Systematic Ideation for Startups & Venture Theses
20 Mental Models for Idea Generation — Part 2
Part 1 of this post can be found here. The full post can be downloaded as a pdf here.
- 11 — Digitizing Behaviors and Activities
- 12 — Tech-Enabled Legacy Businesses
- 13 — Enabling Legacy Players
- 14 — Tech Commercialization
- 15 — Spin-Outs & Spin-Offs
- 16 — Expand a Market
- 17 — Shrink a Market
- 18 — Outsourcing and Picks & Shovels Businesses
- 19 — Enabling Insourcing
- 20 — Channel-First
11 — Digitizing Behaviors and Activities
Digitize processes, activities, or behaviors that individuals or communities partake in.
Digitizing can be for offline activities or constructs (ex. social clubs, cash payments), or for online workflows. In the latter case, a startup would be automating or streamlining the workflows.
Examples: Digitizing Money (ex. PayPal, Cryptocurrencies), Digital Farmers Markets (ex. Farmigo), Digitizing Trade Associations (ex. TradeWing), Digitizing Trade Shows (many B2B marketplaces)
Input insights to look out for: Offline activities that individuals and groups engage in
Additional reading: Alibaba wants to move offline trade shows like CES into the online world by Zen Soo, On the Fourth Day of Quarantine by Web Smith.
12 — Tech-Enabled Legacy Businesses
Build a business that is similar in function to a commonly occurring business in an industry. Leverage technology across the company’s value chain to improve efficiency, reduce costs, and/or provide increased value to customers.
A common approach by several players leveraging this model has been to scale through acquisitions, buying legacy businesses with existing customers and plugging them in with the new company’s improved efficiencies.
Examples: Tech-Enabled Brokerages (ex. Compass in Real Estate and Newfront in Insurance), Tech-Enabled Freight Forwarder (ex. Flexport), Tech-Enabled Private-Equity Firms (ex. Thrasio), Tech-Enabled Credit Investors (ex. Clearbanc, CircleUp), Tech-Enabled Health Clinics & Practices (ex. Forward Health).
Input insights to look out for: Legacy market players that can see serious improvements in core operating areas through tech.
Additional reading: Is Compass really a tech company? and Is Compass no longer valued as a technology company? by Mike DelPrete. Tech Valuations versus tech-enabled valuations: 2020 IPO edition by Alex Wilhelm (paywalled).
13 — Enabling Legacy Players
Build a business that enables a group of existing businesses to operate more efficiently in an area they currently struggle or have failed to evolve along with new technologies.
Examples: Enabling Field Service Businesses (ex. ServiceTitan), Enabling truck drivers (ex. SmartHop), Enabling Restaurants (ex. Lunchbox), Enabling Universities (ex. Trilogy Education Services)
Input insights to look out for: Legacy market players that are struggling to perform in a key area or can see large improvements by leveraging new tech
Additional reading: Deloitte’s Enterprise Value Map and Michael Porter’s Value Chain are good starting points to think through where & how to enable existing legacy players.
14 — Tech Commercialization
Develop new technological innovations for commercial use cases. Oftentimes these are commercialized from universities or research labs.
Examples: Siri (out of SRI International), HaloIPT Wireless Charging (out of University of Auckland).
Input insights to look out for: Patent filings and new inventions
Additional resources: FlintBox by Wellspring and the USPTO’s IP marketplace are two of the better publicly available aggregators of new technologies available for licensing. Many universities have their own lists maintained by their Technology Transfer Offices which list out innovations available for licensing.
15 — Spin-Outs & Spin-Offs
Spin-out internal toolings that have been built within a company. These could be as a result of R&D projects that the firm decides to not pursue itself, or for toolings built internally to solve an organization’s own issues.
Spin-outs can be official where the parent company owns equity in the new venture, or can be the result of an independent team leaving to externally build what they’ve seen at a corporation.
Examples: Gremlin & Roku were both unofficial spin-outs from Netflix. Trello was spun out of Fog Creek before being acquired by Atlassian for $425M. Google’s internal meme generator is an internal cultural tool that occasionally gets cited as a sample product that could be spun out for broader appeal. Otto (started by ex-Waymo execs) is another example of an unofficial spin-out.
Input insights to look out for: R&D projects within corporations or innovations built within companies to solve their own problems.
