In the latest of our Team Talk series, Joe discusses a topic close to his heart: how to start a startup. Joe’s had plenty of experience in the area, so if you’re looking to get going with a new business idea, then make sure you read right to the end… Over the past few years, […]
In the latest of our Team Talk series, Joe discusses a topic close to his heart: how to start a startup. Joe’s had plenty of experience in the area, so if you’re looking to get going with a new business idea, then make sure you read right to the end…
Over the past few years, I’ve had the pleasure of meeting a few investment firm owners. The few I have met were amazing people and often very open about their businesses with me. A couple of them were kind enough to explain how they decide who to invest in… and today I’m going to share that with you.
Firstly, to help you to understand what makes a successful startup but also I’ll break it down and explain how it can help you to start a startup.
Startups are a gamble. Investors know that. But it’s their job to play the odds and discover the ones that are most likely to succeed. They’re good at deciding which ones will become a successful startup.
So who do they invest in?
Simply put: firms will invest if (1) they like you (2) they like the product, and (3) they like the market.
That sounds simple but let’s unpack that a bit:
It’s amazing how simple it is but simple doesn’t mean it’s easy to achieve.
Let’s dig even further and pull out some practical information on how this can actually help you start your startup.
Entrepreneur First is an accelerator and investment company created to help new tech startups. When it started, it was assumed that it would target fresh-out-of-university engineers looking to change the world. In one article, they outlined that actually one of the biggest determinants of success was the level of experience of the founders.
The most successful founders knew the market place, had a good idea and had connections to get their first customers.
Which sounds kind of obvious really. But the whole startup culture has told us that the Zuckerbergs of the world come straight out of ‘college’ and start world-dominating companies. It seems as though Zuckerberg is the exception to the rule and in fact, experience is a great predictor of success.
Understanding the importance of you and your experience should help you to evaluate your business ideas. What problems do you want solved? What do you think is missing from your world? How well do you understand the problem? How well do you understand the needs of the potential customer? How well connected are you in this area?
In short: Why you?
Answer this question and you’re onto a winner.
Simplicity can be key to this. If you’re a student, try a student business. If you’ve worked in insurance, try some new insurtech. If you’ve worked in finance, go into fintech.
But it’s not always such an easy question to answer. If you’re struggling to see what’s right for you, just ask “what do you wish someone would make for you?”
You may find this easy, it may take a lot of work, but remember that this question may be the difference between success and failure.
The second thing to consider is the actual product idea. What problem are you solving and how are you solving it?
Or simply put, what’s your idea?
“Ideas are worthless” the startup community has shouted out for years. However, this is just not true.
This kind of thinking came out of Silicon Valley because “founders” were running around telling investors they had a great idea and asking for money. The problem was that they thought that having an idea was enough. Which it wasn’t. And isn’t.
And so everyone said “ideas are worthless”.
When what they really meant was:
“for a business to actually succeed and become profitable it’s far more important that a founder can execute on their ideas and make them a reality. Ideas by themselves don’t make businesses. You can’t profit off an idea, you need the product, marketing, operations and finances.”
But that’s far less catchy.
And so it got summarised as “ideas are worthless”. Which is misleading.
You still need an idea. And the better the idea the more likely your execution is to succeed. Execution is still by far the most important thing. But the narrative that ideas are worthless can be toxic and lead people to not properly think things through.
Here are my three top tips for creating a solid startup idea:
Avoid ideas that sound like a startup idea but aren’t actually based in any reality. For example “a social network for dog owners”. It sounds slightly plausible but has no basis in what people actually want or how they behave.
As I previously said, you should focus on problems and ask yourself: “what do you wish someone would make for you?”
Focus on finding a problem, not a startup idea.
They say you should either make it 10x better or niche down.
Niching down can be hard. The feeling of removing part of your customer base is a hard one. And niching down pointlessly can be costly if you get it wrong. But it can also be a clear way of creating a differentiator in a market place. Think of it more like specialising. By specialising you’re better able to meet someone’s needs and communicate in a way that resonates with them.
To niche down, ask yourself: which area of the market could you specialise in that would create a competitive advantage? And what features could help that group of people?
