How To Choose The Right Business Ideas

Evergreen is a Bi-weekly collection of links to the best learning resources in business, collected by a group of managers, founders, and investors. We contribute resources about one topic, which are synthesized and shared in this Bi-weekly Edition. The aim is to learn more efficiently through increased context and focus.

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A good business (and a good life) is made of good decisions. Where to invest, what to prioritize, and which ideas to work on. Opportunity cost is everywhere, and we only have a few years to leave our mark.

So the most fundamental question is how do we decide which businesses to work on, which products to launch, and what companies to build?

That is the goal of validation — to put some rigorous thought around where to spend your time and effort to achieve the greatest results.

Where Validation Fits In

Validation of a business idea can be a fuzzy concept. It lives somewhere between “I have an idea” and “I’m going to invest in testing this idea.”

Ideation → Validation → Customer DevelopmentProduct-Market Fit

To me, it is the step that answers an important set of questions: Does this idea suck? Will this Business succeed? Should it? Where does this lead?

Too often, businesses are begun without enough consideration. Validation is meant to create pause for thought and reflection, to examine the opportunity before you and think hard about investing years of your life into solving a specific problem.

This isn’t always about whether or not the business will be successful, but whether or not YOU are the person to build it, and what it will mean for your life, your family, and your future.

Pitfalls of Business Ideas

The most helpful kind of tool for this type of thinking is Inversion — making a good decision by NOT making a bad decision. It is often easier to avoid stupidity than achieve brilliance.

This section is dedicated to dynamics that can kill your business in its crib.

Path Dependence, Infrastructure, and Entrepreneurship

This post does a great job of explaining why some industries and products are so resistant to change. If you’ve ever wondered why some technologies get disrupted, and some seem to never change — Path Dependence and Infrastructure.

Not that anything is impossible, but operating in each area requires a different strategy.

You find markets where disruption will tend to run rampant where infrastructure costs are high and interdependence is low (i.e., Hard drives). You find markets that require full stack innovators to attack an entire ecosystem, where interdependence is high but infrastructure costs are relatively low (i.e., automobiles). You find markets where both infrastructure and interdependence is high, often resulting in collective inaction (i.e., Utilities). And finally, you find very adaptable markets where there’s low infrastructure and interdependence (i.e., professional services).
Knowing where you sit tells you whether you need to integrate up and down the stack, delivering everything from product to post-sale services. It tells you whether you can expect collusion from incumbents. And it tells you whether venture financing or public investment provide more realistic paths towards rollout. It’s not as simple as just having a superior technology. If you’re in a market where you’re fighting the entrenched interests of the entire ecosystem, having a 10x cost advantage relative to your direct competitors might not even be enough.

Starting a business in certain industries is a death wish, because of hidden, seemingly illogical anchors that are only obvious to those with a familiarity with the industry. By studying and understanding these concepts and the space you would operate in, you can avoid this trap.

Thanks to the man/myth/legend Nick Seguin for suggesting this post.

Low Situational Awareness

This is a very benign-sounding term, but in this post from Simon Wardley, the danger of Low Situational Awareness is put very sharply. (Especially if you love chess metaphors.)

His point is that much of business is conducted through reasoning by analogy, or testing of hypotheses (“X worked for Y, so we’ll try X”)

Most businesses exist in low-level situational awareness […]. They have no context, they are rife with meme copying, magic sequences and are dominated by action. We already know that this has an impact not only from individual examples but by examination of a range of companies. It turns out that high levels of situational awareness appears to be correlated with positive market cap changes over a seven year period.

From my read of this post, ‘context’ is a deep understanding of the industry you’re in, and the mental fortitude to reason (and build) from first principles. The power of High Situational Awareness comes from thorough research and understanding, experience working in the space, and the mindset to avoid lazy, analogous thinking.

This is a great post to scare you into pursuing businesses where you have High Situational Awareness, because of the absolute futility of operating against someone who sees the game in dimensions you cannot.

Thanks to veteran Evergreen contributor Itamar Goldminz for the addition.

The ‘Do You Solve a Real Problem’ Test (Value Creation)

For a business to be successful, it must do two things: Create Value, and Capture Value. Value Creation is the most basic fundamental of business — what work a business does to create a product that has utility for people.

