Spending money to validate your idea is the last step. There is a whole lot you can do if you understand business models to figure out if you are dead on arrival first.
Let me take you through a thought process of how to evaluate a business idea.
But first, you need to set your expectations with your initiatives. Are you doing a ‘side hustle’ and want to make some cash, or are you planning on going VC crazy and gunning for a monster exit? Both are equally fine. But there are large implications of both that heavily impact how you review the idea.
I bosh out some ‘startups’ which are basically passive income. If I make a few grand a month from them and I don’t have to do too much work, what the heck, right! But if you want to go big or go broke then the bar is really different, not just higher. So I’ll talk a little generally here.
By hook or crook you had an insight into a problem that people have and you think many people will have it.
You need to give it a name, meaning get really specific. What is this problem? What exactly is the issue? How is it being solved now and what’s fundamentally flawed with that? It could be legacy architecture or archaic distribution strategy that would be too costly to change.
How painful is the problem? Is it a ‘broken thumb’ or a ‘fly flying around your head’. A broken thumb has the attention of potential customers. A fly is something you forget quickly.
The more painful a problem, the easier the sale is.
The other thing to think about is will people get addicted to your solution to the problem? If the problem is a one off your LTV needs to exceed your CAC by a multiple on one sale and not with repeat. Casper and co who do mattresses may sell pillows etc, but people buy a mattress once every 7 years (I made that number up, I don’t know), so you need to be profitable on that one sale. Buffer is something you keep paying for if you want to make content posting easier.
If no one really cares about your problem, then kill the idea, unless it’s going to be a problem~2 years and you are positioning yourself for an industry change. Do think about the future market not just the one you see now.
How can you solve the problem in the smallest manner possible? You don’t want to blow $50k+ on the first iteration. You want to fail cheap.
If you have to build crazy ass back end architecture, massive logistics network etc, then you are going to fail expensive. Unless you have the cash, you can’t do that, but sure, some people can.
Can you solve the problem in a small fashion and still be compelling. With a broken thumb you want some awesome morphene. If I was a drug dealer and was like ‘hey dude, I have some vitamin C, want some?’ you’d be luck f*** off loser. But if I said I have the legal, OTC morphene made in the garden by my Chinese, mystic grandmother that will take away all the pain without addiction, you’d be like f*** yeah! whoop whoop!
So whilst your starting product can be ‘made in the garden’ you ideally need to be able to get to industrial scale production over time. But you ideally want a similarly efficacious pain killer at launch, which whilst it isn’t as good as it could be (limited features) the core feature is enough.
Don’t go down the path of trying to do everything at the start. You can’t. You have to be super ghetto.
So once I know I have a cool problem to work on and I have an idea of what the solution could be now, and what it could look like in the future, the FIRST thing I do is competitive desktop research. You HAVE to do this.
Spend 5+ hours (min) really digging into who the competition is. You want to understand not only what they do, but who they serve- you might just realise there is an untapped niche you didn’t think of and you could super target at the start. OR, you could realise the comp is actually awesome and you just can’t compete. If you can’t realistically compete, that’s good to know early.
This really is one of the most key aspects of ‘idea’ validation.
Look at crunchbase and angellist and see how much they have been funded. If they haven’t raised much, you might still be ok. If they have raised a tonne, you might be cautious. If they raised big and then did rounds which were smaller, there is a big issue! It’s either that the market is not there (bad news) or that they are crap at execution (good news).
Here is an example where I realised there might be an opportunity. My house mare was talking about professional transation… Look at Gengo. You can see on CB that their round sizes got smaller. Hm… Then read glass door reviews and you realise there is an issue at the company. I’m not super passionate about translation, but there could be an opportunity right now to do it better.
Short version, there is a LOT to learn from competitive analysis if you know what to look for.
To really win, you need to do something special. The best business models are when you do something unfair, you have a structurally designed mechanism that destines you for glory.
- The more obvious one is a network effect– see Facebook and Linkedin.
- A data exponent is another. Think Google and search. Bing will never compete due to thsi
- The last real one is brand. Think Coke. But that’s expensive as balls to build, right?
For normal companies, what you can do is:
- Flywheel– you do something which funds you getting bigger. As you get bigger you have more funds to get bigger and it perpetuates. It’s a little like a network effect, but it’s different and more applicable
- Unfair cost structure– there are ways to be really cheap. I was working with a client the other week and they have a way to be 16x cheaper than their industry. Sure, the comp could do the same thing, but it involves such a radical departure from their business model, they just won’t. But when a core aspect of your cost structure is 16x lower, that’s really hard to beat
- Timing and new technical architecture– these are lesser ones depending on your model, but they could be important. Think SalesForce going to the cloud. If first to market really is important (often fast follower is better) than timing can matter
So sure, you could just launch without an evil plan… but I prefer to play dice games with a loaded die. What about you? People who get rich have a model that just makes sense. It’s smart. What about you?
