Building a Startup #3: How To Evaluate If Your Startup Idea Is Unicorn Or A Horse

✨ Hi, I’m Sara! In this newsletter, I share my musings at the intersection of tech, product, and human tinkering, with the aim of navigating business and life in the Technology Era with purpose.

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Hey friends 👋, as announced in my previous newsletter, I've decided to take the plunge and build my own startup. This is a big deal because I have only 10 weeks to find a co-founder, build an MVP, and pitch to investors. Otherwise, I'll need to find a job to avoid running out of funds.

I’m going to document my entire journey and give you all the details of how to build a startup, including all the resources, processes and templates that I am using. This will be a step-by-step guide written as I navigate the process.

In previous issues, we have covered:

1. How to find the perfect co-founder

2. How to come up with a business idea worth millions

In this issue, we will continue discussing business ideas. Specifically, we will talk about how to evaluate if you have a potentially good idea that is worth validating among various options.

We will also explore the difference between good business ideas and ideas that could potentially be worth billions.

Before we start, it's important to set the right mindset and follow Paul Graham's advice: you should think of ideas as a good starting point.

The following process is therefore not a substitute for validating a business idea, but it is meant to help you narrow down the idea you should spend time investigating and validating among various options.

12 Key Questions to Evaluate if Your Idea is Good or Not

To assess the feasibility of your business idea, we need to address 12 essential questions. Now, let's examine each question separately.

1. Is There a Strong Founder-Market Fit? 

   Arguably the most crucial criterion. Many good startup ideas exist, but not all are suitable for you due to various reasons. Founder-market fit means you and your co-founders are the ideal team to execute this idea, possessing a unique combination of competencies, knowledge, and skills.

2. Do You Have Personal Passion and Commitment? 

   Is this an idea you're willing to dedicate years to? Does it align with your personal goals and values? While initial passion is a good sign, often, interest develops as the startup progresses. Many successful ideas come from "boring" sectors, like tax accounting software, which may not initially ignite passion but can grow on you as the business becomes successful.

3. What is the Market Size and Growth Potential? 

   A large and growing market presents more opportunities for capturing significant market share and revenue growth. Markets can be currently large or small yet rapidly growing, fueled by new technologies. For example, Coinbase capitalized on the initially small Bitcoin trading market, which had the potential to become a billion-dollar market.

4. How Urgent is the Problem You're Solving? 

   The greater the problem's impact on your target users, the better your chances of success. Assess how the problem is currently being addressed. A substantial problem with no current solutions is ideal.

5. What Does the Competitive Landscape Look Like?

   Contrary to some beliefs, having competitors is not always negative. Good startup ideas often face competition. However, if you're challenging well-entrenched competitors, you need a novel insight.

6. What is Your Unique Angle? 

   What gives your startup a lasting advantage over others? This could be proprietary technology, exclusive partnerships, first-mover advantage, or an efficient business model.

7. Can Your Business Scale Effectively?

   Evaluate how easily your business can expand in terms of customers, revenue, and operations. High-potential startups typically use technology or innovative models for rapid scaling without proportionate cost increases.

8. What are the Monetization Potential and Time to First Revenue?

   Assess the revenue potential and how quickly you can generate initial revenue.

9. Is the Timing and Market Readiness Optimal?

   Consider whether the market is prepared for your product or service. The timing should be neither too early nor too late.

10. Are There Any Regulatory or Legal Risks?

    Identify potential regulatory or legal challenges that could affect your business. Understanding and planning for compliance is crucial.

11. What is the Exit Potential?

    Think about the long-term exit possibilities, such as acquisition, merger, or IPO. A clear exit strategy can make your idea more appealing to investors.

12. Is Your Business Resilient to Major Impact Events?

    Evaluate the resilience of your business against significant impact events, like a pandemic or the advent of AGI (Artificial General Intelligence). How likely is your business to withstand significant disruptions?

I have created a template with a scoring system to help you sort through each idea. Here is how it works:

1. Reflect on each question carefully.

2. Assign a weight to each question on a scale from 1 to 5 (1= not important, 5= most important). Concur on these values with your co-founders.

3. Rate each idea against each question on a scale from 1 to 5. Do this individually, then combine your scores with those of your co-founders.

4. Examine the "weighted score" row to determine which idea ranks highest.

👉 Get the template here

Example: B2B Startup Idea

Since embarking on my startup journey, I've pivoted from two different business ideas, while three others are still in the exploration phase. All of them are documented in our idea assessment sheet which you can see below.

To shed light on the process and explain why some ideas were discarded, let's examine the first idea, which received the lowest ranking.

The concept was to introduce an integrative B2B health insurance focusing on longevity, enabling businesses to enhance their employees' health and wellness.

Founder-Market Fit: 2

Despite my passion for longevity, my expertise lies in software development, not in medical fields or operations-intensive businesses.

Personal Passion and Commitment: 4

Longevity has always intrigued me, and I can envision myself contributing to people achieving their optimal physical health.

Market Size and Growth Potential: 2

The longevity market is expanding but remains niche. In Germany, employers receive no tax incentives for such initiatives, and traditionally, Germans are hesitant to incur additional healthcare costs.

Urgency: 1

As an employee benefit, the urgency for companies to adopt this is minimal, relying primarily on goodwill.

Competition: 2 (note that in this case, a lower number means more competition, and a higher number means less competition)

The uniqueness of focusing on longevity offers an edge, yet the market for employee benefits is crowded with alternatives, including gym memberships and coaching services.

Unique Angle: 4

The longevity angle makes it quite unique in the current employer benefits landscape.

Scalability: 1

This service model, requiring extensive partnerships for physical interventions, is challenging to scale and demands significant initial investment.

