The 2 Principles of Startup Success

Launching a startup or new venture takes many things: perseverance, timing, luck, a great team, and a workable business model. Whether it’s launching a new startup from scratch, or a larger corporate launching a new product, success often comes down to two key principles.

I’ve found the following framework to be the fastest and most effective sanity check to establish if a new venture will succeed or fail.

#1 The Principle of Quality: you must provide more perceptible value than the status quo.

Simply put, a new venture needs to provide more value to users than the other available options. If we use Clayton Christensen’s framework of “jobs to be done” as a basis (booking a flight, hailing a cab, keeping track of customers, or buying groceries), then the value of the new needs to exceed the value of the current.

Value can be defined many ways: cost, utility, and convenience are fairly standard measures. The value is what the user perceives and experiences on an individual basis, not what the provider thinks. Value originates with the user, not the new venture.

The increased value needs to more than offset the activation cost of the new venture. This could be the cost associated with downloading a new app, completing a registration form, driving to a different part of town, or entering credit card details. There is always a cost associated with doing something new, and if a user perceives that the cost is greater than the value they’ll derive, they won’t switch. Pro tip: make your activation costs as low as possible!

If you must explain your value, it’s not as great as you think.

If the value of the new is relatively close to the value of the current, you enter what I call “The Grind.” This is the unenviable position where you need to convince customers of the value you provide. As Jeff Jarvis eloquently states in What Would Google Do?, if you must explain your value, it’s not as great as you think.

Here are a few real-world examples:

  • The Facebook phone — a failure because it didn’t offer enough perceptible value versus people’s existing phones. Users already have the Facebook app.
  • Uber — compared to hailing a taxi, the app provides enhanced value by streamlining payments and real-time trip tracking — all for (usually) less money.
  • Amazon Prime — shipping is better when it’s free, plus access to thousands of free movies and TV shows is an easily perceptible value. Other retailers don’t offer free movies and TV shows, and Netflix won’t ship you millions of products for free.
  • Customer relationship management systems — new ones typically involve the “UI value fallacy,” which is when you think a new user interface is enough of a value-add for users. It’s not. You need to provide more value to your users and help them do their job. I’ve seen plenty of ugly software packages that are very successful.

#2 The Principle of Quantity: you must have a potential market large enough to be profitable.

Providing value to customers is an important first step, but a business needs enough customers to sustain itself. Generally, the more customers you can serve, the better!

So how large is large enough? It depends on the product or service and the revenue model. Typically, the more qualifiers there are in answer to the question “who are your users?”, the more problems you’ll have.

It’s ok to start with a subset of your market, but it’s the total potential market that matters.

A good answer sounds like: a product designed for real estate agents.

A poor answer sounds like: a product designed for real estate agents in Minnesota showing luxury homes to Chinese buyers.

It’s ok to start with a subset of your market, but it’s the total potential market that matters. And the total potential market should be large enough to effectively monetize and sustain your business.

Tesla is a great example. Its first car, the Roadster, was an all-electric sports car starting at $109,000. There’s a pretty small market for a vehicle like that. Its next car, the Model S, a luxury sedan starting at $71,500, has a much larger potential market. And its planned Model 3, an economical sedan starting at $35,000, has a very large market indeed.

Tesla’s strategy was to start small, building up the experience and expertise necessary to launch a mass-market electric vehicle.

Here are a few more real-world examples:

  • AirBnb — hundreds of millions of people stay in hotels every year, giving AirBnb a huge potential market of travelers for its service.
  • Waterboy — an app for parents to receive live updates from their children’s sporting games if they can’t attend, in New Zealand. A target market that’s too small.
  • Spotify — hundreds of millions of people listen to music every month, on their phones, in their cars, and online — and are all potential Spotify users.

Where does your new venture stand?

When you plot both principles on a simple 2x2 matrix, you can clearly see the sweet spot you want a new venture to operate in.

The matrix above forms a simple framework to help make decisions. If you have several ideas for various new ventures, plot them on the matrix. Aim for ventures that offer the biggest value for the biggest market, and shut down (or rework ideas) that fall into the other quadrants.

Using the 2 principles in practice

Any new venture should be run through the following steps:

  • Accurately identify the status quo “job to be done” that the new venture is addressing. How do its potential users currently complete the task at hand? Remember, the analog might be non-technical and offline (ex: project management via post-it notes).
  • Roughly determine value. Use intuition, focus groups, or paying customers as the ultimate litmus test. If you’re doing this with a small group, form your opinions individually to avoid groupthink.
  • Figure out the potential market size. Are there enough potential users for it to be a worthwhile endeavor? If X users pay Y dollars, is the result big enough?

Always keep these two principles in mind when launching a new venture. Adhering to them won’t guarantee success, but ignoring them almost certainly guarantees failure.

I’m an entrepreneur and technology executive. I founded and sold my tech company, Agora Games, in New York before becoming a corporate venture capitalist for the leading online marketplace and classifieds site in New Zealand. Now I advise companies around the world in the real estate tech space and write on my blog, Adventures in Real Estate Tech.