Startup Life: Finding Your Inner Purpose, Part 2
How to Choose the Best Business You Can Build
Your startup has fabulous technology, methodology, and innovation. In this article, I’ll share a process to help you choose the best business to build from them.
In Part 1 of Finding Your Inner Purpose As A Startup, I discuss why a startup should select a single business area to apply its technology and focus its efforts solely on developing a business around that application. It should acquire domain and market expertise around it, market to clients in that space, and create a business model tailored to their needs.
In the previous article, I glossed over the prerequisite task — choosing the business. Having argued you should focus on one business case, I’ll show you how to find the best one given your technology, team, and IP.
How to choose a vertical?
A startup needs a vertical business to focus on. The wrong choice is costly and wastes time and resources. So it is worthwhile devoting upfront, intellectual, effort to finding the best possible area of focus given information obtainable with a modest investment of time and effort.
As startups first develop their technology, they gain insight into a problem they’re solving; they get an intuitive, sense of the right vertical. More often than not, they’re wrong. Most startups pivot after discovering weaknesses in their initial understanding of the business they started out with.
Whether or not you believe you know the best area of application for your technology, I recommend going through the process here. It will help, either by showing you there are better target markets, or by bolstering your confidence in your first choice. You’ll also gain insights along the way which will guide you as you develop your startup, and give you a head-start on your funding pitch.
To choose an initial target vertical market for your startup (and that at subsequent pivots), you’ll do a broad, concept-only, exploration of various alternatives, before choosing the most promising one.
This exploration is an inexpensive inquiry into the possibilities and efforts involved in each, estimating costs and benefits. It involves thinking out possibilities and a modicum of research and sometimes experimentation while avoiding getting bogged down in development. Think of it as a shallow prototyping of the potential business without building product, personnel, or processes.
I’ll break down the procedure into steps, then drill down on each. I’ve created a companion Google Sheets spreadsheet here to which you can copy (and customize) to guide you.
The steps you’ll take are:
Describe your IP/Idea/Secret Sauce.
Pick the Best.
Describe Your Idea
Write a couple of paragraphs describing the technological or methodological innovation at the core of your intellectual property. What makes this innovation possible, what’s your special sauce? Keep this description independent of the area of application you have in mind.
This will help you evaluate multiple applications of your technology without biasing you with pre-conceptions. Keep this description independent of the unfair advantages you may have, such as domain expertise, partner relationships, deep rolodex of contacts, etc. These are important, but are taken into account in a later step.
Create a list of potential applications of the big idea described in the previous step. Some helpful techniques to do this include:
a. Brainstorming. Collaborate on unfettered ideation without self- or group- criticism or censorship.
b. Associations. List the nouns, concepts, and verbs in the idea’s description and think of problems to which they apply.
c. Gather ideas from others. Socialize your idea description from the prior step to a wide variety of people, and listen for how your technology resonates with their problems. By articulating the IP you have without being specific as to a use case, you can uncover areas of opportunity visible to others which aren’t to you. Resist the temptation to argue them to your pre-conceived notions! You may be right, but you’re not going to learn anything by listening to yourself repeat what you already believe.
d. Adjacencies. Consider opportunities serviced by the prior generation of technology you are looking to replace. What has that been used to solve and how would your tech target those problems?
Evaluate vertical opportunities
For each business opportunity in the list you created, evaluate it with respect the business criteria listed below (you can use a copy of this worksheet). The first two items articulate the vertical to be approached to guide you in evaluating the rest, and are not scored. For the remaining criteria, you should provide a note capturing your thinking and a score of how attractive that makes the opportunity on the basis of that criterion alone. The scoring is subjective, but I’ll say more later about how scoring is done in the companion worksheet.
Note that if you were to investigate these criteria in-depth, you’d have all you needed for a business plan or a funding pitch, so don’t get too deep into the weeds at this stage!
Opportunity. What problem will be solved, and for whom?
Solution Replaced. What is being used now to address the problem, and at what cost?
Those preceding 2 items are not scored; they help answer the questions below.
Market Size & Accessibility. How many clients have this problem? How, where, and at what cost, can you access them? How often and recurring is the problem?
Profit Potential. How much can you make by solving this problem and what does it cost you to do so? A couple of ways of estimating the revenue side are value-based : determining the value you create or money you save your client by solving the problem , and competition-based: what are your clients paying right now to solve that problem. If you can, consider an estimate of your CAC, cost of acquisition, from the Market Accessibility question above.
Team. How well do the skills in your team match those needed in the problem space you’re considering? Does the team have people who are insiders with the customer base? Don’t limit this evaluation to technical expertise. It should be about how well your team already knows the market you’ll be assaying and its particular characteristics.
Customer Availability. Are there customers for your product? A great way of doing this based on data rather than gut-feel is to do customer validation using ads and landing pages. There are many articles on how to do this. Scott Mc Leod’s isn’t the newest but has good explanations and tools.
Competition. Who else is solving this problem for your same market? How, how effectively, and how cost-efficiently, can you compete? Consider the incumbent-effectwhich shows that a product has to be 9x better than the competition to dethrone a strong, established, solution.
Defensibility. If the business succeeds, can you defend it against competitors? The inimitable Guy Kawasaki has a classic but still great post on defensibility.
Sales Cycle. How long does it typically take your intended client to buy? Some solutions are bought on a whim by anyone at any level of a company; others are bought once a decade by CIOs after being courted for years by a dedicated sales team. Both make great businesses so long as the economics line up. In startups, a long sales cycle is difficult to deal with as it requires large expenditures over long periods of time before offsetting revenue comes in.