For example, if you’re going to create a new email marketing platform, you could target ’email marketing for bloggers’. The reality is, you’re unlikely to be able to reinvent email marketing, but you can target your features and marketing around that market to help them more than others can. Then you can expand out from there, once you have an established customer base (Convert Kit, that’s a shout out to you).
This is obviously the gold-standard of creating a product. These are the Ubers, Googles and Apples of the world. It’s the most direct path to massive success but also the hardest.
How to do this is hard to say but here are a few ideas that might get you started (This is by no means an exhaustive list):
The third and final factor investors are looking for (apart from the team and the product), is the market. Understanding this took me a while but once I cracked it, became my most valuable tool in developing new products. It may take you some time or you may already understand it but I urge you to take the time to define the market for your startup. Here are three ways to help you understand and define your market:
The most simple way to define your market is to define your competition. In fact, you should ask yourself: do I have competition? If the answer is no, then you probably have a bad product/service idea.
That’s hard for people to get their head around, but if you have competition, that’s a good thing. Competition signals demand. And demand signals real human behaviour. Competition is validation that the business model works and that people actually want what you’re selling. Define your competition’s market and you’ll start to define your own. If they don’t match what you do, then try to find companies that are closer to yours or try to define what makes you different from them.
The main way I define a market is by using a positioning statement. Similar to the last method, a positioning statement helps you define how you fulfil a need in a way that your competitors don’t. To do this, simply fill in the card below:
(If you would like to learn more about Positioning, read: ‘Positioning: The Battle for Your Mind’ or ‘The 22 Immutable Laws Of Marketing’)
If you’re unable to do this, it’s likely that your idea isn’t refined enough, that you’re trying to solve a problem that doesn’t exist or that you’re trying to solve too many problems.
Some people suggest you should be operating under the assumption of 80% imitation, 20% innovation. This is because you’re unlikely to uncover a completely new problem that no-one has ever tried to solve before. What you’re trying to do is find a problem that has been solved inefficiently and improve on that solution.
By thinking about 80% imitation and 20% innovation you can discover your market place. Look at your competition and define which features you have and which markets also have those features. Then look at what other features they have and if that relates to your product. If their other features would solve a problem for your target customer then you may have a match. You’re in the same market as them.
Note that if you say the phrase “We’re not like anybody. We’re just completely unique.” Then you’re either not researching well enough or you are likely a bit misguided about the product/market/user (this is a rule of thumb but the exceptions are far and few between).
I hope I have provided some useful information and tools to help you think about your team, product and market. However, there is one question is left to answer: how do these three things help you start a startup?
The answer is that you should be continually evaluating your startup ideas against these criteria. Your startup doesn’t have to fit into them perfectly but it should feel like these three elements link together.
Once they do, you have an idea. And once you have an idea, you’re ready to start a startup. And once you have a startup, you’re ready to go for investment with the knowledge that you’ll meet their criteria. That doesn’t mean you should be waiting until your idea perfect, the best way to refine your idea is to actually start trying to build it. But it should help you to evaluate your business as you go.
More practically, you can evaluate how well these elements link together for your business by trying to write them into a single sentence.
Here’s an example of what an idea with potential might look like…
And here’s an example of a bad approach…
You get the idea.
Additionally, this is not the only way investors decide who to invest in, and there are multiple forms of investment as there are many different types of businesses. Many investment firms only invest in businesses that have been operating for 3-5 years, at which point they tend to just look at finances and growth rate.
But overall, the method I’ve outlined seems to be a popular way investment firms and accelerator programs decide on which early-stage startups to invest in.
Finally, you need to know that there is no formula for starting a startup. Many people just ‘start’ and learn along the way. Other ideas are so inherently revolutionary, they don’t require previous experience, just a lot of determination and investment. You need to find a way that works best for you.
My hope is by reading this I’ve given you some insight into how investors evaluate startups. Instead of simply telling you what to do, I’ve hopefully given you some tools to help you start a startup that works for you.
And remember, if you need a little help to make your business a reality — whether that’s through a website, software, digital marketing or help with branding and design — then Newicon are ideally placed to help.
Find out how we’ve worked with other startups to begin their journey to success, by reading our case studies.
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