Articles and Advice

Death by assumption: Why market research is a step no startup can afford to skip

Wondering how important the process of conducting market research for a startup is?  Let’s look at the spectacular failure of US online grocery company Webvan to understand just how important…

If you build it, they won’t come…the ill-fated story of Webvan

In 1996, the internet was the next big thing and on the cusp of infiltrating every aspect of our lives.  A new online shopping concept called Webvan was launched, a venture well and truly ahead of its time.  In the years to follow, internet startups would bring eye-watering riches to the bright young I.T. things of Silicon Valley.  But this was not to be the fate of Webvan.

Louis Borders the co-founder of Borders Bookstores founded Webvan. Borders believed he had identified an avenue into the multi-billion dollar US grocery market.  By merging the relatively new technology of in-home internet access with a grocery delivery service, Webvan’s creators developed one of the first models for online shopping.

The founders were supremely confident in their idea and they steamrolled ahead.  The company recruited a highly paid, highly experienced, CEO and similarly notable board members.  Webvan invested in cutting-edge robotic technology for use in its $30 million warehouses.  They readied themselves for a delivery service into 26 cities across the US.  Before its IPO, Webvan raised over US$800 million in private and public capital.  The minds behind Webvan were incredibly confident the business model would work.  They believed they were set to revolutionise the way consumers bought groceries.

In 2000, Webvan was launched on the stock market.  After 12 months, the company reported sales of $200,000.  This was not a good return on the $800 million in funding received.  The next year Webvan went out of business.

An untested dream

Webvan did not lack for confidence or drive.  But the founders missed a critical step in the startup process.  They did not test if there was a market for the service.  They failed to ask if consumers would like to buy groceries online.  If they had, they would have heard that the answer to that question was a resounding no.

Webvan exhibited classic ‘group think’ mentality.  Key leaders fed off each other’s assumptions and excitement without establishing some important foundations.

Prove it

Determining whether there is a market for your product or service is not a part of the process any startup can afford to skip.

An in-depth analysis will cover target markets, ways to reach them, competitors and geographic locations.  And it will most likely involve paying an expert to do the job.  Don’t skimp, market research is an investment, not an expense.  Identifying objections or adjustments needed now will save money (or complete failure) in the future.

Steve Blank, father of The Lean Startup Movement encourages startups to engage in ‘customer development’ at the same time they engage in ‘product development’.  Blank’s ‘Investment Readiness Levels’ tool allows entrepreneurs to test their business model through 9 levels of metrics, giving plenty of opportunity to catch dangerous oversights or assumptions.

For considerably less than the $800 million lost investment capital, Webvan could have spent a few thousand dollars on customer research around online grocery shopping.  Perhaps asking the question ‘‘Is this how you would like to buy your groceries?” would have saved a lot of heartache.

Webvan was somebody’s vision without validation.  Spectacular amounts of money were lost in a scenario that could have easily been avoided by spending a relatively small amount of money on market research.

We love market research at South inc. We love surveying the market, gathering data on market sizes and most of all one of our favourite tools is creating persona analysis. Talk to us today on how we can work with you to understand your potential market more.