The proof of concept / PoC – goals, methods, and why it is so important

The proof of concept / PoC – goals, methods, and why it is so important

What is the Proof of Concept?

PoC, Proof of Concept, proof of feasibility or Proof of Principle – this is an important milestone in the early stages of the development of an idea through to the finished product. The PoC can show whether a business idea has the potential to work, is economically viable, and can be realistically implemented in practice. It is useful in that ideas are tested before capital and resources are used to realize them. Thus, the PoC decides on the further course of the project. There are various ways of producing a proof of concept, depending on, among other things, whom it is produced by and with what intention. Thus, the PoC is common practice not only in project management but also in the start-up scene. Investors often require a PoC before they are ready to participate in a project, so the PoC is particularly relevant for founders.

Fields of application and relevance of the PoC 

The PoC is used in project management and is considered to be an extremely important section as it checks the feasibility of an idea. Depending on the result, it decides whether the idea should be continued and implemented, or whether it should be rejected or revised. Thus, the PoC is decisive for the further development of the project. Frequently, the PoCs of start-ups refer primarily to the financial feasibility of their idea. Before large companies cooperate with or invest in start-ups, they usually require a proof of concept. In addition to checking the feasibility, it often serves to get to know each other personally and professionally and to start a long-term cooperation with initial success. If the start-ups can deliver a successful PoC, it opens up new opportunities for them.

Depending on the context in which the PoC is implemented, the validation can take place in different ways. In the IT industry, for example, it is often used to identify security gaps, while in the business management sector the focus is more on attracting investors. Sooner or later, every founder and entrepreneur will be confronted with PoC, as this important milestone is essential for a company. But it is also relevant for investors and entrepreneurs before they invest in a start-up or enter into a cooperation. Especially venture capital investors usually require proof of feasibility.

What are the differences between PoC, prototype and MVP? 

Proof of Concept, Minimum Viable Product, Prototype – these terms are used to describe stages of product development that are similar in some respects, but differ in relevant points and occur in different sections. Thus, the Proof of Concept is already carried out in the initial phase and is one of the first important steps. A concept of the product already exists, but it still needs to be tested for feasibility. If this test has proved successful, the next step is to develop the prototype. This is typically more advanced than the PoC, but is still a raw version. It no longer tests whether the product works, this criterion should already have been met in the PoC, but illustrates the way it works. The focus here is on the presentation and communication of the idea. This is to obtain initial feedback, but the prototype is not used later in production.

After a successful development and possible improvement of the prototype, the Minimum Viable Product is created. The MVP is already an early version of the planned final product, which is more mature than the prototype. However, it is strongly cost-benefit oriented and therefore reduced to the most necessary and important functional characteristics. For example, a much simpler version of the product is offered, automated processes are still performed manually at the beginning, or the idea is first tested locally and only later expanded internationally. The important thing with an MVP is that it is ready for use and can be used, because it is tested in real life. The MVP is the last preliminary stage on the way to the finished product before the final version is launched on the market.

Goals of the Proof of Concept  

Depending on who performs the PoC, the intentions behind it, or priorities, can vary slightly. However, some goals are generally valid. For example, the PoC basically serves as a basis for deciding whether a product is ready for the market and can and should therefore be implemented in reality. Furthermore, the PoC serves to minimize unnecessary costs and expenditure of resources for a possibly still immature idea. This reduces the risk of failure as soon as the corresponding implementation finally takes place. In addition, potential problems can be identified that a product that has not yet been fully developed may have. These problems can be logistical, technical, financial, legal or functional and should be corrected before the product is launched on the market. The PoC is therefore an important test that checks to what extent the idea is accepted by the potential target group and is accepted on the market. In addition, the PoC can be used to validate the requirements of the product. Both the objectives and the way in which the proof of concept is carried out can vary depending on the industry and the type of company.

The goals of Startup PoCs 

The goals that start-ups want to achieve with their PoC overlap in some points with those of larger companies. However, the proof of concept is of particular importance for start-ups, as it can serve as a stepping stone to the next stage. In order to attract investors and cooperate with companies, it is usually necessary to be able to demonstrate a successful PoC. Moreover, start-ups can afford fewer failures, especially in the early stages, and can use the PoC to avoid risks and unnecessary costs.

The use of PoCs in startup cooperations 

As a rule, start-ups carry out a proof of concept to convince investors and attract potential cooperation partners. However, it also happens that the PoC is carried out jointly by both parties in the course of a cooperation between the start-up and the company. In this case the PoC refers less to whether the product works on the market, this criterion should already have been fulfilled, but rather whether it is also applicable in the industry in which it is intended in the context of the cooperation. This test is useful in that it lays an important foundation for a good cooperation partnership. This is because over 50% of PoCs in collaborations fail. To prevent this from happening, it should be determined at the beginning how the success of the PoC is defined. Since companies are often interested in long-term collaborations, it can make sense for startups to initiate a longer collaboration directly and to include the PoC in the contract. In this way, the cooperation agreement can. For example, the cooperation agreement can be negotiated for three years, but can be terminated earlier if the PoC fails at the beginning (source: capnamic.ventures).In addition, during the joint execution of the PoC a first feeling for the course of the cooperation can already be developed. Since start-ups and companies often differ greatly in terms of culture, working methods and structure, the first hurdles can already be recognized here and can be taken into account and avoided in a later, long-term cooperation.

