I analyzed pitch decks and business plans of 100+ startup teams in the past years. And, I worked with 10+ teams closely to help them become successful. On a daily basis, I was approached by some similar questions such as “What problem is worth solving?” or “How can I validate a startup idea?”. Therefore, I decide to answer these questions in an article.
You, as an entrepreneur, should evaluate different ideas before spending much time and effort to execute it. And, as an investor, you should deeply analyze startups to distinguish those with high or low-risk profiles.
A technology startup company has 3 main stages of establishment: (a) idea validation, (b) build a product, and c) company growth. Each stage has its own characteristics. For example, when a startup company is in the “idea validation” stage, there would have many unknowns. Therefore, it is very hard to measure the potential of success in this stage. That is why this article may help you.
First, you have to answer 3 essential questions listed below. If you have well-thought answers to these questions, you should proceed with the analysis framework described later in this article.
- Is The Startup Idea Aligned With A Mega-Trend?
“Mega-trend” is a term to describe a set of changes that are enormous in their impact and unstoppable in their occurrence. A mega-trend is sustained global changes that undoubtedly and significantly impact the economy, society, and cultures.
The infamous international conferences annually publish reports noting the major changes happen in the world. These reports help to identify current world-wide mega-trends. For example, the World Economic Forum and Munich Security Conference notes the current major changes in economy and security respectively. Moreover, the leading management consultancy firms (e.g., McKinsey, BCG, or PwC) also publish reports on this matter. For example, according to PwC, we currently have 5 major global mega-trends as follows:
- Shifting in global economic power,
- Demographics shift,
- Accelerating urbanization,
- The rise in technology,
- Climate change and resource scarcity.
Mega-trends are powerful external growth drivers that can significantly and effortlessly promote one’s work. Therefore, an idea that is aligned with a mega-rend may have a high chance of success. For example, Beyond Meat is an example of recent companies that are aligned with the “climate change and resource scarcity” mega-trend.
- What Does Hype Cycle Say About The Idea?
“Hype Cycle” is a branded graphic representation of the maturity, adoption, and business application of a technology introduced by Gartner. According to Gartner, technology has 5 stages of maturity as follows:
- Innovation trigger
- Peak of inflated expectations
- Trough of disillusionment
- Slope of enlightenment
- Plateau of productivity
You can use the Hype Cycle analysis framework to determine the risk profile of a technology. Then, you must ensure it is suitable for you as a founder or an investor. For example, a technology that is moving toward:
- “Peak of Inflated Expectations” is suitable for a risk-taking investor
- “Trough of Disillusionment” will have a hard time to convince a third-party investor
- “Plateau of Productivity” is suitable for a conservative investor
- Can You Use Local Opportunities To Drive Growth?
To become a successful company, you have to think globally and act locally. Nevertheless, most entrepreneurs think globally but they forget to act locally. Every city has its own problems and opportunities. Therefore, as an entrepreneur, you have to take advantage of the opportunities in your community such as a leading industry or a dominant culture.
For example, Let’s assume the financial industry is huge in your town. So, you have a better chance of success if you aim for a problem in that industry. Why? Since you most probably can raise capital or find customers in the local ecosystem easily. You should always take advantage of the opportunities existing in your local communities.
II. Analysis Framework
If you want to reduce the risk of failure in your startup journey, you have to systemically validate the core idea before implementation. This also helps you create an appealing case for investment. In this section, I describe a framework to analyze a startup idea based on 3 pillars:
- Need. Do users really need the product?
- Market. Is the market attractive enough?
- Execution. Can you overcome execution challenges?
- Do Users Really Need The Product?
According to human psychology, our actions are always motivated in order to resolve a need. Plus, the main objective to build a product is to resolve user needs. But what is a need? Need is a “pain” that will be removed by using the product or a “gain” that will be achieved by using the product. You can evaluate the need significance based on 3 sub-factors as follows.
Quality is the importance of the need for users either as pain or gain. You can rank the quality of need using a recommending test or disappointment test. You should not get excited by good results in this step, but you definitely must get concerned otherwise. Note that incremental improvement does not attract users since they always look for a 10X factor change.
Quantity is the number of times that potential users may use the product. You must estimate the quantity by considering the number of users and frequency of use.
Variety is the number of needs such as convenience, affordability, or accessibility that the product aims to resolve. A product is built based on a vision. And, a great vision must resonate with different needs. In this case, you can engage users who have different needs with the product. This creates an opportunity to pivot if you find an assumption is wrong since you did not rely on a need.
- Is The Market Attractive Enough?
You can evaluate the market attractiveness based on 3 sub-factors as follows.
Market size is a quantified value of a target market. You can calculate it using the number of individuals, the number of purchase transactions, or the total amount of sales volume. A cool product that doesn’t have a reasonable market size is not worth a dime. As a rule of thumb, a high-potential idea must have at least $1B total available market to increase the chance of building a viable business.
Market trend (or, market readiness) is a perceived tendency of users to purchase a product. If the potential users are not ready to purchase a new product, even a great product has a hard time convincing its users. That has no connection with the quality of product or execution.
According to CBInsights, running out of cash is one of the top failure reasons among startup companies. But how can you prevent suffering from this challenge? One of the methods is to have a low monetization time. If the monetization time is long, a small company will find challenges to finance the project. you always have to keep an eye on the burn rate and runway.
- Can The Team Overcome Execution Challenges?
You can evaluate the execution complexity based on 3 sub-factors as follows.
A successful product always has an outstanding founding team. They must have aligned visions on the product and philosophy for their lives. The founding team must also in power to attract talents and build a happy and excited team with a great sense of ownership. So, if there is no great team with a great culture you should think twice.
The underlying technology must be well developed in academia before a company starts using it in industry. So, if the technology is still in its infancy stage, you must not build a company relying on that technology.
In the end, the company must have a clear and solid product strategy. A product strategy includes competition analysis, a go-to-market strategy, and a growth strategy. You do not need to have an extensive plan, but you have to create a well-thought one.
The Last Words
You must, first, convince yourself that answers to these questions are all positive. Then, you must systematically answer them to convince a third-party. If you want to find a co-founder or an investor, you must have the answers ready. In this article, I only describe the framework without explaining how you should measure each sub-factor. You can use various methods to numerically measure these sub-factors as long as they fit well with your business.
I noticed that the significance of user experience design is neglected in many technology startups. I wrote an article describing a set of practical principles to enhance the user experience from the perspective of a technologist. If you decide to build a product, I recommend reading this article. Kudos 😊