Here is a whole Edition of Evergreen about Value Creation, with great resources to go deep on the concept.

Understanding how businesses create value is a good model to apply to your business idea — in the simplest terms, ‘How will you create unique value for customers?’

The ‘Can You Actually Make Money’ Test (Value Capture)

The sister concept to Value Creation is more subtle, and often overlooked. Which is probably a huge reason that the failure rate of new businesses is so high — people think about whether they can create and sell a product, not about whether they can make a profit creating and selling the product.

We also have a whole Edition of Evergreen dedicated to thinking about Value Capture in different ways, which would be a valuable set of tests for evaluating a new business idea. It will help you avoid traps like commoditized industries, businesses that require reinvestment, and market-price-setting sectors.

Here is some of what is covered in the Value Capture Edition:

  • The Relationship Between Value Creation & Value Capture
  • How Required Reinvestment Destroys Value Capture
  • Why Not All Revenue is Created Equal
  • How Pricing is the True Test of Value Capture

The Value Capture test is what can save you from starting a commoditized, easily duplicated business that will yield a low margin, and have you working harder and harder just to stay in business with an ever-decreasing profit staying in your pocket.

Are You The Right Person For This Business?

This is the question that brings you into consideration. Many business ideas can be good for certain people, yet terrible for others to pursue.

There are two concepts that come together here:

  1. Knowing yourself well enough to know your strengths, weaknesses, interests, and triggers for impatience.
  2. Knowing your potential market well enough to understand all of what building a business in this space will entail.

This is a concept called Founder/Market Fit in the Startup world. Chris Dixon has a short post that explores what it means and shows the impact that has on a startups success.

In my opinion, the best predictor of whether a startup will achieve product/market fit is whether there is what David Lee calls “founder/market fit”. Founder/market fit means the founders have a deep understanding of the market they are entering, and are people who “personify their product, business and ultimately their company.

This is not only about the success of the company, but your happiness is at stake as well. If you have no patience for kids, maybe your idea to revolutionize daycare would make you miserable, and inevitably lead to failure.

An important piece of Dixon’s post is that this is NOT a static relationship. Markets change and people can learn — no one is born with Founder/Market Fit. You can earn your way there by working in market and learning about it, but expect to invest heavily until you have some obvious expertise.

What Good Ideas Look Like

So what does an actual good idea look and feel like? How do I know if I have one? When should I feel confident about starting a business based off of my idea?

Bad news for you… you won’t know until you’ve already won.

Why?

Good Ideas Look Like Bad Ideas

The tough thing about finding a good business idea is that there is a tough paradox where often the best ideas look like bad ideas. If 100/100 people think your idea is good… it is probably actually bad.

This 20-minute talk by Chris Dixon at YCombinator’s Startup School covers this well, and explains the nuance of a good idea through some interesting Silicon Valley history.

If you’d like a short, text version, there are some condensed notes here.

As a part of this exploration of your business idea, keep in mind that there is a near-100% chance that someone has tried something similar before. This is a tremendous opportunity to learn more about the space, the challenges, and the ‘maze’ you’re about to enter (more on that in a second).

Thanks to Edson Rigonatti for contributing this video and notes!

Go Talk To Some Veterans

To anonymously quote a VC who gave this great advice to a friend of mine:

Most people don’t go searching for who’s tried your idea in the past. You’re more interested in finding who failed than who succeeded because there are a lot more of them, but their stories aren’t told.
Unless you do the effort to talk to those who’ve tried to go down the road you’re about to take, you haven’t done your homework. And if you can’t do this exercise, you probably don’t care enough about solving the problem to see this through to the end.

I believe in both of those statements — there are people out there who know more about the maze you are evaluating than you do, and if you don’t take the time to learn from them, you are choosing a particularly dangerous kind of ignorance.

Huge caveat here — just because they failed doesn’t mean you will. They’ll have scars and biases from their attempts, and will unconsciously try to scare you off from the space. Just remember in those conversations to adjust for their (probably very strong) personal beliefs.

Thanks to Jon Stenstrom for sharing this advice with me.

The Idea Maze

So what is up with the Maze metaphor?

Chris Dixon (yes, again) has another great short post about ‘The Idea Maze’. This is a great way to visualize the challenge of coming up with a business idea, because a good business idea is not ONE idea.

