There are 2 basic tests that your new startup / product needs to be able to pass before you’re going to get any kind of major funding or traction. Both of these tests are addressed by getting your product out there and getting people using it and its important that you can tell the difference…
Step 1: Proof of Concept (aka find users)
The first part is just to get people to use your product / service. You need to show that there is a need for it and that people will actually use it. This you can normally achieve by giving it away fro free to a number of users or applying huge discounts to the price. If you’re going to get people using it, it helps you to position yourself in the market and explain the value. If people won’t even use it for free then you’re doing something very wrong…
Step 2: Proof of Market (aka find customers)
Once you’ve got users you need to find out what they’ll pay you and turn them into customers. This is the dark art of pricing and you need to experiment with this a lot. Use A/B testing and different prices to find the optimal ones. Another handy tactic is to set the price high but then discount massively. Start with a 75% discount to the early customers and then slowly taper down the discount to find the sweet spot. These 2 steps, although pretty obvious, are often not identified properly. You need to know which one you’re after before you start talking to them – not half way through the conversation. The way you test or sell your product at the 2 steps are vastly different. Having said that though, if you can go straight to step 2 then you’ve automatically proved step 1.
Finding customers is what counts, just don’t fool yourself into thinking users are customers.
Note: As far as funding at the various stages goes (See: Funding Secret Series) you may be able to get Angel funding before step 1 but you’re going to need to show both Proof of Concept and Market to be able to get VC funding.