Finding out how your business idea could fail in real life could save you a lot of grief, according to Jonathan Siegel.
A native of Santa Barbara, Calif., and a serial entrepreneur, Siegel calls the concept non-destructive testing (NDT) and was speaking at the sold-out TEDx Dublin (@TEDxDublin) conference last week. Holding an egg up, he said he heard it is possible for an egg to hold a person’s weight. One way to test that is to stand on it. However, if things go wrong, the egg will break and the test will come to an end. The NDT method is to essentially do some research.
Siegel said a similar approach works in business. When an entrepreneur is asked how their business can fail, most will say “it can’t!” But looking at how ventures could fold could avert those same failures, he said.
An example of a business concept that failed destructively was Webvan, said Siegel. Founded during the dotcom boom with the backing of some very experienced businessmen and venture capitalists, the company burned through $1.2 billion before it went under in 2001. It had planned to deliver groceries bought online to local markets in the U.S.
Siegel told of how money had to be spent on a fleet of trucks, warehouses, staff and technology. “They really built a phenomenal system,” he said. However, 1 million customers a month were needed to make the business vialble. After five years, they had only 50,000 a month, he said. As failure loomed, the principals found they could not go back to the drawing board, said Siegel.
Meanwhile, other businesses are constantly testing and tweaking. At Farmville, “new ideas bomb all the time.” But testing is done in small, non-destructive ways. At Google, a decision on whether to make links the same color in Google and Gmail was approached very carefully and scientifically, Siegel said. The company experimented with 41 different shades of blue before settling on the color that maximized revenue with its test groups.
Drawing on his own experience, Siegel said he worked on an invoicing application that was his “third failure in a row.” He said “when I brought out my own products, I brought some real dogs to the market.” After his invoicing failure and after realizing how much time he spent perfecting a back-end billing system, Siegel decided to take a new approach on his next venture: He took credit card information to let people think they would get billed but he did not built any collection system at first.
Instead, he was trying to gauge how popular and profitable his product would be. That freed him up to concentrate on marketing and promotion and “the final steps to buy in.”
Even in the offline world, Siegel said NDT can be used. He wants to open an Irish bar back in Santa Barbara. Instead of some very expensive trial and error with staff, decor and menus, Siegel turned to Facebook to seek advice from potential customers.
Image (remixed a little) originally by Mark Coggins on Flickr.