The market always wins. If you are doing a passive income hustle, fine, a nice uncompetitive niche is gold to make maybe 6 figure salary. That’s awesome, but for grand plans the market needs to be a billion minimum.
You need to know the market. Try find research reports- what does Euromonitor peg it at? Then do bottom up analysis and think ‘there’s probably 200k people that might buy this. At $59 a month that’s $11.8m MRR at 100% penetration (not going to happen). Is that good or bad if you get there?
If you are doing the VC thing, don’t think 1% of the market. As Sequoia dudes say, um, why not take 30%? But could you? Maybe?
I’m not going to harp on, but mate, the market size is soooo important depending on your aspirations. Really figure out if there is real money to be made and how you can target them and how much it would cost?
It’s kool and the gang if the market is small now. It could grow…
What’s happening in the industry? What is changing? What will the market look like in 3 years? If the market is going to grow, then awesome. A tiny market no one cares about now that is poised to be huge is gold! You’re at the perfect time to start. The corporates will view the market as a toy and ignore it. But it could be enough for you to stake your claim and position yourself for when the crazy times happen.
Think about Coinbase. No one could give an ass about it a few years back… but who’s laughing now?
But… think about NFC! I’ve had calls with a bunch of older dudes who tried NFC with cool tech but the market just never took off. So they’re dead.
The reality is you never know, but having a sense the market might take off helps you validate your idea for the long term and give you confidence you are working on something that looks like a toy car now, but might be a ferrari in the future.
Bill Gross at Idealab did some analysis on why startups succeeded or not. Watch this TED talk.
Timing matters. I gave some examples in the industry trends section, so let’s move on. But… timing matters!
As someone who has founded or been part of monster companies and spent dick loads of money on marketing like Groupon, Lazada and Delivery Hero, market education SUCKS BALLS. It costs soooo much money.
In Asia, before Lazada, no one shopped online. Lazada was one of the biggest charities for founders, educating millions of Asians about shopping online. Millions. No the competition just competes for the people we brought online.
If you have to do market education you need to get fancy with marketing. Think about Birch Box who popularised the concept of a box a month (and unboxing as a strategy). No one was searching for ‘beauty boxes’ so how do you do Paid? You don’t.
I have a monster blog to teach you about business models and strategy here. One of the case studies is Birchbox.
You need to have a think about how the hell you market your idea.
If you are doing B2B what is the install like? Do you need to do lengthy onboarding? Infusionsoft charge customers $2000 (some times have discount offers of $300) to onboard customers! Can your unit economics afford field or phones sales? Can you do customer success or even customer care? If not you need to design your marketing and product accordingly.
Think about your primary marketing strategies and question how easy it will be to find customers. If this is a ‘latent problem’ you need to educate customers. Be cognisant of this fact.
Never sell to ‘everyone!’ You need to segment customers and segment again. You need avatars for customers. Who exactly are you selling to and why do they use you?
Be super niche at the start. Think about Facebook, duh. Harvard, then some other unis then…. Senate hearing committees.
Don’t build a CRM for everyone. Build a CRM for Doctors specialised in infant mortality in the greater Atlanta region starting out. I know that sounds lame, but ‘do things that don’t scale.’ I know that’s not the perfect mapping to my point, but start small is the start to scale. The benefit of focus is you can really target.
Now think about how you do marketing. When you are testing your idea you can do FB ads targeted at ‘Doctors specialised in infant mortality in the greater Atlanta region’… do you think that targeting will have higher or lower conversion than targeting ‘everyone?’
So use Canva etc and make really specific ads, use FB and a/b test your custom audiences to those ads and see how they convert.
When you have no data, there is not a huge amount of analysis you can do. And if you suck at Excel it might take you too long to learn to be able to bosh out quick and dirty models. But you can do analysis to varying degrees.
Before I commit to launching something I do analysis on the basics of my theorised CAC and LTV and associated operational costs. I’m good at Excel so i can just bosh them out. I use very few assumptions, but I want to get an idea of what the operating model looks like numerically. You don’t want to launch something where the fundamentals don’t work. Doing the math helps.
I helped a client build his financial model. We realised his business model would simply not work with his approach to CAPEX. With that numerically clear, he reached out to the head of France for X big company and got his tech on a licensing deal which suddenly made his startup viable. Booooom!
Yeah, it takes time, but if you ran the numbers, you wouldn’t need to write a line of code before you knew your idea literally doesn’t pass the numbers test (You can listen to my podcast on the two key test you need to pass to be fundable here).
I talked about market education, which sort of addresses this, but get really clear on how, where and for how much you will acquire your customers from.
You really need one channel that works. Do you know what this is going to be?
If it is paid, it’s easy. You just get ideas of search volume, CPCs and then make assumptions on conversion rate to get the CAC. I would inflate this number as it doesn’t get cheaper over time as you scale (assuming you plan on scaling).
