If you want to attract investors to your business idea, you are often asked to develop a Proof of Concept. What the potential co-owners mean by this is proof that your business idea is feasible in practice and that it is likely to prove to be economically successful.
There are different strategies to provide this proof. The Break Even is considered clear proof. But other indicators are often enough for a proof of concept.
Does the business idea work?
Start-ups that present themselves, for example, at a venture capital company, are often asked to develop a Proof of Concept. The term comes from Anglo-Saxon and describes a state where a founder has proven that his business model works sustainably.
Especially in the case of start-up projects in the ICT sector, the question often arises as to whether the respective business idea is really feasible in reality and whether there is sufficient potential for turnover. Accordingly, on the one hand, the feasibility – can the project really be implemented as planned – as well as the economic efficiency – it is worth it at all – are critically questioned. If both questions can be answered yes in practice, the proof of concept is provided.
TIP: A professional financial plan forms the basis for a proof of concept and discussions with investors.
Different strategies for a proof of concept
As is so often the case, the question is how to develop a Proof of Concept. Basically, the following 3 strategies are conceivable:
1. Full risk: implement the idea directly
The best proof of success is provided by practical implementation. If you decide to just get started to see if your business idea really works, then of course this is the riskiest way to provide a proof of concept. This is clearly achieved if the offer is successfully accepted by the market and you already work to cover costs if necessary. There is nothing standing in the way of follow-up financing, e.g. for expansion!
However, this strategy must take into account the fact that the path to the proof of concept must be financed from one’s own pockets.
2. Slightly less risk: test balloon launch
The slightly less risky variant for getting a proof of concept is that of a test balloon. Instead of implementing the business idea directly, a small market is used to try out whether and how well the concept is received. On the basis of the result, one can refine the business idea and then implement the idea afterwards.
The advantage of this is that one can usually avoid mistakes that are made during direct foundation. In addition, the proof of concept of the test balloon is usually sufficient to convince investors. One problem with this strategy, however, is that with a test balloon you always attract some attention from competitors and you may have to expect imitators relatively quickly if you have a successful proof of concept.
3. Market Research: Conservative, but not a real proof of concept
Although a good and possibly. own market research with a target group survey does not provide a reliable proof of success. Nevertheless, a sound market analysis makes it relatively easy to estimate the probability of a proof of concept. It would also be good if you could show, for example, that a similar business model has already worked, e.g. abroad, but that it does not yet exist here in Germany.
Certainly, this strategy offers the advantage that not an enormous amount of investment is required. Unfortunately, however, the findings are usually not enough to convince investors. Either you just start and finance your project yourself or you let a test balloon start. In this respect, this strategy is rather a preparatory measure for the actual (mini-) proof of concept.
Milestones as orientation
The task to develop a Proof of Concept is not achieved overnight. Correspondingly helpful are milestones to measure the development of the company. The milestones can also be used to determine whether and, if so, how much you have moved away from the original business plan.
Accordingly, two to three different milestones should be defined. For example, this can be a certain number of customers, a certain sales target or – what is often considered a clear proof of concept – the break-even, i.e. the time when the turnover is sufficient to cover the entire costs. But also the threshold, where the turnover can at least cover the fixed costs, is an important milestone and can be regarded as a kind of indication for the sustainability of the concept.
For whom a proof of concept is relevant
Every successful entrepreneur has at some point provided proof of concept for their project – after all, this means that the company is profitable and economically active. In this respect, the proof of concept should also be relevant for every founder and represents an important milestone on the way to becoming a successful entrepreneur.
Nevertheless, the term proof of concept is particularly important for venture capital investors. Professional venture capital companies usually only invest if the proof of success has already been provided. Since the risk is too high beforehand, the successful market test is usually the basic prerequisite for an investment. The definition of when a proof of concept is achieved may differ from venture capital company to venture capital company. For some investors, the break even is considered a key criterion, especially for Later Stage Venture Capital investors. For others, for example, a steadily growing customer base can suffice as a proof of concept.
