How do you decide whether a startup idea is worth committing to?
How do you decide whether a startup idea is worth committing to?
Last week one of my previous colleagues asked me, “How did you decide whether an idea is worth committing to for your startup?” I said, “Ah, I figured that out before my first startup!”
In 2015, I left Google, and joined Sumo Logic to learn how to do startup. Instead of identifying an idea first, I took an engineering approach to establish an evaluation framework first - if I had an idea, how would I evaluate whether the idea would be worthwhile pursuing?
I came up with 4 criteria:
General Demand
Social Good
Monetizability
Personal Passion
I want to clarify these are my personal choices, and they’ve stood the test of time for me. These are not golden rules for everyone, but hopefully useful for many future entrepreneurs.
#1. General Demand
It could be a 2C or 2B product; if 2C, (almost) every consumer needs a product like this; if 2B, (almost) every company needs a product like this.
Key phrase 1: 2C or 2B
Back then, I haven't developed a strong preference between 2C and 2B yet. I was open to both. In fact, I did my first startup Leap.ai as a hybrid, which had both 2C (helping consumers develop career success) and 2B (helping companies hire talent) components.
After Leap.ai got acquired by Facebook, and worked in Facebook / Meta for 5 years, I now have much stronger interest in 2C. The complex distribution among consumer preferences is more intriguing to me personally.
Key phrase 2: (almost) every
When I was at Google, my naive thinking was it would be easier for me to pick a niche market, and build a dominating product in that niche market.
The top lesson Sumo Logic leaders taught me was, it should be the opposite. Go chase a large market. The key is the overall pie needs to be big. When the overall pie is big, even if my initial slice is small, I can always work to increase my slice. If I go after a niche market, there’s no more growth after I am the dominant player.
VCs always look for “market size” in pitch deck, for exactly this reason.
Key phrase 3: needs
Elementary schools in the US teach the concept of “need” vs. “want” early on. When my daughter first learned about it, it was an eye-opening moment for me. Growing up, I never learned or was made aware of the subtle but critical difference.
“Needs” are must-have; “wants” are at best nice-to-have.
Silly example: food is must-have, and ice cream is nice-to-have. Complication: is coffee must-have or nice-to-have? For some people, coffee is must-have to keep their energy, and for some it’s nice-to-have.
More interesting complication: it can change too. Grocery delivery was nice-to-have, but then became must-have during COVID, and post-COVID, is it now must-have or nice-to-have?
#2. Social Good
The product of my startup, if done right, should bring value to humanity.
There has always been lots of controversy around Google’s “Don’t be evil” motto, but I always felt strongly connected to the underlying theme that technology should help humanity and do the right thing.
There are many areas which have strong demand, and can make lots of money too, but I personally wouldn’t want to be involved since I can’t justify whether they are overall good for humanity.
Note that I’m not saying technology has no down side. I believe everything has 2 sides of the same coin; nothing is purely good nor purely bad. It’s the overall tradeoff that determines.
#3. Monetizability
The company needs to make money.
When I first developed this framework in 2015 / 2016, it was common for startups to only chase user growth, with a statement of “we’ll figure out monetization later”. But I preferred it differently. For any company to do social good, the more money it makes, the bigger potential it can contribute to social good. Therefore I insisted on checking monetizability from day 1.
Granted, I wasn’t saying the startup needed to be profitable from day 1; almost no one met that bar. I just didn’t want the monetization plan to be handwavily postponed as an afterthought.
It just happens that VC trend since COVID years has also moved towards this direction. Nowadays monetizability / profitability becomes a tablestake for VC investments. So this is no longer a controversial point any more.
#4. Personal Passion
I must personally feel passionate about the domain.
Entrepreneurship is a long grind, and requires grit and perseverance. If the founders don’t have personal passion for the product, it’s much more likely along the way some event triggers the thought of give-up, and once that thought comes up, it likely only grows.
Therefore if I don’t have passion for a certain domain, I shouldn’t pick that domain for my startup.
Test Cases
1st startup: Leap.ai
Back in 2015 / 2016, I got lots of feedback whether the criteria were too restrictive, and people were suggesting to me that maybe 3 out of 4 would be good enough to consider.
Then Richard pitched to me the idea of Leap.ai, and I found out all 4 criteria were met, and for the first criterion, instead of EITHER-OR, it even met AND.
General Demand
Leap.ai has both 2C and 2B components. Every consumer needs some service to help them succeed in their careers, AND every company needs some service to help them hire the right talent.
Social Good
If Leap.ai were to succeed, it would improve overall society efficiency by helping people better find employment opportunities, vice versa.
Monetizability
It’s common practice for companies to pay headhunter commission fees, thus it’s easy to monetize Leap.ai product.
Personal Passion
I have intrinsic joy mentoring people / helping people grow and succeed.
2nd startup: Gaida
Now in 2024, the idea Gene and I are pursuing also passes all the criteria. I’ll update this section once the idea is more broadly announced.
Conclusion
I have high confidence this criteria set serves me well to guide me to narrow down what to work on. It doesn’t have any correlation to whether the idea works in the end. That is left to execution (and luck too), and the uncertainty is the exciting part.
Onwards…