Good startup ideas are well developed, multi-year plans that contemplate many possible paths according to how the world changes.

Good business ideas are actually many ideas, with many different contingencies and alternate routes planned if ‘Plan A’ does not work out as intended (because it won’t).

The Maze reminds you that good business ideas unfold over years, and it is impossible to plan it all out perfectly from the start. It shows you that you have to get the best map and guides you can find, but that you will still have to make hard decisions with little information, hit dead ends, retrace steps, and bump into some walls on your way through.

Oh, and don’t run out of money while you’re inside the maze.

Thanks to Andrew Brown of Oyster & Google for suggesting this post.

The Book To Read

Last and possibly most important — The Innovator’s Dilemma, by Harvard Business School Professor Clayton Christensen.

This book is the classic read in crafting and evaluating industries, and how to go about entering and disrupting them, starting successful businesses with potential to grow.

Importantly, it also tells you when to ignore all of the advice previously covered in this Edition:

Much of what the best executives in successful companies have learned about managing innovation is not relevant to disruptive technologies. Most marketers, for example, have been schooled extensively, at universities and on the job, in the important art of listening to their customers, but few have any theoretical or practical training in how to discover markets that do not yet exist.

This book was a known favorite of Steve Jobs, and it is clear reading it what the power of these ideas were for him, and we can historically see them applied within Apple.

Thanks to Jason Evanish of Lighthouse for suggesting this piece of canon.

To Sum Up

To boil it down to one sentence: “Don’t underthink your business idea.”

First, try not to pick a shitty idea that will lead your business into an early grave.

Second, try to pick an idea that is uniquely well-suited to you, and likely to make you a happy person even if it doesn’t succeed massively.

Third, you will never 100% know that you have a great idea. It will always involve some uncertainty.

Fourth, even great ideas require continuous refinement and reinvention. Be ready to keep working on it for years to come.


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Thank you

Massive appreciation for those who suggested pieces of content (or wrote something new) for this Edition of Evergreen: Pui Kit Choi, Jason Evanish, Andrew Brown, Jon Stenstrom, Itamar Goldminz, Edson Rigonatti, Anne-Marie Lemoine, Julie Lyle, Matt Veryser, Luke Swanek, Vikas Lalwani, and Nick Seguin.

Many thanks for being a part of this project! Not every suggestion is able to make it to the final edit, but every single suggestion is read and appreciated.

Never Enough

As my Father always says: “There’s always room for the best.” There’s always a better resource out there. These collections can always get better, and I hope that they do. If you can think of anything that was missed, I welcome you to share it.

To share your thoughts, improvements or additions: Email or Twitter.

If you liked this, check out other Editions of Evergreen:
Building and Managing a Team:
How to Find and Recruit the Team you Need
How Not to Hire like a Clownshow
Compensation Rules Everything Around Me
Why Employee Onboarding is holding you back
How to Boost Employee Retention
How Performance Reviews are being Reinvented
Secrets to Perfecting Organizational Communication
How to Manage Scale, and Operate in Scaling Organizations
How to Fire an Employee
What you actually need to know about Company Culture
Strategy and Competitive Advantage:
How to Master the Craft of Strategy
Competitive Advantage: How to Build a Winning Business
The Power of Network Effects
How Cost Leadership Builds Powerful Businesses
Why the Best Brands Stand Out
Scale as Competitive Advantage
Building the Business:
How to get good business Ideas: Mental Alchemy of Ideation
Product/Market Fit: What it really means & How to Measure it
How to Failure-proof your business with Customer Development
How Strategy and Psychology Work Together to Perfect Pricing
The Most Important Equations in Business - CAC (Part 1)
The Simple Math Behind Every Profitable Business - CLV (Part 2)
How Psychology behind Word-of-Mouth Works
The Secret Core of Every Successful Business--Distribution
The Most Important Lessons in Sales
Why Value Creation is the Foundation of Business
Why Value Capture is the most important idea you haven't read about
The Misunderstood and Underestimated Genius of Advertising
How to be a Great Employee:
How to Start a New Job: Handling Career Transitions like a Boss
How to Master the Discipline of Product Management
I've also written about How & Why we started Evergreen:
How a prototype's failure created the next iteration
Mission & Method of Evergreen
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