Choosing a Stanford quality startup idea–part 3

Congratulations, if your idea has made it through the first basic set of tests then it must be excellent. Now on to the next set of tests, remember we are trying to eliminate bad ideas fast and through a logical and non-emotional process.

Just to be controversial…who cares about the idea?

Having just gone through a process to choose an idea, many people would say that this is not the key issue to success – it’s all about the market.

Just to be clear then – I agree, you absolutely should choose a MASSIVE market – if you have a great idea and a restricted market you are much more likely to fail in my experience, you have to do everything perfectly and that’s a practical impossibility.

In reality the key to success is a combination of the best idea you can develop married to a team’s ability to execute, to build, market, and sell a product or service that’s better, faster, or cheaper, and to do so to near-superhuman perfection.

Let’s now run through other questions to ask about your startup idea:

  • Developing the idea, what is a solid business concept?

Beyond the basic criteria we set at the beginning, we can add the following for ensuring the idea is worth developing. -It represents a new approach to existing business processes, ideally by applying technology in a new way.

-Real, existing corollaries (analogs) exist in the marketplace, today.
-Equally large ancillary markets to the big central market, either vertically or horizontally aligned to the space, also exist.
-Most important of all, the startup team possesses good execution skills in the chosen space.

  • Are you riding a WAVE?

The overwhelming majority of successful innovations exploit change. Trends have the power to significantly impact how people and organizations behave, and an idea will gain traction if it can take advantage of that change in behavior early on in the trend’s lifecycle.

Example Trends:
-Macroeconomic and Industry Trends
-Social and Demographic Trends
-Technology Changes and Trends
-Government and Regulatory Changes

  • What is the Competitive landscape?

Is there room in this market for you and your idea? Is your idea better/faster/cheaper? Is your idea creating a new market, if so what are the “old” competing ways to deliver your idea? I assume at this stage you are beyond “me too” and have something unique to offer!

Get detailed knowledge of the competitors, both direct and in-direct, and their key unique selling points, pricing, channels and everything else you can learn. How do you stack up? Do you think you can beat them and why?

-Look for inertia and status quo issues in the market.
-Develop something not just that they can’t do, but what the won’t do
-Understand their likely response to you, what’s to stop them crushing you
-What is the degree of threat from other new entrants

Also consider the issue of “Substitution”:
-What are the substitutes for the products/services that your company provides?
-How easily can customers do without your company’s products/services?
-What are the switching costs to the buyer?

  • What is the regulatory and legal landscape?

Have you checked your idea is not going to have any legal issues down the road? Does it require any special approvals or testing to be sold to the public? Are there any laws that relate to the idea in the US or Worldwide you need to check out? Have you done a patent search to ensure your idea is clear from obvious issues of infringement or copyright?

Just make sure that you understand the issues, any costs of approvals and likelihood of law suits before you take your idea to the next level.

  • What is your planned route to market? and who is the real customer?

It pays to do some basic work on understanding your potential customer and the route to market. This will enable you to understand any issues with your thinking and business model.

Who will your company’s customers be and how price sensitive are they?  How are they segmented and how powerful are they?  What is the buyer concentration to firm concentration ratio? Are you selling directly to a user, or providing value to a user but selling to another customer in the value chain i.e. like advertising.

The biggest issue I see again and again here is the “cost of sale” vs. the likely revenue per customer. It’s critical to create a sustainable business model that does not eliminate your idea. Work on some basic assumptions based on what you see in the market and check that your planned way to sell your idea stacks up in terms of profitability and viability. In particular work on how you will acquire customers and the cost of doing so vs. the profit per user and check that adds up.

  • Check the analog / anti-logs for opportunity issues

Finally, check for Analog (similar companies with useful parallels to your idea) and see what you can learn from their experience. Did they take a similar idea in similar markets and create a VC backed $100M business? Now try and find those that failed (the anti-logs) and see why. This may again create red flags you haven’t thought about or allow you to avoid pitfalls. What can you learn about these other companies in relation to Market size/growth/VC raise/valuation metrics/legal issues/other problems…use this data to filter the idea.

Finding a strong “corollary” proves there is a pain in the market. Any market “proof” is very useful in your final VC presentation.

What’s next?

This part of the idea diligence process is to get a read on the other core issues and eliminate the idea if it has any really big red flags. If no impediments are in the way then we need to go to the next stage and dig deep into the market-validation research required to confirm these basic assumptions and build a solid case/investment proposal for the business.

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