Proof of Concept
In the previous articles, we have already read about why entrepreneurs require seed funding and how they obtain this seed funding. In most cases, the end result of seed funding is to implement a theoretical product idea on a smaller scale in the real world. There are product management techniques in place which have been created in order to achieve this purpose. Proof of concept, prototyping, and a minimum viable product is three such techniques that are commonly used. In this article, we will have a closer look at the meaning of proof of concept.
What is the Purpose of Proof of Concept?
The main purpose of a proof of concept is to verify whether or not a theoretical idea is ready for real-world applications. A proof of concept is done by creating a working prototype of a product. This product is then provided to a small segment of customers in a controlled environment. Their usage of the product is monitored in order to determine its utility.
The purpose of a proof of concept is to confirm two things:
- Firstly, the proof of concept intends to confirm whether the proposed product has any utility for the end consumer.
- Secondly, the proof of concept intends to validate that the entrepreneur does have the technology and the resources required to build the product.
By building a stripped-down version of the product, entrepreneurs create “proof” that the implementation can be done on a larger scale if they have the resources to do so.
Earlier, the idea of proof of concept was widely used only in the information technology business. However, now since a lot of businesses have started adopting more advanced technologies, proof of concept has become more relevant to a larger target market.
The Types of Proof of Concept
There are different types of proof-of-concept projects which are commonly undertaken by startup firms. The different types have been mentioned below:
- If a startup plans to introduce a new product, design, or technology in the market, it requires some proof to convince the investors that the new product, design of technology can be implemented on a larger scale.
- Proof of concept is also required when an already existing technology is utilized in a completely new context
- Startups can use proof of concept to demonstrate that their products are being rapidly adopted by the target market. This helps them further build traction which can be helpful during later stages of the funding process.
It is important to note that proof of concept may only be required for the new feature, design, or technology. Creation of the entire product may not be required in order to declare the proof of concept to be a success.
Benefits of Proof of Concept
Proof of concept often requires dedicated time and resources to be spent. This can be a daunting task for startups where both times, as well as resources, are scarce. Hence, in order for entrepreneurs to spend time and money on this exercise, there must be some tangible benefits. The details of these benefits have been listed below:
- The most obvious advantage of a successful proof of concept is the fact that it attracts a larger number of investors. The proof of concept considerably lowers the perceived risk of the startup. Hence, it convinces more investors to offer a better valuation. Entrepreneurs are willing to spend money on proof of concept because they can obtain a significantly higher valuation using the results of the proof of concept
- Another potential advantage of the proof of concept is that it saves critical time. When the company implements a proof of concept, they generally face most of the technical hurdles during the process. Hence, when they actually decide to implement the larger project, the go-to-market can be much faster and much more hassle-free.
- Entrepreneurs often use proof of concept in order to test different technological solutions to the same problem. Theoretically, it may be possible to solve the same problem in more than one way. Hence, in order to discover which mechanism would be the most efficient in real life, entrepreneurs often use proof of concept.
- A proof of concept is an inexpensive way in which a company can continue with their experimentation. They can continuously be on the lookout for newer technological applications in unrelated fields. They can then try to merge these technologies with their own products. This approach is often used by companies that have a dedicated research and development department. Even though such proofs of concepts have a high failure rate, they still help companies stay ahead of the competition. The amount of money lost in proof of concepts is often a small price to pay in return for being able to continuously stay ahead of the competition.
From the above description, it is quite clear that a proof of concept is more focused on execution. It assumes that the features of the product are already known and only tries to execute the plan in a simulated environment. The results are then carefully monitored and inferences are drawn as to whether the technology or design must be implemented on a larger scale.
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- Seed Funding - Introduction
- Why is it Difficult to Raise Seed Funding?
- Documents Required for Startup Financing
- How Co-Founders Split Their Equity?
- Proof of Concept
- Minimum Viable Product
- What is Prototyping?
- Asset Light Business Model
- Advantages of Asset Light Business Model
- Disadvantages of Asset Light Business Models
- Cash Burn Rate: The Basics
- Managing the Cash Burn Rate
- Startup Financing and Term Sheets
- Key Terms and Conditions in a Term Sheet of Startup Funding
- Red Flags that Investors Need to Look out for in Term Sheet
- The True Cost of Owning a Property
- Valuation of Early-Stage Startups: The Mindset of Investors
- Pre Money and Post Money Valuation
- Start-Up Valuation: Advanced Concepts
- How Pre-Revenue Companies are Valued?
- Valuation Divergence - Meaning and its Importance
- How Do Option Pools Work?
- What are Capitalization Tables?
- Asset Sale vs. Stock Sale
- Financial Models for Startups
- Key Performance Indicators for Startups
- Restricted Stock Options (RSU’s)
- Veto Rights - Meaning and its Importance
- Financial Benefits of Incubators
- What are Unicorns?
- Why Startup Companies are Staying Private?
- Why Unicorn Companies Fail?
- Building a Startup Team
- Bootstrapping: Meaning and its Advantages
- Disadvantages of Bootstrapping
- Revenue Based Financing
- Convertible Notes and Startup Funding
- Pros and Cons of Convertible Notes
- Simple Agreement for Future Equity (SAFE)
- Keep It Simple Securities (KISS)
- Series A Funding
- Series B Funding
- Series C Financing
- Venture Debt in Startup Funding
- Pros and Cons of Venture Debt
- What is Venture Leasing?
- The Freemium Model - Different Types of Freemium Models
- Pros and Cons of Freemium Model
- Scalability and Startups
- Pros and Cons of Scalable Business Models
- Why Do Start-ups Fail After Receiving Funding?
- Start-ups and Arbitration
- What is a Revenue Model?
- Understanding Investor Focus on Burn Rate
- How Investors Evaluate Start-up Ideas?
- Government Regulations Which Impact Start-Ups
- What is a Start-up Accelerator?
- Managing the Operational Metrics of a Startup
- Different Types of Investors
- The Founder’s Dilemma
- Role of Social Media In Start-Up Funding
- Start-Ups and Public Relations
- Red Flags for Start-Up Investors
- IPO: An Exit Route for Start-Ups
- What is Acqui-Hire?
- How to Build a Start-Up that gets Acquired?
- Legal Issues Faced by Start-up Companies
- Corporate Venturing
- How Reverse Pitching Works?
- Aggregator Business Model
- Marketplace Business Model
- Difference between Aggregator and Marketplace Business Models
- Product as a Service (PaaS)
- Benefits of Product as a Service (PaaS) Model
- Disadvantages of Product as a Service (PaaS) Model
- The Co-Working Business Model
- How Co-Working Spaces Make Money?
- Peer to Peer (P2P) Business Model
- The Instacart Business Model
- The Goodleap Business Model
- The Twitter Story
- How Tesla Reinvented the Automobile Industry?
- How Epic Games Changed the Gaming Industry?
- The SpaceX Success Story
- The Stripe Business Model
- The TikTok Business Model
- Zillow Story - The Real Estate Marketplace
- How Business Cycles Affect Start-Up Companies
- Managing Start-ups During an Economic Downturn