Additional reading: Why investors love spin-off startups by Gareth Wilson and Inside Netflix’s Project Griffin: The Forgotten History of Roku Under Reed Hastings by Austin Carr
16 — Expand a Market
Leverage technology to profitably service customer segments that previously were unable to access an offering due to the price being too expensive or because the costs associated with servicing them were too high to make economic sense.
Examples: Leveraging technology to underwrite and distribute micro-loans in emerging economies (ex. Tala) or lending to low credit borrowers shunned by banks (ex. Avant).
Input insights to look out for: Products or services that are generally only used by or offered to customers above certain limits (capital, employee size, etc)
Additional reading: Banking-As-A-Service Takes on the Underbanked SMB by PYMNTS, The $100 Trillion Opportunity: The Race to Provide banking to the World’s Poor by Jeff Kauflin and Susan Adams, Tala: Providing loans for those without a financial identity by Gabriel Araujo, Forget Shrinking Markets — How About Expanding Them? by Rob Go
17 — Shrink a Market
Launch a product that reduces the size of a market by being disruptively cheaper than incumbent offerings. Josh Koppelman and First Round Capital summed this up as companies that “can take $5 of revenue from a competitor for every $1 you earn…”.
Examples: MS Encarta shrank the market for Encyclopedias and Wikipedia shrank the market for digital encyclopedias like MS Encarta (both highlighted in Josh Koppelman’s post)
Input insights to look out for: Techniques for providing the same service or product offering that consumers or businesses are willing to pay for, at a disruptively lower cost.
Additional reading: Shrink a Market! By Josh Koppelman
18 — Outsourcing and Picks & Shovels Businesses
Take certain activities or operations off a company’s balance sheet where an external operator can do it more efficiently through improved technology, know-how, processes, or by pooling demand from a number of companies. This is sometimes thought of as a form of unbundling.
A version of this model is to build or back ‘Picks & Shovels’ businesses — companies that assist emerging companies or industries with frequently needed infrastructure or tools.
Examples: Outsourced Software Engineering (ex. Gigster & Andela), Outsourced Finance & Accounting (ex. Paro), Third-Party Insurance Claims Management (ex. Snapsheet), APIs for web services (ex. SendGrid, Twilio, Stripe, & Mailgun).
Input insights to look out for: Activities or business functions performed by a large number of companies. Generally, the best prospects will be areas with the most similarity between workflows across users and those where an external player can conduct the activity more efficiently and/or reliably.
Additional reading: Idea — Outsourcing (Economist), A Massive Opportunity Exists To Build “Picks And Shovels” for Machine Learning by Rob Toews, and APIs are the next big SaaS wave by Daniel Levine.
19 — Enabling Insourcing
Enable corporations to bring cost-centers in-house that they previously had contracted out. Take a piece of the savings the corporation will attain by helping transition or manage after the transition.
Examples: Enable corporations to own their payments infrastructure (ex. Finix), Enabling corporations to self-insure certain risks (ex. Collective Health)
Input insights to look out for: Activities being outsourced or contracted out by a large number of users where the user could save significant money or improve operations by bringing the service in-house.
Additional reading: A Startup’s Plan to End Health Insurance Tyranny With Slick Tools by Issie Lapowsky, Profiting from health: The self-Insurance story by Adam Schaefer, and Fintech Startup Finix Raises $18 Million, Aims to Become the Twilio of Payments by Jeff Kauflin.
20 — Channel-First
Work backwards from a distribution-channel that is new and growing or that you have proprietary access to. Identify businesses that would be of interest to those you can reach through the channel.
This model is generally directional and may need to be leveraged in tandem with one of the others listed above.
Examples: Selling to the customer-base of a community that you are an alum of (ex. an incubator). Building or selling on top of new networks or platforms where there is less competition (ex. Shopify App Ecosystem, TikTok, Slack, etc).
Input insights to look out for: A new and emerging channel you can leverage for growth (ex. a new ad network or a platform with lower competition) or a channel that you may have proprietary access to.
Additional reading: My Rule of Three for Investing by Reid Hoffman, The Lifecycle of Internet Distribution Channels by Eric Stromberg and Viral Loop by Adam Penenberg
A huge thank you to Richard Kerby, Rick Zullo, Simran Suri, Chelsea Zhang, Ahmed AlRawi, Joseph Milla, Arjun Kumar, Amrit Singh, and Chase Bonhag for contributing insights and reviewing drafts of this post.
