Proof of concept is the evidence, typically deriving from an experiment or pilot project, which demonstrates that a design concept, business proposal, etc. is feasible.
In the field of business, proof-of-concept helps to establish the viability of a commercial idea. It isolates potential issues and helps founders and possible investors understand the overall direction of the business.
Proof of Concept as part of a Business Plan
Business plans are often seen as documents for outlining strategy and startup steps. However, if you are building a business plan that you intend to use for funding, you need to make sure you are also viewing it like a pitching document. In other words, your business plan is a proposal for funding.
Inside a proposal for funding, there needs to be a Proof of Concept and demand. For an entrepreneur starting a business, this means there needs to be evidence that the business idea is valid and that there is clear customer demand for the product or service. Showing this correctly can make a huge impact on the credibility of a business plan and on the way an investor interprets the business potential.
The content can vary by business type, so it is not always obvious how to show the Proof of Concept. Below are a few ways to approach this challenge:
Survey of Interest/Demand
One way to demonstrate the clear need for a business product or service is to survey at least 100 target customers. This can be digitally done through a service like SurveyMonkey or can be manual. The survey can be simplistic, perhaps three to five questions long. It should ask the target customer what they would pay for, and what they would like to see in your product or service.
Adding the survey results to your Proof of Concept section can help validate to investors that you are going to meet a clear need by introducing your business idea to the area specified.
Beta test customers
A great option, especially for product-based businesses, is to beta test that product with a select number of target customers. This could mean giving the products out for free in exchange for candid feedback about the product or selling the products at a discount to gauge interest and market demand. In the Proof of Concept section of the business plan, information on how satisfied customers were, whether they would pay full price for the product, and other information related to your product can be invaluable in showing investors that you know your market and your market is interested in your product.
For both service and product-based businesses, a pre-launch of activities can be a way to test market entry without a huge investment. One of the most practical ways to execute this is through an event. For example, a shirt manufacturer can bring 500 shirts to a large concert, sports game or cultural festival, and do a pop-up business by becoming a vendor onsite.
Meanwhile, a restaurant could rent a truck or van to sell their cuisine onsite to test their recipes or validate target customer assumptions. Feedback from these types of events not only show that the market demand and customer interest is present, but it also shows the investor that the business owners are diligent and methodical in their approach.
No matter the type of business, a clear market entry strategy should include some Proof of Concept. This is best practice for any business plan, but especially so for a business plan that is intended for winning funding. Remember, a great business plan for funding should be treated like a proposal. It should show why there is potential for something great and prove that an investor’s money is going to support a market with a proven need.
To progress development and market validation, a company should begin with a Proof of Concept. It is instrumental in helping entrepreneurs to turn novel ideas into day-to-day practice, harness business confidence and navigate the route to market and realise returns.
A Proof of Concept might typically include some or all of the following: the agreed specification, the length of the development period, how the idea is to be funded, the conditions of the use of the IP, the company structure, a budget breakdown and who is involved.
A good Proof of Concept is an integral part of a startup’s journey and will also be fundamental to its stakeholders; it represents an important statement to possible investors of a startup’s business values and potential performance.