Monetization Potential and Time to First Revenue: 2

Revenue generation is contingent on establishing the service infrastructure for tests and consultations, delaying initial earnings. Additionally, employers' fixed benefits budgets may not suffice to cover operational expenses, much less yield a profit.

Timing and Market Readiness: 3

The pandemic has heightened awareness and interest in health optimization and longevity, potentially benefiting the business. However, this field is still emerging and niche.

Regulatory and Legal Risks: 2 (note that in this case, a lower number means more risks, and a higher number means fewer risks)

While technically a wellness package and not a medical service, handling health data requires stringent compliance measures.

Exit Potential: 3

Achieving significant presence and revenue could make the business an attractive acquisition target, though its operations-intensive nature limits IPO prospects.

AGI or Pandemic Resistance: 4

Healthcare remains essential, with potential demand spikes during pandemics, indicating resilience to significant disruptions.

Do You Have a Horse (Good Business Idea) or a Unicorn (Billion-Dollar Business Idea)?

Now that we have seen the criteria for a good business idea, let's explore what a billion-dollar business idea looks like. First of all, there is nothing wrong with good business ideas – most companies fall into this camp. However, once in a while, some companies rise to the billion-dollar potential.

The primary difference between a good business idea and a billion-dollar business idea lies in the scale of impact, market size, and growth potential. While a good business idea can be profitable and successful within a specific niche or market, a billion-dollar business idea has the potential to disrupt industries, create new markets, and achieve massive global scale.

Here are the key criteria and examples that differentiate the two:

• Addressable Market Size:

  • Good Business Idea: Excellently serves a niche market with steady but limited growth prospects. For instance, a boutique specializing in custom-made, eco-friendly furniture might cater to a growing trend and secure a devoted customer base, supporting a successful, sustainable enterprise.

  • Billion-Dollar Business Idea: Targets a vast, often global market with products or services that meet widespread needs or desires. Airbnb disrupted the traditional hotel industry by enabling people to rent out their spaces to travelers, tapping into the global travel market.

• Innovation and Disruption:

  • Good Business Idea: Enhances existing solutions or addresses an underserved segment. A mobile app improving booking services for salons exemplifies a good business by solving problems for businesses and consumers alike.

  • Billion-Dollar Business Idea: Creates or entirely disrupts markets. Uber, for instance, revolutionized transportation by facilitating convenient ride-hailing through an app, challenging taxi services and the norm of personal car ownership.

• Competitive Advantage and Moat:

  • Good Business Idea: Boasts competitive strengths, such as exceptional customer service or a unique product feature, though these can be more easily mimicked or overcome by competitors.

  • Billion-Dollar Business Idea: Has a profound, enduring moat that protects its competitive edge. This could stem from network effects (e.g., Facebook), proprietary technology (e.g., Google's search algorithms), or a distinct business model (e.g., Amazon's e-commerce ecosystem).

• Gross Margins:

  • Good Business Idea: Generates reasonable gross margins that permit profitability but offer limited scope for exponential growth.

  • Billion-Dollar Idea: Commands high gross margins, often through intellectual property, scale economies, or unique competitive edges, like software giants or pharmaceutical firms with patented products.

• Platform or Ecosystem Potential:

  • Good Business Idea: Offers a singular product or service with minimal expansion or integration potential.

  • Billion-Dollar Idea: Has the potential to evolve into a platform or ecosystem, fostering third-party integrations and supporting a range of complementary products or services.

• Global Reach and Relevance:

  • Good Business Idea: Targets specific regions or demographics, fulfilling localized or cultural needs.

  • Billion-Dollar Idea: Appeals universally, transcending markets, cultures, and demographics, like global search engines or internationally recognized brands.

• Founder Vision and Ambition:

  • Good Business Idea: Efficiently meets current market demands with a focus on short-to-medium-term growth and stability.

  • Billion-Dollar Business Idea: Is driven by a bold vision aiming to alter how people live, work, or interact, foreseeing and shaping future trends and opportunities.

B2B vs B2C: Characteristics of a Billion-Dollar Idea

While scalability, market size, and innovation are fundamental in both realms, their execution and impact vary due to each sector's unique challenges and characteristics.

B2B Sector:

• Good Ideas: Often involve improving efficiency, reducing costs, or solving specific industry-related problems. These ideas have a clear target market and offer solutions that businesses are willing to pay for. An example could be a new software tool that automates invoice processing for small businesses, saving time and reducing errors.

• Billion-Dollar Ideas: Tend to transform entire industries or create new ways of doing business. They often involve platform-based solutions that connect different businesses for mutual benefit or disrupt traditional value chains. Salesforce is an example, having revolutionized customer relationship management (CRM) with its cloud-based platform, changing how businesses interact with their customers.

B2C Sector:

• Good Ideas: Typically focus on meeting consumer needs, enhancing convenience, or providing new experiences. These ideas may not necessarily create new markets but capture value within existing ones. An example could be a subscription box service for gourmet foods, which caters to food enthusiasts looking for new tastes and experiences.

• Billion-Dollar Ideas: Often involve creating entirely new consumer behaviors or tapping into large, underserved markets with innovative business models. Amazon began as an online bookstore but grew into a retail giant that changed how people shop for a wide range of products, effectively creating and dominating the e-commerce space.

What’s next: the journey so far

After discarding the previous two ideas, I'm now focusing on testing and researching the remaining ones, while keeping an eye out for more opportunities. Based on my scoring, which is admittedly subjective, the matchmaking app idea looks like the most promising.

Now it's time to transition from arbitrary assumptions to actual idea validation. In the next issue, I will guide you step-by-step on how to validate the idea you have selected.

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