I have had quite a bit of discussion about my article Ideas are not Cheap over the last few months and especially around the checklist for judging the quality of startup ideas.
The checklist was my personal list that I use to judge my own ideas and it consisted of 25 points in no particular order with no details. I thought I should do a follow up explaining these points in detail so they would be more useful for others. This rather long article is the result.
I am biased towards startup ideas that can be bootstrapped as I believe most founders should be bootstrapping. Not everyone shares my beliefs, so I encourage you to create your own checklist. The real value of having such a list is in helping you think critically about your own ideas, not in claiming you met 15 out of 23 from my list.
Some of the criteria can really only be determined retrospectively (e.g. Criteria 5, 10, 11 & 22). These criteria are still valuable to consider as they help you think deeply about your ideas. You may not be certain if an idea meets a criteria or not, but you will still benefit from careful investigation.
Try to avoid erring on the generous side. If you are unsure if your idea meets a particular criteria then score it as no. Your ideas are your children, but unlike your real children your love for your ideas should be conditional.
There is no hard rule about how many criteria your idea should meet to be good idea. Even so, a rough rule of thumb is if you have less than 10 then keep working on your ideas and if it has more than 16 contact me so we can talk.
This checklist is ordered from most important to least important.
Good Idea Checklist
1. Can you execute the idea within your limitations?
This is the most critical criteria on this list. If the answer is no then the idea is not a good idea. You can have an amazing idea for a multi-billion dollar business, but if you can’t actually execute on it then put it aside and work on something else. For example, I hear many ideas for new social media startups that will be fantastic businesses if the person can get to 10 million users – the problem is they have no realistic plan on how to get to this number of users. Just building a social network that is better than every other social network does not mean people will use it. Facebook is not worth more than $250 billion because it is the best social network ever created, it is worth this amount because it has more than 1.5 billion users that advertisers pay to reach.
An idea you can’t execute on is worthless (to you).
2. Do you have a competitive advantage?
What is it about your idea that gives you an edge? Just being an avid user of SnapChat and Instagram does not give you a competitive advantage making a new photo sharing app. The question you have to ask yourself is do you know something really important about the problem or industry that no one else does? Why should you be the one to succeed when there are thousands of people who are smarter, richer, harder working, and better looking (sorry) that have tried and failed? Why has nobody executed successfully on your idea? If you don’t have good answers to all these questions then you don’t have a competitive advantage and your chances of success are slim.
The good news is you can acquire an edge by studying the problem and industry in depth. If you have an idea for an industry you are unfamiliar with then get a job in that industry. For example, if you have an idea for improving the buying and selling of homes then get your real estate license and work in an agency before launching your business. This will help you learn why things that seem crazy to outsiders are done and it will help you avoid building a product that nobody will buy. Selling will be easier as you will be able to speak the jargon of the industry and won’t come across as some starry-eyed dreamer who has no clue what the industry pain points are.
3. Can you bootstrap the idea?
By this I mean can you build the business without ever needing outside investors, not can you start the business, glue together a brittle demo, and go out and look for investors.
For an idea to be bootstrapped into a viable startup you need revenue above your burn rate before you run out of capital. Unless your kindly uncle is extremely wealthy, this means you need paying customers – ideally you will have your first customers before you launch. I see very few ideas that meet this requirement. If it were easy to build a startup by bootstrapping then there would be no such things as angel investors or venture capitalists.
One thing often overlooked by people when thinking about bootstrapping is they need an idea that will generate enough cash-flow to allow the startup to grow. Rapidly growing businesses require lots of cash and if your sales do not provide this cash-flow then you have a problem. An idea is only a true bootstrap candidate if it can generate sufficient cash-flow to allow a startup to grow.
I should note that one of the huge advantages of bootstrapable ideas is they help you avoid building products that nobody wants, or more importantly, nobody wants to pay for. If you must get real paying customers right from the start then you can’t spend years and millions of dollars building something that no one needs, or pivoting from one bad idea to another while burning someone else’s money. Bootstrapped startups have to achieve product-market fit quickly or they die. Embrace the focus bootstrapping brings to your advantage.
