An article we liked from Thought Leader Alexander Jarvis:
How do you validate a startup idea?
This blog is going to take you through the key facets of a business model and the industry environment to help you build conviction that your startup idea makes sense before you start. It’s not just a list of things to test in coffee shops and with a live product to validate it. If you internalise all the key factors, you’ll be able to rapidly evaluate each and every idea you have and hopefully help you mitigate wasting time on ideas that are doomed to fail for reasons you could have predicted.
When you have an idea, you will have a torrent of thoughts, especially if this is your first startup rodeo:
- Will VCs fund my idea? (No)
- Should I sell my house and just build this idea? (No)
- Should I validate my idea? (Yes!!!)
- Will it cost me a lot of cash to validate my idea (Not really)
- Can I validate this without talking to customers? (Yes)
- Should I talk to customers before building something? (Yes)
Clearly, you should start out doing the groundwork to really validate an idea. If you are not flush with cash, then you might be happy to know that spending money to validate your idea is actually the last step. There is a whole lot you can do if you understand business models to figure out if you are dead on arrival first, or if this idea is worth actually spending any time on at all.
Let me take you through the thought process of how to evaluate a business idea. First, let’s start by creating a baseline for your objectives to ensure the idea meets it.
Is this a side hustle or your big idea?
First, you need to set your personal expectations with any idea you will have. Are you doing a ‘side hustle’ and want to make some cash, or are you planning on going VC crazy and gunning for a monster exit? Both are equally fine. But there are large implications of both that heavily impact how you review the idea.
I bosh out some ‘startups’ which are basically passive income. If I make a few grand a month from them and I don’t have to do too much work, what the heck, right! But if you want to go big or go broke then the bar is really different, not just higher.
If you have a family, aren’t a big risk taker, but have an entrepreneurial itch, then why not launch something small? You never know, this could grow and become something big?
Ideally, it’s something close to what you do for a job or that is your hobby.
- If you have experience in M&A you could set up a course for budding analysts to get into M&A? Maybe you make models for PE investors?
- If you work in customer care, you might notice you built a handy little time-saving tool you built for yourself. Perhaps, other people would like that too? Why not polish it and sell it as a little SaaS business?
The main benefit of doing something ‘close to home’ is you really know what you are doing and are the customer yourself. You know already what people need and want, you might even know the market size and how much people will pay? That’s really handy, right! Might you even build something and get your company to be the first customer?
If this is your goal, you need to view your ‘idea’ through the lens of a side hustle. You might spend a few $k of your savings, but you don’t intend raising investment, so what you build has to be within these constraints. If it involves hiring 40 people and doing field sales, you should probably drop the idea and look for something easier to ship and manage.
Gunning for a billion
If your goal with the startup idea is to make a tonne of cash which will involve raising a load of venture capital, you need to view your idea through an entirely different lens. The bar is 100x everything than for a hustle.
It needs to have a potentially huge market, there need to be scaleable acquisition channels, you need to be able to recruit an elite team, you need to think critically of your unit economics and you will want to have a special sauce that will imbue you with an enduring competitive advantage.
Figuring out an awesome VC fundable startup idea is not easy. When analysing your model you need to think far more critically than you would for a side hustle. Your idea might be fine for a side hustle, but you are going to drop most ideas as they just won’t meet the bar for investible. That’s fine, but be ok to kill your darlings. Don’t start something that doesn’t make sense, just because you want to do something.
How much do you want to sell for?
This is a question I ask all founders that I mentor and do consulting calls with. It’s is honestly incredible that 100% of people that I pose this to have no answer. They often say “hmm… I didn’t think about this.”
Whilst you care about your exit, it is all that investors think about. I’ve written about this in detail here:
A meaningful founder exit is not the same thing for venture capital
If you are setting up a side hustle you need to answer this question:
- How much do I want to make each month to make this worthwhile?
This could be $5k a month. If you don’t think your idea can generate this much income, then you need to kill the idea.
If you are setting a VC fundable startup, you need to answer this question:
- What do I want to sell this for and will someone buy it?
There are a lot of implications for how much you sell your startup for. If your goal is $20m it’s only likely at best fundable by one small angel round. That’s the only way the numbers work. If you are gunning for a $billion, then you are VC backable, but you’re going to have to build something really massive.
My recommendation is that you should aim to sell your startup for at least...
Read the rest of this article at alexanderjarvis.com...
Thanks for this article excerpt and its graphics to Alexander Jarvis.
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