Methods and process of implementation – How do you achieve a PoC?

There is not the only correct way to provide a proof of concept. This can be done using different strategies, each of which has its own advantages and disadvantages. The three most common methods are presented here.

Market Research 

Doing market research is one way to provide a PoC. It can provide a probability, based on market analysis, of how successful the concept would be in the market. The market analysis is carried out, for example, by means of target group surveys or is based on similar models that already exist abroad. Larger companies often conduct standardized market research and statistical analyses, while start-ups tend to work with customer interviews, design thinking and user research. Many founders also make use of their personal network or their accumulated experience in recent years. Due to low investments, market research carries little risk, but is often hypothetical and does not provide any tangible evidence. Investors are not always convinced by this strategy. Therefore a good market research can be sufficient as PoC, but should usually be used for preparation rather than the final result.

Start a test version

A little risky but nevertheless effective method, which is very common and also finds greater acceptance in the startup scene, is a small test attempt. For this, the ideas are first tested on a smaller scale. Depending on the result, the product can be adapted again. For some investors the test run is already sufficient as PoC.  In addition, this approach not only offers a lower risk than a direct market entry, but also the advantage that errors can be avoided or reworked. The only disadvantage is that the competition can quickly become aware of the concept if it is successfully implemented. Therefore the next steps in the development of the product should follow quickly.

Direct market entry 

One possible way of providing the PoC is to bring the product directly to the market and develop it quickly and continuously iteratively. The immediate implementation is rarely used by startups, mostly when the functional scope is very focused and manageable. Larger companies sometimes use this approach to implement a strategy project aggressively and quickly. Here, the financing has to be carried by the company itself until success, which is a high risk, which is the disadvantage of this strategy. The advantage, on the other hand, is that in the event of success, the proof of concept is very clearly accomplished: customers use and buy the product. Direct market entry is usually the best option if a simple solution with a small range of functions can already create added value for the customer. If, on the other hand, a far more complex problem needs to be solved (e.g. CRM, ERP), it is more difficult to start directly on the market and it makes sense to start with a test version. The way to provide a PoC depends on the complexity of the business idea.

Process and duration of the PoC  

As already mentioned, there is not only a perfect way to perform a PoC. For a successful implementation, however, there are a few things that need to be considered in general. Of the strategies presented above, an ideal process is based on the second variant, which works with the test variant. To be able to implement it optimally, it is advisable to conduct market research in advance. The duration of the PoC process can vary from days to weeks and depends on several factors. These include the thoroughness of the execution, how far the product has matured so far, and in which area it will be tested. If the PoC fails, a revision of the idea follows. If the PoC is successful, the next steps are to work out the prototype, obtain feedback, create an MVP based on this and finally bring the finished product to market (see figure).

 

Break Even as final proof of concept 

The break-even point is the point at which a company’s revenues cover its expenses. Mathematically, it is described by the zero of the profit function, so the break even is usually followed by the first profit. The break-even is relevant in this context because it represents the final, watertight PoC for many investors and entrepreneurs. Grade start-ups, however, often reach the break-even point late, sometimes only after about seven years, which is why it should not be considered the only decisive factor.

The interface of PoC and Lean Startup Methodology 

Similar to PoC, the Lean Startup method is based on an iterative work process. This process is repeated until a satisfactory product is developed. Three steps are used for this – building, measuring, learning. However, the problem solution fit should have been identified in advance. This is the first important milestone on the way to a successful product. It defines the point at which the developed solution fits the problem on the market and is the basis for a successful business idea. The target group should be of a certain size so that it is worthwhile to work out the product. It is also important that the idea can be realistically implemented. This is where the PoC comes into play, which is also used in the Lean Startup method. The first step in this method is to build the product and launch it on the market. The Lean Startup method works with the Minimum Viable Product, the “lean” version of the final product. After market entry it is measured how the product is accepted by the target group. Ideally, the key indicators for this were already defined during the development of the MVP. This information is then evaluated in the third step and the product is continually improved and revised on the basis of the insights gained. This process is repeated until an optimal result is achieved or the ideal product is created. This is usually followed sooner or later by the product market fit. According to Marc Andreessen, software engineer and founder of Netscape, this term is defined as follows:

“Product/market fit means being in a good market with a product that can satisfy that market.”

The product market fit is another important milestone, but not to be confused with the break even. It is not uncommon for ideas to be discarded and reworked in this process. If the insights gained lead to a fundamental change in the business idea, this is called a pivot. In this case it can happen that it is almost completely changed. The interface with the PoC is now that this is also particularly important in the initial phase of a Lean Startup process. In addition, the Lean Startup method is also oriented towards making do with the most necessary and minimizing risks.

In conclusion, one can say that the proof of concept is extremely relevant for both young founders and experienced entrepreneurs from a wide range of fields.In any case, it should be noted that the Proof of Concept is carried out with special care, as it is crucial for the further course of the project.

We have written a detailed article about the joint startup PoC, which in certain parts resembles a pilot project and differs from the regular PoC, as part of our series “Start collaborations with startups”.