4. Do you have profitable customers?
Unless you are running a charity, you need profitable customers. It is relatively easy to give something of real value away for free, but in the absence of very patient and understanding investors, you are going to need to make money sooner rather than later. Building a great product, getting users, and exiting by being acquired by a Facebook or Google is not a viable plan. You need profitable customers, or at least a very clear plan to get profitable customers, as early as possible. Never forget that users are not a substitute for customers.
You need to be able to identify and sell to profitable customers. It is desirable if your early customers are as homogeneous in their needs as possible, but you don’t want build on an idea that will only ever target a very narrow market. Many ideas are too narrow in appeal to be good businesses. It is fine to have as your initial target market Welsh women between the ages of 25 and 35 with a passion for skydiving and needlepoint, but you need to have a plan for expanding your market into other areas such that you have a viable business.
Due to crazy spending fuelled by the venture capital industry, in some markets it is not possible to acquire profitable customers. If the players in your niche are burning truck loads of VC cash buying users then you may not be able to find profitable customers even if your product is far better. For example, in a lot of markets a new food delivery or ride sharing service just won’t be able to charge the true price of providing their service as there are too many competitors burning investor’s cash trying to get scale. Stay out of these markets until the money bonfire burns out.
5. Is the idea hard to replicate?
There is little point building a product that is easy to replicate since a better resourced team can and will come along and steal the market. You want to build products that very few people in the world have the skill or knowledge to make (i.e. where you have a competitive edge – Criteria 2). The only exception are markets where the first mover has a very significant advantage (Criteria 10), but even here being the first mover is just a factor that makes your idea hard to replicate.
6. Does the idea offers high margins that won’t be eroded over time?
This is related to Criteria 5, but it is slightly more subtle and in the long run more important. Startups with high margins can afford to make a lot of mistakes and still succeed. If your margins are 80% then you can mess up almost everything and still succeed, while if your margins are 3% you need to get (almost) everything right. High margins also solve cash-flow problems since every sale is basically money in the bank.
You want a build a business that can sustain high margins. With high margins you can afford to hire fantastic people and provide them with an environment where they will flourish. With a low margin businesses you have to be laser focused on every cent being spent. On top of this it is just so much more fun to work in a high margin business than a low margin one. You want to be worrying about how big to make the Christmas bonus this year, not if you can shave 0.1c off each unit by outsourcing the backend maintenance to some three man shop in Laos.
It is critically important that if you are going to build a startup around high margins that you have a credible plan to avoid your margins being eroded. Ask yourself very critically what is going to stop your margins from being driven down over time? The last thing you want is to build a high margin business (with a corresponding high cost base) and then have to later try to shift to a low cost model because your margins have evaporated. Very few companies can survive this transitions.
7. Does your sales model work?
Ask yourself if your sale model will work at the product’s price point. A high touch sales model (i.e. one with sales staff who chase leads) just does not work for many products if the customer lifetime value is under $1,000. A really common mistake people make is they see a huge demand in the market, know how to make a product that will meet this demand, but only later find they can’t sell the product for the price required to support the required sales model.
The small to medium business (SMB) market is notorious for leading people into this valley of death. There is massive demand by SMBs for better technology products and services — the problem is the lifetime customer value of most SMBs just can’t support the cost of acquiring them.
If you are need to use a high touch sales model to sell and support your product then you need to focus on large customers, or you need to work out a way to be able to sell your product using a low touch model. In some markets it is just not possible to close the gap between the low lifetime value of the customer with the high cost of acquiring the customer. Stay out of these markets no matter how attractive they appear on the surface.
8. Is your idea 100x better than any current product or service?
Most potential customers will stick with the devil they know rather than take the risk on something new. Your idea needs to not just be 10x better, it needs to be 100x better to make people change. Never forget that it has to be 100x better for the person making the decision, not the business or shareholders who will ultimately benefit. Plenty of great ideas have failed that would have helped a company make huge profits because they made life more difficult for the decision maker who had to decide to buy the product. Few decision makers ever lose their jobs for saying no to the new so you need to offer them something fantastic to get a yes.
9. Is your idea sticky?
Does your product or service provide such value to the customer that they will wonder how they lived without it? Will they find it impossible to switch to a new product or service because your product has become totally enmeshed in their processes and habits. If the answer is yes then you have the foundation for a great business.
