Is Your Startup Idea Good Enough for Investors?
The cardinal rule of startups is to build something people want. The fact is that as unusual as it seems, many startups were funded at the idea stage, even before writing a single line of code. For example, Zenefits, a HR Management solution that offered employee onboarding, payroll, benefits and scheduling was actually funded by Y Combinator at the idea stage and moved to unicorn status with a current valuation of $3 billion.
To evaluate an idea is not as simple as figuring out what’s wrong with it. Its trying to find the missing piece of the puzzle to make it a winning idea. It’s never going to be obvious.
A startup idea is a hypothesis about why a company can grow quickly. You need to figure out how to construct the hypothesis (the pitch) for the investor. Be aware of the tendency to over describe the moving parts of the idea. Focus on the path and hurdles you are prepared to overcome to make it a billion dollar idea.
The problem: The initial settings or conditions for the company to grow quickly
The solution: What is the experiment you intend to run to assess those conditions.
Insight: What’s you explanation as to why your experiment will succeed.
6 Components of a Good Problem
- Popular – so a lot of people face the issue.
- Growing – demand for a solution is increasing.
- Urgent – the market is grappling with it
- Expensive – the existing options are ridiculously overpriced and customers can feel the pinch.
- Mandatory – There are no other alternatives
- Frequent – Customers face this problem on a regular basis
You problem doesn’t need all components but at least 2 or 3 should do. Especially frequency as this will affect your opportunities to convert.
Its best encapsulated by the following behavioural theory created by BJ Fogg of Stanford University.
Behaviour = Motivation + Ability + Trigger
All three components must work simultaneously for the behaviour to be induced. Motivation is determined by the pain of not having a solution. The Ability is fulfilled by your finished end product and the Trigger is fulfilled by consistent marketing.
What factors make the Ideal Problem for a startup?
- Millions of Potential Users
- Markets growing at 20% a year.
- People are trying to solve it right now.
- A Billion Dollar market
- Resulting from increased regulation
- People encountering multiple times a day
When it comes to a solution, its best not to start here. Otherwise you end up with SISP (Solution in search of a problem). It is very inefficient to shoehorn a solution into a problem as it becomes warped and inadequate. For example, if you’re an engineer looking to tinker with experimental tech, creating a prototype before actually finding out if people need it is a bad idea. When you try to artificially create the problem, you risk investing a lot more than necessary on branding it as a problem.
To understand your insight, you need to answer the following question: What is your companies unfair advantage? What makes you special compared to your competitors? This advantage needs to be related to growth. You absolutely need one. It shows how well you’ve thought through a problem.
Types of Unfair Advantages
- Founders – Are you 1 in 10 of all the people in the world who can solve this problem? Are you a super expert? Investors are looking for feel confident about your ability to create the product.
- Market – Is it growing at 20% a year? A steady growth in the market with little to no contractions is great. However, another factor to consider is whether a product is recession proof. This is the weakest unfair advantage and you may need to pair it with others.
- Product – Is your product 10x better than the competition?
- Acquisition – Whats your CAC (Customer Acquisition Cost) and LTV (Customer Lifetime Value)? Of your channels, what portion is paid acquisition? You need an acquisition path that costs $0. Word of mouth is a great option.
- Monopoly – As your company grows, is it difficult for you to get defeated by competitors? Leading contributors to this monopoly tend to be either network effects (as my network grows, the strength of my company and value of my product grows with it) or market places (winner takes all)
You need at least one. But more of these are even better.
Factors that influence an investors perception of your idea.
- Threshold Belief: what is the default situation for your company to succeed? Can you even build the product? What is your sales process and is it good enough to sustain your startup?
- Miracle Belief: Is there a possibility of a windfall that will better position you? Are you working on a breakthrough?
Get comfortable evaluating your idea. Find the holes to plug and fill em up. You may have to pivot. If you do, it’s not the end of the world. It’s getting better with every iteration.