Entrenched Interests. Are there strong entrenched interests in your market? Can you align with them? Sometimes markets have hidden dynamics which will aid or prevent a solution’s taking hold. If you don’t surface these early, you will find out about them after investing effort fruitlessly in a product that isn’t really wanted by your customers. It’s worth vetting your notions of your value proposition with an insider to validate you assumptions.
For example: a solution which helps car dealers sell more cars will fail if it gets in the way of their real profit center — financing and fixing them.
Budgets. Where does the money come from to pay for your solution? An existing budget with low lock-in is ideal. A budget created from savings or additional revenue, only slightly less so. A totally new expenditure which your customer isn’t yet aware they need to make will present notable friction for your business.
Roles and Capabilities. Who are the people involved in using, seeing the value of, approving, and paying for your solution? What powers do they have to purchase, and how do people in these roles relate to one another? Will your solution require the role receiving the benefit to have substantial help or approval from one that doesn’t benefit directly? (For example a sales-team solution requiring huge internal IT effort.) Is there a way you can wrap that additional help or service into the solution you’re providing? Is there a powerful role in your client’s org that loses its power if your solution is put in place?
This also should factor in the roles involved in paying for the solution out of the budget from the last item. An ideal case might be a product cheap enough to be charged on an employee credit card, vs. a sale requiring CIO-approval. A more difficult scenario would be a budget effectively controlled by someone other than the customer who will directly benefit or save money from your solution.
Special Access Needs. Do you need to overcome hurdles to get to and sell to your customers? Will you face regulatory constraints, demands on credibility and demonstrated success, requirements on financial strength, or demonstrated market position? An insurmountable requirement for special access is a difficulty for a startup.
The flip-side would be special access you do already have. You might have the rare rapport with C-suite necessary for your business based on a stellar track record in that industry. For example, I know several exceptional businesses formed by people starting with pre-negotiated contracts with their prior employers to provide the service they’d been performing previously in-house.
Network Effects. Does getting one more customer provide a marginal value-add to existing customers? James Currier and Pete Flint of NfX have smart essays on this highly valuable property of some businesses.
Investment/Capital Need & Availability. How expensive is it to attack this market and this customer and fend off competition? What ready sources of capital are there for that, such as investors eager to fund a hot market, lenders willing to finance on early revenue, or customers willing to pay upfront?
Team Passion. How personally excited are you and your team to work on this problem, interacting with the customers and challenges involved?
This criterion is heavily weighted. Personal passion for a business doesn’t guarantee success, but lack of enthusiasm for a market is guaranteed to make you fail. Without passion, your team won’t have the resolve and resourcefulness to face challenges for the years it takes to be successful. Life is too short to work on things you don’t care about. We may think a great market will guarantee quick success and then we can move onto something we do value, but statistics shows that this is wrong most of the time, leaving us slogging for years working in a business to which we are, in the best case, indifferent.
You can score these criteria subjectively however you feel is appropriate. In the companion sheet, I’ve implemented a scoring mechanism based on setting values for each of the criteria from -2 to +2.
I’ve put tables assigning weights to each of these scores for each of the categories in a separate tab. Positive and negative scores are neither symmetric nor linear. Often a negative factor can make a business infeasible, but the absence of that negative factor isn’t as positive, just attesting that the business is not impossible. Similarly, the absence of some characteristic, such as especially easy funding, isn’t a strong negative, while the availability of easy capital is a strong positive.
You can use my suggested weights directly, or, by customizing them, you can make them reflective of your own beliefs and preferences.
The result will be something like what’s shown at left. In the opportunity profiled there, you can see that market opportunity, Size/Access and Profit Potential, significantly outweigh the difficulties.
Where some criteria needs to be investigated further, leave the score at a neutral 0 until you decide to fill it in.
It’s also important in this process to reduce wasted effort by culling obvious losers early. When some thought shows difficulty for a few high-valued criteria, eliminate that opportunity from the list.
Pick the Best
Now you’ll have a numeric score reflective of your weights. This is an approximate, subjective, measure, which could change as you learn more. I suggest you pick the top 20% of opportunities, and do a bit deeper investigation on the criteria, especially validating assumptions, then adjust the scores. On the worksheet, the total scores will be colored green to red, from best to worst.
For a final pass, founders should debate all the remaining interesting opportunities and come to consensus on the one they’ll focus on. Unanimous consensus is best so that everyone is totally committed to a single business, without being distracted by a rejected favorite.
What if you pick the wrong vertical?
One might think that the wrong choice of vertical is as detrimental as pursuing many at once. But immense mental and logistical clarity is gained from focusing on a single opportunity. Even if a chosen vertical turns out not to be as good as was initially believed, other viable businesses will lie close to any judiciously chosen path. Partial pivots down the line can then tap into pockets of opportunity, leveraging existing developments and investments.
Take time before diving into a business to assess a wider variety of possible opportunities. It’s hard to fight the feeling of momentum and dive into solving the first problem which suggests itself. But, you’ll have plenty of time to focus relentlessly on one market opportunity. It’s worth making an effort to make sure it’s the best.
Marc Meyer is a long-time Silicon Valley technologist, founder (6 startups, 3 exits, 1 IPO), executive, investor, advisor and teacher. He has invested in and advised over 100 companies, chairs the Advisor Council at Berkeley SkyDeck, is on the Selection Committee of HBS Alumni Angels, advises at multiple accelerators, and has an Executive Coaching practice helping leaders achieve their greatest potential.