Facebook is the classic model of this stickiness. Lots of people have made better social networks than Facebook, but the lock Facebook has through the network effect is incredible. If you are going to disrupt Facebook you had better have a product that is at least 100x better (Criteria 8). For a startup it is not likely to be possible to create such a product – even Google failed with Google+ and they had almost infinite resources.
The good news is thinking about the importance of stickiness will help you develop strategies to make your product stickier. Always be thinking about what can you change to lock in your customers, or what can you add to your product make it harder for them to switch to another product.
Just don’t go overboard with this process or you will find you can’t get any customers in the first place. Customers are aware that you want to lock them in and will resist your efforts – make a product too obviously sticky and they will stay away.
10. Does your idea have real and significant first mover advantage?
It is always desirable to have first mover advantage (assuming you are first), the problem is that in most markets first mover advantage does not exist. History is littered with examples of late entrants killing the original pioneers (look at what Amazon did to Book Stacks Unlimited). It is very easy to overestimate how much value there is in being first to market especially if you don’t have access to unlimited resources. If you really do have significant first mover advantage this can be very valuable, but be aware that it is likely a mirage.
11. Is your idea viral?
This criteria is both the second most important and the most difficult to determine in advance. If you have a true viral product of general appeal (i.e. if every new user recruits two or more new users) then all your problems are solved. You don’t need to make money (VC’s will chase you with a checkbook) and eventually a Facebook or Google will buy you out for billions.
The problem is it impossible to know if your product will be viral before launching, or even afterwards most of the time. It is very easy to convince yourself that your idea will go viral (i.e. all your friends say it is a work of genius and it is going to be H-U-G-E), but in most cases it does not happen. It is really, really hard to make a viral product with wide appeal.
If you believe your product will be viral then you need to ask yourself why a stranger would take the time to convince their friends and colleagues to use your product. When someone recommends your product they are investing their ego in your idea so it needs to make the recommender look uber cool / attractive / a genius in the eyes of the person to whom your product is being recommended. Very few ideas can do this. You should always assume, unless you have very good evidence to the contrary, that your product will not go viral beyond a very small niche.
One thing to be very wary of is self-limiting virality. Just like real biological viruses can spread rapidly through a sub-population, yet fail to spread through the general population (HIV is a classic example), ideas can also show the same limited virality. Your great idea might only appeal to 10,000 people in the world. You will launch and see your product spread virally through this niche (small communities talk) only to hit a wall after 6 months once everyone interested in it has been reached. Unless these 10,000 people provide enormous customer lifetime value you will have just created a product that some people love, but which won’t make money. Ask yourself how many people will love your idea so much that they will invest their ego in telling other about it.
12. Is the market the right size?
The right size depends on the funding strategy you are pursuing. If you are looking to raise investor money then the market needs to be in the billions, while if you are bootstrapping you want to avoid these large markets and concentrate on niche markets. The ideal size for a bootstrapped startup is a market around $25 million that will generate profits of $5 million per year. This is too small to attract VC-backed competitors, but large enough to be worth the hassle. There is no point going through the agony and stress of creating a startup if you are only going to earn $100,000 a year in profit. Think big, but not too big.
13. Does your idea fit into an existing market?
It is really hard to create a new product and a new market at the same time. It is much better if you build a product that fits into existing market and is 100x better (Criteria 8) than to be first to market and be banking on first mover advantage (Criteria 10).
14. Will existing market players be indifferent to your idea?
This criteria touches on a series of warnings signs that you want to avoid. Does your product have legal (patent/copyright/IP) issues? Will you threaten the business model of powerful player(s) who are willing and able to crush you? Does your product build on another businesses product or service that can change at any moment locking you out? If you answer is yes to any of these questions you need to have a carefully thought out strategies for how to avoid these dangers.
15. Does your idea create a monopoly?
Monopolies can be highly profitable and very desirable to own. The difficulty is, outside of small niches, that they can be very hard to create and even hard to defend. Ask yourself how you will be able to stop others entering your market? What strategies do you have for stopping a better resource player from stealing your customers?
One of the many advantages of bootstrapping is you can choose markets small enough that defend a monopoly is possible. The VC backed startups just won’t enter a market of $25 million a year. Provided you don’t get too greedy (or lazy) you should be able to retain a monopoly position once established in these small markets.
