This blog was originally written by Rikke Nedergaard, a Gust Launch Marketer.
It’s a harsh truth that most startups fail and go out of business within five years of their inception. One way to greatly improve your chances of business success is to vet your startup ideas thoroughly. Evaluating ideas ahead of time will help you avoid some of the business mistakes that entrepreneurs often make and show investors that you have done your research and planning thoroughly.
Know your market and your competitors
There are many ways to solve a problem, which means that your competitors might be selling products that are very different from yours. To figure out which ways companies are already solving the same problem you are trying to solve, evaluate which broader needs or desires your product fulfills for specific customer segments. From there you can identify your competitors in the same customer segments and the competitive strengths and weaknesses of each competitor relative to your own. Another way to evaluate the target market for your product is to speak with founders or investors who aren’t your direct competitors but who have have developed products for the same market. Their experience and feedback could be very useful for your business. Additionally, reading reviews of current competitors’ products may help you understand where they fall short and where you, therefore, have a chance to get ahead.
Distinguishing your business and determining your competitive advantage are only possible once you have done your research and evaluation. Usually, your product must be better, cheaper or easier to buy in order to gain traction and sales. Take Uber for example: their business clearly stands apart for the ease of purchase which created the competitive advantage that has made it a global success.
If you really can’t find any products that meet the same needs or desires that your product meets or if all your competitors solve the problem for free, then the lack of revenue-earning competitors suggests that your product doesn’t fulfill any need or desire that customers are willing to pay to have met.
Does your idea have market potential?
Once you have established a potential customer group for whom you can fulfill a need, you should should consider the size of the market. While small markets may be fine if you are looking to run a small business, professional investors only invest in companies that serve markets worth at least $1 billion. Most angel investors want the projects they invest in to have the potential for a 10x return, and VCs usually look for projects with an even higher return. To evaluate the market potential of your startup idea, you can calculate three numbers: the total addressable market, which is the value of the market as a whole, the serviceable available market, which is the portion of the addressable market that you would aim to sell your products to, and the serviceable obtainable market, which is the portion of the market that you expect to be able to capture.
To find the total addressable market, you need to determine the total number of potential customers and the expected lifetime value of a customer.
Finding the total number of potential customers might be difficult, and the way in which you find it would depend on what your customer group is. If you are lucky, you might be able to find the number of potential customers directly from statistical resources. If there are no statistical resources available that can tell you how many people belong in your customer group, then you might be able to work backward from other information that is available: for example, if you are manufacturing widgets for people with a niche hobby, you might look for the number of registered users in forums dedicated to that hobby to gauge the size of the market.
The expected lifetime value of a customer is the aggregate value of all the sales you expect to make to a customer. You can arrive at the expected lifetime value by multiplying the price of your product with the number of times you expect to be able to sell them that product. If you are a subscription service, then this will be the price per time period multiplied with the number of time periods you expect them to stay on your subscription.
Once you have both these numbers, you multiply the number of potential customers with the expected lifetime value of each customer to arrive at the monetary value of your total addressable market.
From the total addressable market, you can arrive at the serviceable available market, which is the portion of the total addressable market that you would aim to sell your products to. This is smaller than your total addressable market if you restrict your sales geographically or otherwise.
From the serviceable available market, you can arrive at the serviceable obtainable market, which is equal to the amount of money you can spend on acquiring customers divided by your expected cost to acquire each customer. The monetary size of the serviceable obtainable market is the revenue you expect to make.
To check whether your figures look credible, you should research the aggregate sales and profit of your competitors.
Gathering and evaluating feedback for your startup idea
A key aspect of pre-startup research is talking to as many prospective customers as you can to understand their everyday lives and problems. When evaluating the sales potential of a given product, it is important to find out not whether potential customers are interested in your product but why they would, or wouldn’t, be willing to pay for your solution. You cannot assume that customers want a product just because you think it is worth it, and you certainly can’t assume that they will pay for it. Because your opinion of your product doesn’t necessarily align with your potential customers’ opinion, it is useful to get as much feedback as possible on your product from customers.
The vetting stage is also a good time to begin considering pricing strategy since pricing impacts what your potential customer group would be: it may sound obvious, but it is important that you don’t produce a product that your prospective customer can’t afford. Conversely, there are also good reasons to set your prices strategically high if you are aiming for a wealthier customer group.
Evaluate the feedback you gather and use it to make your startup plan better. Critical feedback might be especially useful since it can make you aware of significant problems with your business that you haven’t realized yet.
You can even consider finding a person you trust who is willing to play devil’s advocate and attempt to talk you out of starting your business. Maybe you can’t, or don’t have to, solve all the problems that the devil’s advocate brings up, but it is crucial that you are aware of these issues. You might also find that investors will ask you questions about these very same problems. In this way, the devil’s advocate exercise makes you consider business weaknesses ahead of time, and with properly researched answers the exercise will also prepare you to defend your strategy in front of potential investors.
It isn’t necessary to worry too much about your ideas being stolen in the process of gathering feedback. Instead of worrying about your product potentially being copied, it’s more productive to focus on building your product and using your first-mover advantage. One way of using your first mover advantage is to launch a minimal viable product as soon as possible to get a head start on acquisition of customers and then keep developing and improving it as fast as you can to stay ahead.
In addition to using your first mover advantage, it is also worthwhile to ensure that your company owns all of your relevant intellectual property (IP), including your competitive advantages, so that your IP contributes to the value of the company and limits your competitors’ ability to use what you develop.
Having done your customer research properly will help you convince angel investors and VCs to invest, but more importantly, it will help you ascertain whether there is a market for your startup idea. If there isn’t, it is imperative that you acknowledge this too and then you can turn your attention to ideas more worthy of your time.
This article is intended for informational purposes only, and doesn't constitute tax, accounting, or legal advice. Everyone's situation is different! For advice in light of your unique circumstances, consult a tax advisor, accountant, or lawyer.