Six Dynamics of Startup Opportunity

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This article was originally posted on Inc.com.

What are the keys to startup success and how can you know if a startup is likely to succeed? A study by Inc Magazine and the National Business Incubator Association found the failure rate to be as high as 8 in 10 businesses, so it is a worthy question to ask before investing significant time and resources into your new venture.

After years of researching this question with Dr Zhang, my co-author from The Smarter Startup , we developed The Startup Opportunity Scorecard. It is a simple tool for evaluating startup ideas against a set of startup heuristics, to ensure you’re accounting for the important dynamics that drive startup success. We’ve defined 18 heuristic principles that are based on generally accepted best practices, and grouped them into 6 major areas upon which a startup is scored:

1. Customer – Always start by identifying a prospective customer and an unmet need or desire, that the market has not sufficiently addressed. What can you provide that is so meaningful that someone will gladly pay you for it? Ideally the customer you identify will represent a market that matches your own needs and ability. If you’re well funded then likely you’re looking for a large scalable problem to solve. If you’re a solo bootstrapping entrepreneur, a less scalable niche opportunity is more likely to bring you success as you can service that niche with a lifestyle business, and not worry so much about getting pushed aside by well-healed competition. Think both in terms of satisfying a need and whether this is the right size market (segment) for you to address.

2. Product – The product you’re creating needs to directly answer the unmet need or desire of your customer. Stay laser-focused on solving that problem and don’t ambiguate the solution with a lot of additional features or messaging that confuse or dilute the value of you’re providing. As you begin to design your product, stay vigilant against anything that could represent a barrier to adoption such high switch costs, a steep learning curve, or a lack of integration with workflows the customer may already be using. The costs (monetary, learning curve, disruption) all need to be low enough that there is still a net value to taking up your solution, compared to the nearest alternative (value = benefit-cost).

3. Timing – Every market has a lifecycle and every opportunity thus has a limited window of time before it expires. In the beginning of a new innovation, markets are easy to enter and a technical solution is the primary challenge – anyone who can solve the problem can find opportunity. Conversely, there is also a risk in being too early to a market since chasing unproven markets can lead to dead ends, or worse, a viable opportunity that will not bare fruit for years to come; a much longer ramp than most startups can finance. The typical startup is best served with a “fast follower” strategy where by you identify new interest by a set of customers that is already occurring but is still early enough that the need or desire for the solution is not yet satisfied.

4. Competition – It is the imbalance of excess competition compared to new customers entering a market that make a mature market turn unfavorable for new entrants – this is the dynamic usually seen in the latter half of an innovation’s lifecycle and why we prefer to focus on newer market opportunities. What we’re looking for is indication of market inefficiency – that a market has not yet sufficiently met the (potential) need or desire for a solution. New or fragmented markets for example, or old stagnant markets that are ripe for disruption. In such a market you’ll have the opportunity to develop a differentiated positioning strategy.

5. Finance – How much up-front investment of capital (sunk cost) will this product require to develop? Do you anticipate large gaps in time between accounts payable and accounts receivable (working capital float)? Both of these scenarios represent financial risk that you need to weigh against the potential benefit you’re anticipating. Every business requires money to get started but the goal should be to minimize the risk / cost where possible, and to weigh those burdens against the potential for returns. Think of this in terms of building an efficient investment machine – our goal is to achieve maximum output (profit) with the minimum possible inputs (risk and cost).

6. Team – If this is competitive warfare, how confident are you that your team can win the battle? Assuming you have limited resources, you should opt out of any battles you are not confident you can win, and preserve them resources for later opportunities. Someone on your core team needs to intimately understand the nuances of the customer you’re addressing, if you are to solve their need or desire. You’ll also want a technical expert on your team who can devise a well-crafted product that answers the need. Consider also whether you have access to favorable sourcing and distribution relationships you’ll need to remain competitive.

With these six dynamics in mind, take a moment to grade the opportunity using the Startup Opportunity Scorecard. Give it an A-F grade for each of the above criteria, using the following scorecard as an example:

startup opportunity scorecard

The power of such a framework is that it provides a holistic vantage point from which you can assess an opportunity before jumping in with both feet, rather than simply following your instincts and succumbing to your own blind spots, or listening to a wise maxim that turns out to not apply to your situation. By going through this process and objectively evaluating an opportunity, you can often identify weaknesses and perhaps even predict the reason your startup will fail, before you begin. If you are able to focus your efforts on only the battles you are most likely to win, then you’re already one step closer to winning the war.