16. Is your idea simple to explain, but hard to conceive?
This is one of the most misunderstood points from my original article. People assumed that since their idea was hard for them to conceive, and since they can explain the idea, then it must meet this criteria. This is not what I meant (this is my fault). I considered removing this criteria from this list because of this confusion, but it such a valuable feature if true that I decided to keep it but explain it better.
So what do I mean by an idea being simple to explain, but hard to conceive? In some ways it is like a reversing a one-way hash function. It is easy to hash a string, but very difficult (impossible) to reverse the process. An idea that is hard to conceive is one that very few people could have come up with, either because you need to be a genius (unlikely), or they have a very unusual background with just the right combinations of skills and interests. Almost all ideas that are hard to conceive are also hard to explain while almost all ideas that are easy to explain are easy to conceive.
It is a very rare idea that is both hard to conceive and easy to explain. Coming up with one is like reversing a hash function. The value is that it is unlikely that anyone has thought of your idea before, but you don’t face all the problems involved in explain it – you get all the benefits of complexity with all the benefits of simplicity.
17. Can your idea be sold using a low touch sales model?
If you don’t need to hire shiploads of sales staff to sell your product or service then, all things being equal, your life will be easier. Not only do you avoid all the difficulties involved in managing and motivating sales people, but many more markets will be open to you as your cost of acquiring a new customer will be much lower.
The difficulty is knowing if you can use a low touch sales model before launching. It is very common for people to think that their product will be easier to sell than it really turns out to be. You need to question why you think you can sell using a low cost sales model. Try to get as much advice and feedback from experienced sales people before deciding that this model will work. If products of similar cost and complexity are not sold via a low touch model then it is very probable that you won’t be able to use this model either.
18. Is your idea easy for customers to trial and use?
This one is obvious. Of course the easier it is for a customer to trial your product the more people will, and assuming it offers real value, the more people will buy. The difficulty comes from managing the expectations of potential customers for a product with complexity. If you make a complex product too easy to trial then potential customers can undervalue the product, or misunderstand what it can do. Sometimes less is more while other times more is less.
19. Can your idea be scaled at low cost?
It is common advice for startups to do things that don’t scale. While there is great value in this advice, it is not useful when applied to evaluating ideas. When deciding on the quality of an idea you want to choose ideas that can be scaled at low cost with minimal human labour. Whatsapp is an example of the sort of idea that scales at low cost, Magic is an example of the sort of idea that doesn’t. You really want to build a Whatsapp and not a Magic.
20. Does your idea need low cost labour?
You want to avoid ideas that require low cost labour for two reasons. First, most startups that need low cost labour are low margin businesses with all the problems this entails (Criteria 6). Second, managing large numbers of people is never fun. Unless you want to build an empire, you really want to hire as few people as possible to get the job done. Follow the path of Whatsapp which had 55 employees supporting 900 million users when it was acquired by Facebook. Every person you add to your business will only make your life more complex. Better one really good person paid $200,000 a year than four average people paid $50,000 each.
21. Is your idea of interest to the media?
Your idea is unlikely to be of interest to the media, and if it is, it is likely it will be for the wrong reasons. If you are lucky enough to have an idea that will generate positive press coverage this is great, but don’t lose too much sleep if it doesn’t. In the end it is customers that matter, not if your mother gets to see you on the cover of some magazine in a black turtleneck.
22. Can your idea be sold internationally?
Almost all products can be sold internationally, the real question to ask is your idea suited to international sales. Ideas based on geography, legal frameworks, and specific cultural interests or tastes are less desirable than ideas that have universal appeal. The difficulty with assessing the universal appeal of an idea is that it can be very hard to make this judgement since the world is a big place and we all have a specific and limited cultural frame of reference. It is much more difficult than it seems to know how much international appeal your idea will have and often you will only find out after launching.
23. Will your idea make a dent in the world?
We all only have one life so spend it doing things you care about. If you want to build a startup then build one that will make the world a little better than you found it. It is very unlikely that on your deathbed you will regret not making an extra $100,000, but it is much more likely you will regret not doing the things you really wanted to do. Seize your chances and live a full life.
Most importantly don’t stop thinking.