Of the five essential elements of entrepreneurial success, the vision—a great startup idea—is the alpha and the omega. So how do you know if you have an exceptional idea? One way is to look at how angel investors and venture capital firms evaluate potential. They look for specific indicators that a) you’ll succeed and b) they’ll get a fast and substantial return on their investment.
Eight Signs You Have a Great Startup Idea
A startup concept that has huge potential generally ticks off one or more of these eight boxes:
- Your market is big and growing.
- The problem you’re solving is a well-defined, known pain point.
- Your solution is easy to implement.
- Your startup disrupts a sleepy industry.
- The new solution can become the “system of record.”
- The product has a 10x feature.
- Your startup is capital efficient.
- You can reach your target customers quickly.
A Big and Growing Market
First, the market for your great startup idea’s product or service is big. “Big” can be defined by:
- industry size
- industry speed of growth
Your initial or beachhead market is usually smaller, and you need a plan for how you’ll grow from that to the big market. But the idea is to find a large and growing market.
Geographically, for example, your initial market might be the US. Once you’ve established a foothold there, you plan to expand to other countries.
Industry size is another way to measure market size. If your industry is small, you might focus on selling to one industry first, and then expand to others. The nonprofit tech startup Civic Champs, for example, sells software tools for volunteer management. Founder Geng Wang could try to sell directly to small nonprofits (with wildly diverse missions). But a smarter strategy is to start by selling to community foundations, who will then promote the great technology to the smaller nonprofits they support. Next, Civic Champs might expand their market to large corporations with corporate responsibility volunteer programs. After that, they could go to banks, since federal law mandates that banks have to give money to community outreach and donate a certain number of hours.
So the true market size of Civic Champs’ software isn’t just nonprofits, though that’s certainly a market in itself. And as we’ll see in a later point, industry size is only one side of the coin; the other side is your ability to reach that market.
Speed of industry growth also matters. If your startup is in a fast-growing industry, it will probably grow at least as fast as its market. Take digital advertising. It’s leveled off from its heyday, but it’s still growing 10 to 20% annually—nothing to sneeze at. If you’re a startup within that industry, you’re probably going to grow at least that fast.
A final way to size up the market is to examine how deflateable it is; in other words, to what extent can you replace an existing solution? If you can solve a pain point with a cheaper and easier fix than the existing solution, that’s going to be a large market, and you can steal market share from competitors.
So market size is definitely one of the factors that define a great startup idea.
A Definite Pain Point
A second factor that makes an idea exceptional is the size of the pain point it solves. How desperately do people need or want to solve that problem? How many people want to solve it? Breakthrough startups are in a market in which a) the pain point is obvious, and b) significant numbers of people know the problem and are willing to pay to solve it.
Sometimes there’s a problem in the market that the consumer doesn’t really see. These are harder markets to grow, because you first have to create awareness of the problem, and then sell your product as the solution. It can pay big dividends if you do it right. You’ll need to find early adopters, perhaps specialists of some kind, who recognize that there is a problem and are willing to pay you for it.
Formstack, for example, solved the pain point of building an online form. In 2006, the general public probably didn’t even realize online forms were complicated and expensive to build, much less understand all the ways such forms could be used; but early adopters did, and they flocked to Formstack. Today the market for workplace productivity tools is predicted to grow to $100 billion by 2027.
Ease of Implementation
How easy is your solution? If your solution is really difficult, even if the problem causes a lot of pain, people may not want to solve it that way. The cure can’t be worse than the disease. And so, even if the problem is clear, you still have to ask: how quickly can the customer understand what your solution is? Can they implement it quickly, without a lot of specialized, expensive support? The simpler, the better.
Before Stripe came along, for example, if you wanted to implement credit card processing on your website, you had to work with different companies and technologies:
- the bank or credit processing engine behind the scenes
- the customer interface to collect credit card information
- the secure technology to connect customer information to the bank for processing
Stripe changed that. You only needed to work with one company, the solution was easy to understand, and it was incredibly easy to implement: copy and paste five to 10 lines of Java code on your website, and you’re up and running.
When the founders were first gaining customers, whenever they found somebody who was interested in their services, they said, “Okay, great, give me your laptop. Let’s implement it right now.” And they did it on the spot. Soon the company was growing too fast for them to do all of those manual implementations—and they didn’t need to, because customers could easily do it themselves.
A Sleepy Industry
A fourth measure of startup potential is a sleepy industry. In sleepy industries, old ways of doing things persist, and technology usage lags. That makes them ripe for disruption when you introduce technology that creates value. Despite the explosion of new technologies, these kinds of opportunities still exist today.
A good example is the Bee Corp and their hive technology. In the old way of determining whether bee hives were healthy, a beekeeper would manually inspect each individual hive. If the hive was good, she’d say, “Check, it’s good.” If it was bad, she’d say, “Okay, we need to replace it.” If it was somewhere in the middle, she’d put a stick on the hive (literally) to mark it to check again a week later.
