Table of Contents
- Introduction
- MVP development and its role in the building of the final product
- Things the startup MVP should showcase to potential investors
4.1. Making it simple to understand what your product is
4.2. If your product has market need
4.3. If your team is up to the task
4.4. Whether your MVP’s shortcomings are fixable
4.5. If the product will stay above the hurdle rate
- What investors may look for in your MVP
- Wrapping Up
Introduction
In the age of startups thriving everywhere you look, one is sure to find a greater number of startups unable to take the next step. Although there are many reasons for this, this is mainly due to the failure to gain support of the intended customer base.
As reflected in the above result of a survey by the New York Private Equity Company, CB Insights, not getting the funds is one of the top reasons why most startups fail, coming only below not having the market need.
However, the risk of failure can be greatly reduced by launching an MVP as hugely successful companies such as Airbnb, Twitter, Spotify and Amazon did.
Having already touched upon one of the ways in which a startup can gain traction by creation of an MVP with the help of professional developers in one of our earlier blog posts at Siya.tech, we will now look at the latter aspect of a successful startup’s growth trajectory. This is the article where we try to outline the role of MVP development from an investment point of view.
MVP development and its role in the building of the final product
An MVP, short for Minimum Viable Product, aims to showcase the product to keen customers, who are termed as early adopters, while the product is still not complete in its build phase.
It must hit a sweet spot where the MVP adequately serves as a working iteration of the product, while not taking up a lot of time, effort and resources, i.e. money, to be created.
This point is emphasized by the graph given below. The Y-axis denotes the return on investment and the X-axis shows the effort or resources spent. Thus, the placement of the MVP close to the Y-axis and away from the X-axis means that it should utilize the minimum amount of resources while providing maximum ROI.
This is where the concept of hurdle rate comes in. In the latter stages of the development, the graph is seen providing lesser ROI for equal amounts of efforts. If the graph falls below a certain mark, then the ROI must be too low for the investors to keep funding. This mark on the graph is known as the hurdle rate. We will discuss this further in our succeeding articles.
5 reasons startups need MVP to entice potential investors
The following points are the reasons for why investment becomes a much bigger possibility when you have a well-built MVP in your hands:
- Making it simple to understand what your product is
This goes without saying but having an MVP handy will serve to help your prospective investors understand what exactly your product is all about. They will be able to tangibly see what you have got to offer and how your product will set out to do so.
Depending on how much work has gone into the development of your MVP, the investors you are showcasing it will be able to gauge if the product will be able to find a space within the industry it is operating in.
Take the example of Producthunt. It is an online forum and marketplace for product and tech enthusiasts to discuss software for either smartphones or PC, hardware projects, and the latest tech creations.
Its creator, Ryan Hoover came up with the idea in 2013 and is famously quoted as saying in reference to the rough outline of the platform he created and shared with his fellow tech enthusiasts.
“within 20 minutes, I had an MVP”
He stresses that these 20 minutes spent making a rough MVP were the most vital part of the conception as it not only showed everyone what his product was, but helped him gain plenty of insights and feedback to be able to move ahead with his project.
- If your product has market need
Having built your MVP, the primary aim of making it in the first place needs to be realised. This means rolling it out for early adopters to use and provide feedback on.
Once this has been done and the data regarding its usage has been collected, not only will it aid further development, it will also provide a window into how much the need for the product is.
For instance, founder of Zappos, Nick Swinmurn registered at Shoesite.com and put up photos of the shoes he thought would sell, instead of building a whole new website. He wanted to check the market need for his idea.
The shoes ordered by his customers were then bought from a store and shipped. In 2009, Zappos was bought by Amazon for US$1.2 billion! It’s safe to say there was plenty of demand for what Swinmurn had to offer.
- If your team is up to the task
Not only will a well-executed MVP help in achieving the above, but it will also help in showing the skills that your MVP development team you have hired have up their sleeve.
Not having a large budget to work with may limit the development to a certain extent. However, it should not hinder your team’s efforts of turning in a product that expresses the vision for the product as best as possible. In fact, the budget constraints should only be a motivation to be more creative and display how technically sound they are.
This is what the creators of Golfhubber did. They outsourced their MVP development and consequent development to Siya.tech and now they have a working app which is one of a kind.
