How To Pick a Good Startup Idea
How To Pick a Good Startup Idea
You'll need great timing, pre-built assets, and an obsessive interest in the problem
I’ve had a lot of startup ideas. I probably get one every single day. And in the moment, they all sound great. This probably sounds familiar to you if you’re an entrepreneur. People like us CANNOT STOP THINKING about startup ideas. Unfortunately, this is even the case when we’re working on our own startup already. Due to the fact that every business starts as an idea, I wanted to write a quick guide on how to evaluate startup ideas.
What makes a startup idea good?
When someone thinks of a startup idea, if it sounds at the time, then one could consider it a good startup idea. For example, a startup idea I have is to build an in-person Esports league for VR arcades using Oculus Quests. The idea is that someone can buy a few Quests and can host their own league with a leaderboard and everything. They have 4 headsets. They host the tournaments at their house. There’s a $10 buy in, and the winner gets 70% of the pot, and the host gets the 30% of the revenue. In this post we will be evaluating this startup idea.
So on the surface, this may sound like a great idea to some and a stupid idea to others. No good startup idea will sound great to everyone, because if that’s the case, there are already 1,000,000 people working on it. So when you get an idea, do NOT ask your friends if it’s a good idea, simply because your friends may not be in your target market.
Instead, you should be looking at:
Timing of the market
Your own ability to have a disproportionate advantage working on this idea
Your inherent interest in the topic, regardless of potential financial returns
Timing of market
Getting the market timing right is probably one of the hardest jobs you have as a founder. There are countless examples of companies that were started (and failed) before the market was ready for that idea. This concept means the same idea can bad in one year but a great idea five years later, simply because market dynamics shifted. A post that goes into this topic well is on the NFX blog, what they call the The Critical Mass Theory of Startups.
The equation behind that post is: Critical Mass = Enabling Technologies + Economic Impetus + Cultural Buy In. Here is each element broken down
Enabling technologies - Is there technology that exists that allows for your startup idea to exist? If you want to build a worldwide VR eSports league but there is lag in the headset connection latency, then it just won’t be possible to accomplish this goal because the technologies have not enabled it. Ideally. to be a good idea, this technology just was created, so there’s been only a little time for people to think about startup ideas to build on to of the technology.
Economic Impetus - Is there a price for a good or a unit economic structure that makes sense today, where it didn’t 5 years ago? Was an industry previously unprofitable, but now is profitable, potentially because technology brought the friction and cost down? For my example, this absolutely comes down to the price of headsets. Right now, the Quests are $400. If in the next few years, Oculus gets the cost down to $50-$100, this could make entering this market and buying 10 headsets for $1,000 more economical than right now, where I can only get 2 for $1,000. This also applies when prices go up for an industry too.
Cultural Acceptance - Do people even want this product? If so, do enough people want it where it makes sense to pursue it? Culture has a big impact on this. Building a remote work tools startup in 2010 may have been forward thinking, but they were too early, as COVID-19 has accelerated he interest in remote work, and building a remote work product in 2015-2020 is more ideal, because it’s become more culturally accepted. For my VR idea, the question will be do people even want to form esport leagues? If not, will they in the future? This is the last component to getting timing right.
So thanks to NFX’s great framework here, if your startup idea is going to be good, it needs to be the right timing in the market. Ideally, you have enabling technologies, favorable economics, and cultural acceptance of your idea category. If you have all three of these, then you have a piece of one way to evaluate if you have a good startup idea.
Sometimes, timing won’t be enough. Surely, you aren’t the only person paying attention to this market, meaning there are other founders watching the formula too, waiting for the right time to build and scale to build a company that wins the category. Ideally, you are already in the position to take the market once the timing is right. This is the 2nd element of evaluating if you have a good idea. It’s taking a look at yourself in the mirror and seeing if you have the assets needed that give you a disproportionate advantage to enter the market.
Your own moat/assets
Many times when pitching investors, they will ask what your “moat” is. Moat ultimately means answering the question of “what’s your competitive advantage?”. When I was asked this, I always told them my hustle and our unique insight on the market was our moat. Nope, it wasn’t enough. Investors are looking for actual objective moats. They don’t look at this because they don’t think you’re a good founder. They just know other good founders will be working in this space too, so what other competitive advantages do you have?
Your moat could be that you’ve been in an industry for 20 years and you have contacts with every potential enterprise customer available. It could be you have a prelaunch list of 10,000 to send your product to. Or maybe it’s you already have serious revenue and just have a head start. Sometimes your initial moat can be how far along you are in a company.
Note that you can have assets that set you up to be successful in one market but not in another. Although your heart may pull you to one idea you like, your assets may point you to a different market. This is actually the situation i’m in.
If you look at my assets, I have:
2,000 Twitter followers who probably follow me for business and startup related content
A newsletter with 1,000+ readers who get news on startups
A startup podcast with 5,000+ listeners a month
So although small, I do have a growing asset in the world of startups. This gives me a bit more of a competitive advantage to build a product for startup founders or in the startup market. But as mentioned in the beginning of the post, I am interested in building in the virtual reality market. So even though my interests pull me to one direction, my assets are urging me to stay in my lane.
If I actually did want to build out my VR idea, I should probably spend 1-2 years before I decide to take the plunge and start building some assets, like a podcast about VR or getting a newsletter going about VR. This will allow me to build a list and a following, and more importantly, an asset, so I am able to have that moat needed to succeed in a market where other people are also vying to take it.
Obviously the previous two points are important, and are more objective in what you need to come up with a good idea. This last point is a little more…fluffy? This point is simply having a inherent interest in the market that you are entering. If strong enough, this can supersede the first two points.
Have a obsessive interest in the market
I started my company, PubLoft, with no knowledge about the market and no assets behind me. Yet, with my cofounder, we scaled it to $25,000 MRR and got a $100,000 investment from Jason Calacanis. As outsiders. The reason for this is we actually really liked what we were doing and the vision was strong. The market probably didn’t have the best timing, and we sure had no assets behind us. Yet, we still got traction from scratch.
The reason for this is because we wanted to liberate freelancers from the sub optimal experience of Upwork and Fiverr, and this mission drove us to do incredible things during that time period. We were missionaries, not mercenaries. So if there is a market that you have a burning desire to learn more about and to build a product inside of, this is ALSO one of the the checks boxes needed to make an idea a good one. You need to be truly interested in that market. If you just see a business opportunity, it’s not a good sign for a the long term.
Applying this to my VR idea, the fact that I play 30 minutes of VR a day on my Quest and wish I could be more competitive with it, beside the fact I think that would be pretty awesome, it makes me a good fit for this market. And this COULD be enough if I wanted to enter. It would just be better if I knew the market timing was right and that I had the assets needed to give me a moat.
So, do YOU have a good startup idea?
You now have a framework to think about that idea you just got while reading this. Instead of just telling your friends “OMG THIS WOULD BE SO COOOOOL”, actually evaluate the idea from this lens. It isn’t just a good idea because it sounds good, it should be a good idea because:
The market timing is right
You have assets that give you a moat
You have a true interest in the market
To wrap up this post, there are always exceptions to the rule. If all you have is #3, just go for it. The best case is that you make it work, and the worst case is that you learn a ton in the process. Best of luck getting out into the market and as always, let me know how I can help —> Mat@matsherman.com