This was simply too much time-consuming manual work. You could only check around 10 to 15% of hives, and so you’d just extrapolate from there and assume the rest of the hives had the same health rate. And, importantly, this health rate is tied to what the pollination customer pays for the use of hives. Healthier hives mean better pollination and premium prices; less healthy hives are discounted.
The Bee Corp’s technology allows people to check an entire batch of hives in a fraction of the time that it would take to manually check 10 or 15%. It’s cheaper, it increases productivity 10 to 20 times, and it’s simpler. You just add a dongle to your iPhone, which then takes a 3D picture of the hive, and using a lot of very sensitive and complicated formulas, determines the health of the hive and how many bees are alive.
This is a new technology in an industry that doesn’t use a lot of technology, but it’s quickly catching on. Why? The technology solves a known pain point easily and cheaply, and because its results impact other factors significantly (the price of the hives), people are willing to pay for it.
System of Record
Another measure of your solution’s potential is how deeply it can be integrated into its customers’ operations. Can it become what’s called the system of record? When software becomes so essential that it forms the backbone of the company, you get very high retention rates, and you can achieve deep integrations with other software products that the company needs to use.
Salesforce is the perfect example. It holds many customer records, and every time you add more customer records, its value increases. When Salesforce first started, the premise was twofold. One, it lives in the cloud, so it never needs updating. Two, it gives sales managers insight into what’s happening with their sales teams, which in turn makes those team much more productive.
Previously, Andre or Melissa would simply say, “Well, boss, here’s how many deals I’m working on. Here’s when I think they’re going to close, here’s the value of them.” All of the data lived in the salesperson’s head, maybe on spreadsheets; there was not a way to pull it out and use it to manage the team. And so Salesforce gives sales managers a lot of a lot of insight. But it doesn’t stop there. Once Sales brings in clients, Customer Service needs access to that data; then Accounting needs to bill them. Soon, Salesforce becomes essential to everyone in the company.
So that’s an example of how a product can become the system of record around which everything else is built.
Another way to think about the solution is what else it offers customers. What is a 10x feature you can create, something so valuable that everybody wants it? Something that completely solves and even obliterates the problem?
When Gmail first came out, Google offered each user 1GB of storage space. At the time, that was huge; Hotmail and Yahoo only offered one or two megabytes, and as a result, users had to constantly delete emails. Customers flocked to Gmail because they wanted to store emails for reference later. This feature was so important that users were willing to overlook other product problems, like Gmail’s lack of an address book. Every time you emailed someone, you had to type out their entire email. But people were willing to overlook those inconveniences because the storage feature was worth 10x its face value.
Another aspect of Gmail’s success is that the solution is something users log into every day. It becomes an essential part of daily workflow. Your solution can create value on a weekly or monthly or quarterly basis, even on an annual basis. It doesn’t have to be every single day. But if you’re evaluating ideas and you want to quickly reach the biggest market, focus on the stickiest idea, the one that people will use on a very frequent basis.
Low Burn Rate
Another measure of potential is whether the idea is capital efficient; does it have what’s called a low burn rate?
Being capital efficient doesn’t mean being cheap. It simply means that every time you raise money, you’re able to turn what you raise into 18 to 24 months of operating runway. In other words, you have a low burn rate for the cash you’ve raised.
This can mean raising a quarter of a million dollars and spending $10,000–20,000 a month, or raising $18-24 million dollars and burning a million a month.
As long as you’re being as capital efficient as possible for as long as possible, you’re going to stack the deck in your favor in terms of success. A long runway gives you more time to figure out how to make your startup successful, and being capital efficient is a crucial part of having a long runway. A capital inefficient startup may still succeed, but the odds are against you, because you either have to raise more capital to buy more time, or you have to get your startup off the ground in much less time.
Speed of Market Reach
Finally, another measure of a great startup idea is its ability to reach its target market quickly. If you can market to your customers quickly and effectively without a ton of marketing–one-on-one emails, maybe a little bit of networking—you’ll be able to hit those first customers pretty easily.
Take Stagetime, for example. A social network for non-corporate professionals doesn’t sound, on its surface, like a compelling idea. The magic lies in how the founder, Jennie Moser, is building that network: by focusing on opera singers. Opera singers are professionals, but LinkedIn doesn’t work for them. YouTube doesn’t work for them. Instagram and Facebook don’t work for them. As an opera singer herself, Jennie has a huge network of operatic singers; she reached out to her network, and within a couple of days was able to get 700 people to sign up on her wait list. After the sign-up period was over, her phone kept blowing up with singers asking to be added, hoping there was a way they could still get in. She was able to hack her market and reach it quickly.
This last example illustrates that sometimes, the quality of an idea rests on the founder’s ability to execute against that idea: to reach a market quickly, as Jennie Moser of Stagetime, or to see beyond the obvious industry end-users of your solution to other customers in other industries, as in the case of Geng Wang at Civic Champs. The five essential elements of startup success are connected. The quality of an idea is embedded in how well the founder communicates it in a compelling vision: a vision that is pushed forward by a team, into a network, that responds by supplying capital and feedback.
But for today, consider: How many of these eight indicators of high potential does your startup have?