InMails and phone calls went answered. The message we got from customers was consistent: “Who knows what the next year looks like? I’m ready to experiment.”

Testing Is Really Cheap Now. Buy more.

As we validate an idea we take whatever we have--an MVP, a demo, or even just a set of value propositions--and put it in front of consumers through various ad platforms. This yields a treasure trove of insight both in terms of measuring the total demand and the underlying acquisition economics. With so many companies cutting ad spend, it is far cheaper to test value props, product concepts or marketing voices. For most categories, CPMs are now at an all-time low. Of course, if your business relies heavily on digital acquisition, don’t assume that the current economics will last forever. Enjoy them for what they are, an inexpensive laboratory for rapidly iterating and de-risking your idea, that will likely go up 50-100% in the next year or so.

Think Creatively About Early Revenue.

As we have spoken with investors in our community and elsewhere, we have heard a consistent pattern of interest in ideas that can quickly generate revenue. We feel this is a rational reaction to prevailing uncertainty about the broader fundraising environment. In our own validation, we have placed greater emphasis on questions about how quickly the market can be developed, and privileged ideas that can manage burn by self-funding with free cash flow.

Recently, we have been exploring a new venture, which we hope has the ability to become a defensible, high margin marketplace. As part of validation, we have paid particular attention to  how we can generate early revenue with a tools business. While the tools business might be only a tenth of the size of the larger market, we feel it is important to be particularly crisp (and creative!) about the way in which the business can survive and then thrive.

How do we continue?

We believe strongly in the role that entrepreneurs have to play in building solutions to the myriad problems our community faces. Never has that work felt so salient. Entrepreneurship is at its very core solving problems, and venture-scale businesses inherently must solve big problems that are felt by an enormous number of people. We have been heartened by the explosion of activity and mobilization to help answer the question “how do we continue?”

If you are contemplating a new venture or solution, we hope that these learnings are helpful to you. And of course, if you think it may make sense to work together, please don’t hesitate to reach out to us at hello@psl.com.