Golfhubber is known to be the “first complete golf network of its kind, bringing clubs, pros, and amateurs together on a shared digital platform”
- Whether your MVP’s shortcomings are fixable
It would not be wild to assume that your MVP is going to have a few flaws and chinks that can be improved upon. After all, this is the whole point of an MVP – to highlight the issues within your startup’s UX, or its fundamental idea.
Having the insights ready after deploying your MVP will help you to make certain changes to bring improvements to the following versions of your product. Consequently, it will also help the potential investor see that the issues, which are bound to be present, can be modified as per user demand and are not fatally irreparable.
This will encourage them to be inclined towards trusting your team in case any future enhancements or even sweeping changes are required based on the market and industry trends.
The example of Foursquare is relevant here as it began as a single-feature MVP that served as a regional social media channel in 2009. Now, it has found its use as a travel and accommodation guide with a variety of services and partners.
A similar example can be found in the case of Hubspot, who now create software for content management and marketing, but were founded only as a blog channel.
- If the product will stay above the hurdle rate
We took a brief look at the hurdle rate using a graph. This is the rate at which the return on investment falls below a certain amount for an equal amount of effort or resources spent. This amount is determined by the investors themselves.
Although staying above this point is dependent on a lot of factors, such as the cost of outsourcing the product development to a company or marketing, a well-built MVP can go a long way in mitigating the drop in the profits later down the line.
How this can be achieved is by accurately analyzing the outcome of the MVP’s deployment which includes acting on the user feedback on how the UX is and seeing how much need for the product is in its segment.
This last point is key as a thorough analysis of the insights gained from the MVP deployment are invaluable and can’t be replaced by any other method of learning about the product. Particular attention needs to be given to it as it can vary from a case to case basis.
Wrapping Up
We hope that by bringing this blog article to you, we have helped you get a fairer understanding of what investors look for when they decide to choose a startup to invest in and how a well-made MVP might help in them taking a punt on your idea.
Although this has just been the tip of the iceberg so to speak, this should stand you in good stead for understanding some of the other resources we have got lined for you.
To surmise, we have taken a look at what an MVP is supposed to achieve, both in terms of getting the requisite feedback for further development and from the point of view of attracting investors with the minimum resources spent.
When developing a startup MVP, one should not have any one particular goal in mind. Although this is what each member of your team should be doing on an individual level, you as a CEO should always have all of these considerations in mind simultaneously. You should also put yourself in the shoes of the prospective investors, so to speak, in order to be prepared for being scrutinized.
FAQs
- Why is MVP development important for startups?
MVP development allows startups to deploy their product and consequently, understand their space in the market, gather data about how it interacts with users, and make the changes that will render the product usable for use by the general population, not just the early adopters. MVP allows all this to happen without spending too many resources or much money.
- Should I hire a professional for MVP development?
Professionals and companies specializing in building an MVP have dedicated tools and resources that are systematically designed to reduce the time taken to reliably develop a working product, or MVP in this case without any delays. This helps entrepreneurs secure funding on time by showing their MVP to investors.
- When to look for investment for my startup?
Even though there is no wrong time to get investment, getting funded too early can mean that you have not gone through the more difficult stages where the creativity and frugal aspects of nurturing your startup take place. On the other hand, you might get funding at a stage that is too late for your idea to take on the next set of challenges. It is important to recognize when your startup has gone the furthest without external financial help before you seek investment. The investment should come when it is an absolute necessity in the next step of the startup’s development.
- Can my startup fail even after receiving funding?
The answer is yes, and this has happened on numerous occasions where the money runs out even after a lot of promise being shown by the business. This can happen if there is a lack of research, bad relationships with partners and investors and ineffective marketing strategies. Not being an expert in the industry is also a major hurdle, although it can be overcome with expert analysis or outsourcing the MVP development to a reputable startup studio.
- What do investors look for in a startup before funding it?
Investors will look at things at whether the market has any significant reach for the products to be sold in large quantities and if there are competitors operating in the same industry. They will need to be convinced if your startup can manage to beat them with your know-how and the existing product, for example, an MVP is doing and what the scope of improvement is.
