7 WAYS TO ASSESS A STARTUP IDEA

May 19, 2010

Evaluating a new business idea? First, ask yourself the following questions:

1. Does the idea meet your personal criteria? Is it a fit with your goals, passions, and work environment preferences? Are you comfortable with the risks involved? Do you have the right skills and resources to make it successful?

2. Are market conditions favorable? Why is this the right time for your idea to work? How fast is the market growing? Is it big enough to support your revenue goals? For example, if the entire market only generates sales of $10 million, it’s probably unrealistic to think your company’s revenue will hit $5 million within five years.

3. Is there enough demand? Who are your target customers? Do they have important needs that are not being addressed? What evidence do you have that they will buy your products? (Note: “my friends like the idea” is not good enough).

4. Is it working somewhere, somehow? It’s a good sign if other companies are pursuing similar ideas and experiencing success. That shows the idea can work, and provides an opportunity to learn by watching what other companies do. On the other hand, too much rivalry can tie up partners, drive down prices and make it tough for you to compete.

5. What’s the business model? Very, very few companies can get away with gaining a following first, and figuring out a business model afterwards. Leave that to whiz kids with venture capital backers. Instead, come up with ONE way to generate revenue that is clearly working elsewhere, and make sure your idea is a good fit with that revenue stream. For example, if you want to sell advertisers access to your website, understand how much traffic you’ll need, and whether your audience is one that brands want to reach – before you go through the trouble of aggregating that audience.

6. What will you need to execute? How much money do you need to build the business, and when? What kind of team will you need? Are there particular skills or relationships you’ll need to be successful?

7. What’s the payoff? If all goes well, how will you and any other shareholders (e.g. investors) benefit? Will you get paid along the way? Get a payout when you sell the company? While it’s tough to predict the future, you have at least one plausible end game in mind before you commit to an idea.

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5 things to look for in a startup idea, for bootstrappers

May 6, 2010

What types of ideas are best suited to bootstrapping? (We’ll get to “how to bootstrap” in a separate post). Here are a few things to look for:

1. Low startup costs. Look for ideas you can launch without writing big checks. For example, it tends to cost less to start a company that sells services than one that sells products. Want to sell a line of baby food? You’ll need to create product formulations that meet FDA standards, and design packaging that stands out on store shelves. Also, you may have to produce more than you want at first, to meet supplier minimums and be prepared for customer reorders. Want to start a consulting firm? You can probably get started with a simple website and business cards.

2. Low marketing costs. If possible, find companies that reach customers without the need for large marketing budgets. For example, one of my clients has a $3 million revenue business and has never spent a penny on marketing. She sells hospitality services that cost over $100,000 per year. The universe of potential clients is fairly small, so she networks her way in the door, gives a sales pitch in person, and (sometimes) walks away with a big fat contract.

3. Proven demand. Forget “if we build it, they will come”. Instead, make sure you can sell it before you build it. There are a few ways to do that. The best way is to get customers to commit to making purchases in advance. Alternatively, you can work closely with one large customer when developing your product or service, so you can build their needs into your design. Can’t do that? Copy something that’s already selling.

4. Simple operations. Pursue ideas that don’t require large teams, wide varieties of products, or other factors that make operations difficult. Instead, find businesses where you sell one type of product or service to one type of customer, at least at the start.

5. Quick break-even. Seek opportunities that will let you get a product or service to market quickly, get cash flowing in the door, and reach profitability within a few months. Beware of ideas that require critical mass, before you can start generating revenue, like advertising supported websites or marketplaces. Also, watch out for startup ideas that entail long, unpredictable development cycles, or high levels of overhead.


Size matters: How to estimate your total addressable market.

May 5, 2010

Market size is important, because it provides a general idea of just how big an opportunity you’ve got. If you are going after a market where customers currently spend $10 million per year, it’s probably unrealistic to think that you’ll generate $5 million in revenue anytime soon – that would require a 50% market share, which is more than Coca-Cola has, and they’ve dominated their market for more than 50 years.

Still, sit through enough pitches, and you are bound to hear something like the following:  “This is a $1.5 billion market. It’s huge! If we capture just one percent, we’ll have a $15 million business!!!” Trouble is, the $1.5 billion market size is pretty much irrelevant because it includes lots of segments that have nothing to do with their business. Also, one percent is arbitrary—that could be a little or a lot, depending on the competitive dynamics.

When sizing up a market, focus on the part you can sell to—the total addressable market. That’s the amount of revenue your company could generate if you got 100 percent of your potential customers.

For example, let’s say you are starting a cosmetics business, selling high end products (“prestige” in industry parlance) through U.S. specialty stores like Saks, Sephora and Neiman Marcus. Total annual sales of cosmetics may be more than $40 billion on a global basis, but that’s not your opportunity. You won’t be selling lipsticks at Wal Mart, for example. Instead, you’ll compete in the U.S. market for “prestige” cosmetics, which is closer to $3 billion in revenue.

It may seem like bigger is better, but overstating the market opportunity is bad for everyone. It can mislead founders and shareholders, who will be disappointed when sales are lower than expected. It can also reflect poorly on founders, especially when pitching to investors who know better.


3 reasons to make your startup the this of that

April 14, 2010

Some business ideas are truly revolutionary – radical departures from anything done previously. When revolutionary ideas lead to successful companies, founders and investors reap bountiful rewards. In 1999, two venture capital firms invested $25 million in a young, innovative startup with an odd name: Google. Their stake in Google is worth about $50 billion now.

But starting a company based on a revolutionary idea isn’t for everyone. It’s extremely risky because there are so many unknowns. Will customers buy the product (or service)? Will they pay enough for you to make a profit? How much will it cost to market and sell the product?

Many entrepreneurs prefer to pursue evolutionary ideas. They find concepts others have implemented successfully, and modify them. These founders strive to create the “this of that”. Here’s why:

1. Lower risk. Method revolutionized the household cleaning product market. They developed sleek designs and eco-friendly formulations, and outmaneuvered huge rivals like P&G and Clorox. They also opened the door for other startups, by establishing a proven model for success. Following that model is less risky than creating a new one and hoping it will work.

2. Instruction manual. A friend of mine is building “the Method of oral care products”. Whereas founders with revolutionary ideas have to start from scratch, my friend can look at the history of Method, and learn from their successes and missteps. He’ll have a head start when figuring out how to price, manufacture, distribute and market his products, for example.

3. Easier to pitch. Founders of startups have to persuade other parties that they have a winning idea, including customers, investors, partners, suppliers and employees. A “we’re going to be the this of that” pitch makes it easier for those parties to grasp and believe in the merits of your idea.

Got a “this of that” idea? Post it here for some free feedback. Don’t worry about copycats – success is about 95% execution.


Half-baked startup idea o’the day.

December 22, 2009

In most cases, a startup idea isn’t worth all that much. The idea itself may generate 5% of the value, while execution accounts for the remaining 95%. So when my plate is full, like it is now, and I come up with an idea, I’d rather share it than forget about it.

Today’s idea isn’t so much of an idea, as a problem: Scheduling meetings. Let’s say you and I want to meet. We’re busy, so we start planning via email. I throw out a few days that work. Then you reply with counter-offers. Then back and forth a few times until we find something that works. Sometimes we have to find a meeting place too, like a spot for lunch or drinks that’s convenient for one or both of us. It’s all pretty inefficient. And while I’m a 98lb tech weakling, it seems like this is a problem that could be solved with technology.

That’s all I’ve got. No clear solution. No business model. No idea how much it will cost to build. To say it’s half-baked would be generous. Then again, you’ve got to start somewhere.

Like the idea? Lemme know. I’ll earn my 5% helping you figure it out. Got an idea of your own? Instead of letting it gather dust, run it by some people for feedback. You never know…


Forget “stealth” mode

December 20, 2009

Just read this comment in the google group “lean-startup-circle”.  Author Mike Brown from Indianapolis was kind enough to share:

“I see so many people saying, 1I’ll tell you what I’m doing after you sign an NDA.’ …Unless you’re talking about some really deep technology that REALLY pushes  the bounds of what we do (think Project Natal from Microsof), you most likely aren’t the only one doing what you’re doing.

… The sooner you get a working product that your users can play with, the sooner you can get feedback and in many cases ideas that will significantly improve your product. Going stealth I would argue (counters that approach). Think about it in terms of software development. With software… one primary goal is to get a working application in front of  your stakeholders quickly so that they can provide feedback as the application is evolving.  (That) avoids the problem of spending a year working on a project only to get feedback at the end from the customer that you totally missed the mark.

If you want to kill a startup, the quickest way is to spend a year developing a product that no one wants because you were in ‘stealth mode’…. By letting people know what you’re doing, you’re likely to get a lot of feedback that you’d pay a lot of money to get otherwise. Such as ‘this reminds me of…[insert competitor you didn’t know of]’ or ‘I’m building something similar, want to team up to make a unified product” or “I like [feature x] but I really wish I could do it by [method y]’. All of this feedback can be used to help you adjust your launch trajectory.

That’s the true definition of Lean (startups).


A little advice… on getting advice

December 19, 2009

I’m all for getting advice about your startup idea and approach – before, during, and after you launch. But not all advice is created equal. Before you seek advice from a person, be sure to think about what they know, and don’t know. Here are a few types of experts you may want to consider getting advice from:

Functional experts. People with expertise in roles like sales, marketing, team building, product development, technology, law, manufacturing, etc. The more relevant their expertise the better. For example, if you are launching a training business that will sell to large corporations, get sales advice from someone who has sold similar types of services to similar types of companies. Advice from someone with expertise on selling consumer products to retailers may not be on target, and could even steer you in the wrong direction.

Industry experts. People with expertise in particular fields, like mass market retail, food and beverage manufacturing, or consumer e-commerce. Once again, the more specific, the better. And watch out for people who can’t see beyond outdated industry standards. For example, someone in publishing who doesn’t see how e-books, self-publishing, and other innovations threaten to change the rules of the publishing game.

Startup experts. Running a startup with limited resources is obviously very different than being an executive at a large corporation. If you haven’t started a business before, be sure to get the perspective of someone who has been there, done that.