2) The Solution — Does It Solve the Problem and Can We Make Money Doing So?
Once the problem is identified, it’s time to look what solution the startup has come up with.
Making sense of the solution the startup offers requires asking yourself the right questions, and figuring out the startup and its idea in more depth. The following will guide you along understanding the solution the startup has come up with.
How have they solved the problem?
First, it is important to look into how the startup is solving the problem. A good start would be to map down their business idea.
- What is the solution that they’re offering?
- What is the idea they’re presenting?
- What is the product or service they’re offering?
- Are they even solving the problem?
People don’t buy products, they buy solutions.
Once the business idea or the solution is defined, it’s important to ask, who are the people who need it. The key here is to look at the startup’s value proposition. Value proposition focuses on how the company is creating value to its customers.
Why is the solution unique?
Once you have figured out how the startup solves the problem, it is worth asking, what makes their solution unique. What are the key features that differentiate their product or service from others? Asking these questions help to understand the competitive advantage that makes them different from the competitors.
Startups, who have created a unique solution or have a competitive advantage over their competitors, have better odds to do well compared to startups, who haven’t.
One aspect that helps to determine the uniqueness of the solution, is owning patents, proprietary solutions or other types of intellectual property. When a startup has one of those, it counts as a competitive advantage and the company is then protected from others copying that solution. This is definitely a good sign.
On the other side, not owning any patents or proprietary solutions, doesn’t mean the startup is destined to fail. Often startups lack the funds, time or other means to file for patents, and find it more important to go to the market and start generating revenue.
Software solutions can be more difficult to patent since they need to meet specific patentability criteria. In those cases, the uniqueness of the solution can lie in better customer service, smarter marketing or better business effectiveness than the competitors’.
Does the solution create a viable business model?
No matter how unique the solution is, it has to be possible to make money using it. This is where the business plan comes into play. The business model defines how the startup will generate revenue from its idea.
The idea that the startup is working with often determines their business model. It should be the heart of every startup because, without a clear plan to generate revenue, the company will struggle to make money and survive in the long run.
There is no universal business model that works for everyone. Different types of businesses require different types of business models. Determining, if the business model the startup has chosen, is viable, needs to be looked at in a case-by-case manner.
The Solution Checklist
To sum this all up, we have prepared a checklist. The more “yes” answers you get, the better. But keep in mind, that a startup does not have to check out on every question. If they would, then they probably wouldn’t be asking you for an investment.
The Funderbeam Guide for New Investors
In case you missed the previous chapters in our series and want to know more, check them out here:
- Investing in Startups: 10 Checks Before Your First Deal
- 1) The Problem — Analysing Your First Investment
- More coming soon!
Keep yourself updated with more chapters in the series: wire.funderbeam.com/investing-in-startups
About Funderbeam
Funderbeam consists of three parts:
- Free data intelligence on investors and startups
- Tools for startups to raise funds and for investors to co-invest
- A marketplace for investors to buy and sell their investments
Our vision is to provide everyone in the world with equal opportunities, whether you are building a company, or looking to fund the next big thing. What if the next Silicon Valley is not a place, but a platform?
> LEARN MORE ON FUNDERBEAM.COM, OR WATCH THE VIDEO BELOW:
