2 Essential Questions You Need to Ask Yourself When Assessing Startup Ideas
Posted on September 16, 2014
The downside of being an early entrepreneur is that everyone looking to make the leap pitches me regularly. On the other hand, one of the benefits is that I get pitched regularly. Yes, it’s a blessing and a curse. While running GlobalPetals, it became clear that our business model wasn’t “perfect.” Then again, arguably, none are. I got thinking though, if there was a perfect business model, what would it be? How can I flush out high-potential new businesses from duds? It didn’t take long for me to come up with a 2-step litmus test to assess startup ideas. It just so happens VCs would likely agree with it as well. It’ll save you time, money, and countless headaches as you begin your journey on any new concept.
Step 1: Is it cool or does it suck?
This could be the single most important question you ask yourself. Think back, when you had that light bulb, did you think:
- “Wouldn’t it be cool if…?”
- “I hate it when…”
- “This sucks because…”
Any of these questions can lead to successful businesses and there are plenty of companies that can be traced back to each. That being said, the latter two are a better gauge of potential traction and success for a business idea.
It’s much easier to solve a clear and previously experienced problem than it is to convince someone your duhicky is the coolest thing on Earth. The “cool” thing can be made into a business, but it’s much more likely to require a long runway and more pivots until you find out what pain point it actually solves. You might as well skip the headache and focus on things that “suck” instead of things that COULD be “cool.”
Step 2: Ask my friend, Mr. PC ²
GlobalPetals did not follow this model originally and does not 100% even today. Though, I thought about everything the business would need in order to be successful, and that’s how Mr. PC² was born. I took steps to make GP as close to these goals as possible, and that’s what turned it around. Again, no business is perfect, but we can increase our chances of success if we can strive to be as close to it as possible.
You want high margins: 50-300% if possible. Why? Because in the beginning, cash flow is king. So, any and every product you sell needs to be able to support and grow the business. Why do you think Elon Musk chose to start off with luxury Tesla models instead of the middle class sedan? Because they could actually make some money on those, gain traction, and quality reputation, which could then justify applying economies of scale to afford producing a cheaper vehicle.
Sell to the rich. This doesn’t just mean individual consumers. Rich also includes corporations for those of you making B2B products. You sell to rich people/organizations because they can afford to pay you higher margins. It’s much more efficient to land a few whales than it is to catch a handful of minnows.
Avoid selling perishable products. There can be a handful of regulation around this, but more importantly, you will always disappoint a customer. You can put controls in place, but it’s a fact of life that perishable products die. That life span will disappoint someone at some point. When getting off the ground, every customer is important, and if you don’t have control over their satisfaction, it’s hard to build the good will and referrals necessary to grow quickly and efficiently.
Avoid selling consumable products. This is similar to perishables. Except, the main concern is regulation around consumables. It costs time and money to get products approved. Additionally, if anyone gets sick or has adverse side affects along the way, a lawsuit can bring your startup to its knees before it has a chance to breath.
Control the production of your product if possible. It’s much easier to walk down to your own production line or engineering office and tell them about an issue than it is to phone an international manufacturer or tech team. This is especially true if there’s a time sensitive issue. It may be cheaper in the short run to work with these external suppliers/manufacturers, but you need to do a thorough cost-benefit analysis to see whether it’s really worth it. The key is to consistently give the best experience to new customers, so they turn into building blocks that you can leverage for referrals, testimonials, and case studies to land more customers. It’s hard to control this experience when your company is not executing it from top to bottom.
Why VC’s would agree
When you think of a Venture Capital firm, most probably think technology, so let’s take Intuit’s QuickBooks software as an example.
- Problem: (High) Doing accounting by hand sucks; large time investment and human error leads to frustration and mistakes.
- Margins: (High) Inherent in software products; gross margins are in the 1000s%.
- Rich people: (Medium) Sell to small-medium size businesses
- Not perishable & not consumable
- Control: (High) Engineers who work for the company produce it, bugs can be fixed quickly, and employees have vested interest in success of the software.
VC’s are looking to put their money to the most efficient use, so a product like QuickBooks is a prime example. It takes relatively few physical resources to produce (little cash in), and it’s something of immense value because it solves a large problem. Thus, it can demand a high margin (in turn, ROI for investor). Last, there’s very little regulatory or external risks that could bring damage to their reputation or financial earnings.
The most important and efficient decisions you make when starting a business are picking your opportunities correctly. Sure, any business can be made into a success. Though, if you had to choose a business that has the potential to grow faster, make more money, and cause you less headaches, wouldn’t you prefer to choose that? By examining the problem and following Mr. PC ², you’ll be more likely to enjoy your entrepreneurial journey.
What other things do you look for when assessing new business ideas? What are your big red flags?