Founder market fit
You should really question if you want to do this idea and if you are the best person for it. Founder market fit matters.
You will only really kill it if:
- You know everything about the industry and are an insider
- You have the network for deals etc
- You have a pool of talent to hire
- You understand the ‘why’ behind the what and when
Sure, plucky kids can do cool stuff, but would you not prefer to back an insider as an investor?
Ask yourself if you are the best person to do this… if you are doing the VC thing anyway. But learn if it is a side hustle.
There are reasons why people in Asia copy startups in America. You don’t get it if you are in America. There is a contiguous land mass and sure there are state laws but everything is basically the same. There are a tonne of service provers yada yada.
Try doing ecommerce when your logistics providers suck and you need to teach them how to do their job. I’m not fricking joking. We had more data about logistics company operations than they did and we had to teach them. Everything is hard in new markets. Make no assumptions.
Now let’s pick on enterprise. Sales cycles suuuuuuuuuuuck. 12 months plus is a nightmare and real. I know. I sold to insurance companies and banks. One mate at the investment bank with the largest tech budget on the street said it would realistically take 13 months to be in production (and getting those licence fees).
I can go on, but the point is this. How hard is it for you to execute on your startup? If you are in emerging markets, don’t make assumptions…
That was 2700 words… but we went through the fundamentals which matter. That is real validation, not a cheaper way to test AdWords.
Once you really believe you are on the right track, it’s time to actually do some startup planning. How do you execute this?
If we are talking tech product, you need to figure out your starting value proposition. I talk in terms of minimum desirable product, not MVP.
Here is the “The real reason to launch faster (not talked about)”
But… you don’t start with the tech. You want to do some testing, so do this:
- Talk to potential customers. Do they like it and will they pay? Actually pretend you have product and ask them to pay. That’s the difference between talk and walk
- Do a survey. Post if on FB, message people etc. Get feedback on the concept, pricing etc. You can chuck in a prize of an Amazon voucher.
- Ask your smartest contacts for feedback. Pitch them the idea. You will learn. No, your idea sucks and yes you should share. You can only learn. No one is going to copy you
- Pitch an investor if you have the network. Again pretend it is real and get feedback (negative too)
Refine your pitch and product.
Write an investment thesis. Explain why this makes sense and what you need to prove for this to work in the short term. Be explicit. Then set out to test it.
Write it down so it is real.
Don’t build product first. ‘Ship’ vaporware.
- Name the company
- Buy domain
- Set up a landing page
- Ensure your hero has a ‘to the point’ statement and CTA
- Populate a pretty site which sells benefits
- Set up GA and GTM to track
- Buy some targeted FB ads- key is you want ideas about CAC
- Post to Quora, Reddit, HackerNews, Medium, Startup FB groups…
- Track metrics
- Goal is sign ups
Does it convert or not?
If so, congrats, you have a lead list. If not, you failed fast.
Here is a real example of a consulting like startup I started this year, Perfect Pitch Deck.
- Saw someone do AdWords for pitch decks. Wtf?
- Saw they had 8 people on their hiring page
- See they raised $500k or so on angellist
- Google who else is doing this. Eh, whatever, I’m not going to raise, who cares about competition but understand pricing.
- I’m an expert on pitch decks (founder market fit) so I don’t care as nothing to learn to start
- Do excel model to understand unit economics (Watch it)
- Only costs me a site and some time to launch, f*** it, launch it
- Copy site. Copy… everything. Ghetto on wordpress, Buy theme for $59 and host. (Step by step guide). Just get it done
- Pay chick on Fiver to make logo for $20
- Set up Stripe
- Pay a dude to build a pricing form on upwork which sucks. Pay a chick on fiver to build on Jotform (works better) but takes time. FML. Down maybe $150
- Steal my own blogs from alexanderjarvis.com on pitch decks and post on ‘blog’ to fake content
- Steal my ‘featured in’ type bollox to add social proof to the site
- Learn how FB ads work
- Brainstorm problem statements to market
- Use Canva to make some ads
- Set up FB myself and do retargeting on my blog (focused on startup founders also). Scream f*** FB ads is such a crap platform…
- Get a customer for €380 the first day I start ads. Holy crap that was fast. Screw it, let’s put in more work
- Make site nicer (ish)
- Set up some basic marketing automation and lead magnets for an email automation course (Step by step guide)
- Get more €22k worth of clients in 2 weeks
- Make site better. French designer says site is terrible, so learn about design. Redesign.
- People start saying site looks awesome.
- Add a new lead magnet to do ‘free pitch deck audits’ and start getting a load of leads which 70% convert (most are too poor). Make template deck which is backed by AI analysis which people think is cool
- Clients start returning for other kinds of help. bla bla bla
- Let’s see!
Most of the work is on the back end and business nerd orientated, it’s not just CDM (customer development methodology). Yeah, that matters, but there’s a lot of work to build a thesis first.
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