A checklist for stress-testing startup ideas

“Under conditions of complexity, not only are checklists a help, they are required for success.”
― Atul Gawande, The Checklist Manifesto: How to Get Things Right

I’ve spent a lot of time recently tearing down startup ideas, for both hypothetical businesses and existing ones. 99 times out of 100, at some point in the conversation you discover the “fatal flaw”. Sometimes the shortcoming is evident immediately; but often it takes a while to search out.

To save time, I developed the checklist below. It’s a series of questions, the goal of which is to “break” a startup idea as fast as possible — there’s no point in discussing downstream possibilities if the upstream fundamentals don’t make sense.

With an idea in mind, answer the questions below, and keep track of where you respond “yes”, “no” and “I don’t know”:

1. Personal

• Would you be happy working on this idea for the next 10 years?
• Does your personal risk/reward profile match that of the business?
• Do you have the team you need, or can you get it?

2. Market

• Is the size — or potential size — of the market absolutely huge? [1]
• Who is the customer, and what do they need?
• What are the current offerings, and how do they fall short?

3. Innovation + timing

• What’s your innovation — something you do 10x better than anyone else?
• What is the history of your space/product?
• Why now? Why hasn’t this been done before? [2]

4. Distribution

• Can can you cheaply MVP/prototype/test your idea? (Or: can you raise enough money to get past the R&D phase?)
• Do you have a devastatingly effective go-to-market strategy? [3]
• What are your marketing/sales channels? How big is each, and what are your anticipated CACs and LTVs?

5. Defensibility

• What are your moats? (See this post.)
• How fast can you scale? What parts of your business can you outsource vs. what must remain a core competency?
• What are your gross and operating margins, and do they align with your business model? [4]

Evaluating your answers

If you can answer all of the questions completely or in the affirmative, great! You have the workings of a good idea.

If you answer any question as a “no,” then stop. You need to work with the idea until the “no” becomes a “yes,” or drop it.

Finally, if there are any questions you can’t answer, do more research. If research isn’t possible or doesn’t yield results, then it is a risk factor. It’s fine to have risk factors—every startup is a calculated gamble, or by definition it would already exist. The important thing is that you 1) clearly identify your risks, 2) acknowledge the assumptions you’re making to justify them, 3) have a way of knowing when your assumption has failed, and 4) have a plan for when they do.

No checklists are going to give you a great startup idea. But I do think they can help you avoid bad ones.

I hope you find this framework useful. Please message me if you can think of anything else useful to add.

[1] You can’t always know market size, and many of the most successful companies in the world—Google, Apple, Uber—succeeded in previously non-existent markets. However, most companies that do this fail, and the battlefield is littered with the skeletons of startups that made products nobody wanted. Before going into an unknown or “small-but-could-be-big” market, acknowledge that it is a dangerous game.

[2] Almost always, great new businesses capitalize on something new in the market—a new technology, a new law, a new set of social norms. Great ideas don’t just sit there lying around forever; smart people snap them up. In fact, according to research by Bill Gross, timing is the most important factor in startup success.

Sometimes, a change in the market will trigger a gold rush—a trend like “on demand” or crowdfunding. If you’re participating in a trend, be aware of it, and your position in it: you may face easier fundraising conditions in the short run, but also more competition in the long run.

[3] Having a great distribution hack (or virality) can be the difference between a viable business and a dead one. AirBnB couldn’t have started without Craigslist. Stripe might not have survived without early adoption by the YC community. PayPal scaled to a critical mass of users by giving away free money. Amazon scoped its massive infrastructure challenge by focusing on books first. Uber got initial liquidity with black cars. All of these companies had highly idiosyncratic, highly effective go-to-market strategies.

[4] e.g. If you have thin margins, make sure you’re doing a volume business and have some deep moats.