What is a Proof of Concept?

A proof of concept is a common idea in the business world, where entrepreneurs and start-ups demonstrate that a company or product is financially viable. Usually, this involves extensive research and review, and it is submitted as a single package to concerned parties. The proof of concept is also used in the arts, in research and development, and a variety of other fields, although the procedures remain much the same.

When a company is asked to invest in a another company or project, usually a proof of concept is required to demonstrate that the proposal is fiscally sound. For example, a company interested in developing a new suite of software would look at market demand, feasibility of the project, projected cost, and other factors. This analysis would come together to show how the concept will play out in the real world.

Sometimes, making a proof of concept requires creating a minimalist prototype, to show that the idea or device could be made to work. Especially in the digital arts, many companies experiment with short animations or films to see if a concept is viable, and present these films as proof of the concept. In other cases, a company may build a small representation of a new type of equipment to show potential investors how it might look and feel.

The project usually begins with the company background, where the history of the company is examined. When working internally, staff members might ask if the proposed concept fits in with the missions and goals of the company. Externally, potential investors look at how the company has performed in the past, what the proposed product or service is, and if the company has the resources to develop the concept. Then, the market for the product is examined. Investors look at what kind of regulation might be expected, how saturated the market is, and what kind of demand there has been for similar products, as well as what sort of competition exists.

Usually, a proof of concept includes an examination of the revenue model as well, with companies showing projected revenue from the product and service, and indicating development costs, long term financial projections, and how much the product or service will cost to maintain and market. Hand in hand with this goes a review of the intellectual property rights involved, and whether the company may need to pay for licensing.

This type of analysis is an excellent way for a business to evaluate itself internally, as well as look at proposed acquisitions and projects. Some businesses specialize in offering advice and evaluations of new concepts, assisting companies in the path to making the right decision. Ultimately, a proof of concept is designed to reduce the amount of uncertainty involved with a new project or acquisition.