How to know that your startup idea is good?
The simple answer is research that involves speaking to potential customers
If you can find a substantial group of end users willing to use your product, and a substantial group of customers willing to pay for your product, your idea is good.
Start with the Internet and see if there’s anything similar out there. Chances are, there probably is. Don’t let this deter you; competition is a sign that there are people out there who may find your idea useful and pay for it. If you find that the market is dominated by large players, you should look for other industries where your idea could be applied, or see if you can make a substantial innovation upon existing practices. Otherwise, move on to a new idea.
If your preliminary look-up is promising, proceed to a down-up research methodology.
1- Segment the market
This will include a good amount of brainstorming and research of possible applications for your idea across industries, markets, market segments and finally — end users. Select 6-12 industries, 1-3 market segments for each industry, and 1-3 potential end users for each segment. How will your idea be applied by each of these potential end users?
2- Narrow the opportunity
Ask the following questions about each market segment (borrowed from MIT’s Bill Aulet):
-Is the target customer well funded?
-Is the target customer readily accessible to your sales force?
-Does the target customer have a compelling reason to buy?
-Can you today, with the help of partners, deliver the whole product/solution?
-Is there entrenched competition that could block you?
-If you win this segment, can you leverage it to enter additional segments?
-Is the market consistent with the values, passions, and goals of the founding team?
3- Speak to potential end users
The next step will be to contact some of these potential end users and actually speak to them about your idea. Ask what they like about it, and why they think it wouldn’t work. Listen to their pain points. Learn as much as possible regarding the 7 questions provided above. You will learn more from these conversations than from all the Internet research in the world. This process could take a few weeks, but it will be paramount for validating your idea. Pitch your idea often, but don’t try to “sell it”. Adjust your pitch as you get additional feedback from potential customers.
4- Select your “beachhead” market and estimate TAM
After speaking to potential end users, you will have a good feel of which market may be more attractive for your idea. Since startups usually have very limited resources, the key word is focus. You need to select only one market to test your assumption. The beachhead market should be comprized of a group of customers who buy similar products, expect similar value, and have “word of mouth”. What’s more, the market should be rather small to allow you to specialize quickly.
Next, estimate the size of your beachhead Total Addressable Market (TAM). TAM is calculated by multiplying the total number of end users in your market by the expected annual revenue per user. According to MIT’s Bill Aulet, startups should avoid beachhead markets of under $5 million, and above $1 billion, with the sweet being spot around $100 million. I’m sure many seed stage investors would disagree, as they would like companies to go after larger markets and more substantial returns, but I think that there’s a lot of merit in conquering small segments in order to expand.
5- Move to validation
If you have performed the above analysis, you are on the right track with validating your idea. The next steps will include creating a customer persona, and getting feedback on the actual solution you will try to provide.
Further validation will include MVP/prototype testing and variable testing of your value proposition with a larger group of potential end users.
A good methodology that will put your idea to a scientific test will help you stay focused and objective. Good luck with creating the next unicorn!
