How to Easily Evaluate your Startup Idea
Wednesday, June 11, 2008
After you listen to about a hundred startup company pitches you start to notice that they all sink or swim on just a few basic points. Given enough time, you don’t even need to know what the product is. Instead you just start asking whether or not the entrepreneur has the right answer to a handful of questions that validate just about any startup idea.
This isn’t about having a sixth sense about the success or failure of a potential business idea. No one has that, not even the investors sitting across from you pretending like they do. This is about boiling your startup idea down to the few principles that make all the difference in the world. So here they are, in order of importance.
The Problem / Solution Issue
Every great business idea comes down to a solution to a problem. As entrepreneurial visionaries, we sometimes get enamored with our solution at the expense of having a real problem to solve. If you’ve ever wondered what a solution looks like without a problem, just take a look at anything being sold in a Sharper Image catalogue.
The value of a good product idea is proportionate to the size of the problem it solves. For example, if I tell you I have the cure to cancer I don’t even have to tell you what the product is. You inherently know what a massive problem cancer is, so certainly any solution I have must be somewhat interesting.
When you can communicate the severity of the problem to investors, and they nod their head and say “yeah, that’s a huge problem, I get it” then you’ve got an interesting business idea.
When you can communicate that same problem and back up it up with a solution that consumers respond to with “here’s my check” then you’ve actually got a business!
The Sales and Marketing Strategy
Although you may have the solution/problem thing licked, it means nothing without knowing how to bring a customer in the door. Anyone telling you that a product will sell itself should try walking into a grocery store after it’s closed. I guarantee when you don’t bring people through the door, the products don’t sell themselves!
That’s why a powerful sales and marketing plan can be even more critical to your business than an initial revenue model. Don’t get me wrong, you can’t sustain your business forever without revenue. But I’m 100% sure that without any customers you’ll never have to worry about your revenue model.
You don’t have to have a ten year plan for every type of media you will buy and sales pitch you will perform. You just need to have a basic explanation for how you can cost effectively find customers over the next year or two. Your plan might stink, but not having one is a huge red flag.
Revenue Model
There are many conflicting schools of thought on what it means to have a revenue model for your business. Some people will say that with enough customers you can eventually make the numbers work. Others will say that if you grow quickly enough you can get acquired long before you ever have to worry about making money.
Both schools are rarely right, and the exceptions only prove that there are exceptions. “We’re going to sell to Google” isn’t a revenue model any more than “I’m going to win the Powerball Lottery” is a full-time career move.
Your revenue model should be simple – someone is willing to pay for what you offer. Whether they pay for it indirectly through advertising or directly through a purchase, there has to be a sustainable and readily identifiable revenue model.
More importantly, it has to be a profit model. I can sell dollar bills for 99 cents and generate tons of revenue, but will certainly guarantee that the company will go bankrupt. The only companies allowed to exist without a profit model are charities and major airlines.
If you Figure all that out, Let’s Take a Look at the Product
The last order of business, which may sound bizarre, is the Product Plan itself. That’s because if the product doesn’t solve a customer’s problem that you can make money on, it just doesn’t matter what the product is.
In many cases you can test the market for your product against the three previous points by simply doing some basic research. Long before you actually build a product, you can ask customers if they’d buy it. You can start to figure out how difficult and costly it might be to acquire more of them. You can also get a sense for what you could sell your product for and get a basic understanding of whether you could do it profitably.
When you’ve got answers to all of these questions, then, and only then, it’s time to go build a company. Until, then, keeping asking questions.