New businesses must understand validation

According to an RBS research report, over 20,000 new companies were created in Scotland in the first half of 2025, marking an 18 per cent increase in business formation compared to the previous period.

Economic growth is good news. But before we celebrate potential boom times, take note of the data that shows up to 60 per cent of all new startups go bust within five years.

Running out of cash is often cited as the reason new businesses fail. So, why do businesses run out of cash?

Research shows startups are often in too much of a hurry to start trading. Entrepreneurs all too often fall into a “love trap” whereby the brilliance of their own idea creates tunnel-vision thinking and a desire to begin trading as soon as possible.

Tunnel vision thinking happens because the creative thinking associated with starting a new business releases lots of dopamine in our brains. Dopamine acts to reinforce enjoyable behaviours which we are driven to repeat. Dopamine also works to block resistance as well as “bad news”.

It’s natural and a good sign for founders to be passionate about their ingenious gizmo. That extra energy is needed to get the business off the ground. But when we fall in love and blindly and excitedly fast-track the launch process, we become susceptible to missing a critical step.

And that critical step is business validation.

When we think about starting any new business, we naturally make assumptions as to how target customers will respond to our new offer. But assumptions are guesswork and if our guesswork is not tested and checked we are in danger of building a business based on sand. And startups that build their businesses on sand are the ones that typically don’t survive five years.

How does validation play out in practice?

Imagine a founder who wants to charge £100 for their innovative new widget. The startup may want to charge that price, but will customers pay it? Unless this assumption is validated through back-and-forth honest communication with potential customers, the notional price is simply guesswork.

Some startups make the mistake of validating their business idea by asking questions of friends and family.

Don’t do this. Not only are these people very unlikely to be target customers but their emotional attachment to you means they just want you to succeed. As a result, these people lie to you and therein lies the seeds of business destruction. You must talk to people you don’t know.

You might be thinking that validation sounds like hard work. You’d be right. But validation is far less stressful compared to the feelings of failure and indignity associated with closing down a business.

At SimVenture, where we’re currently growing a base in Scotland, we've built an easy business validation platform called Validate to guide founders through the validation process, and we hope that it will help more startups succeed.

Peter Harrington, CEO at SimVenture and TEDx speaker