How To Assess A Startup?
Difference between StartUp and a Business is described quite gracefully by Paul Graham. Growth is one important metric for a startup, but the task for most entrepreneurs is to assess the business they are getting into and ask themselves. Does it make sense to run it? Is this the real problem or pain point to solve? Will it grow and how fast?
Once you are firm on a problem statement, you can start with the feasibility to know how big it can grow to.
The billion dollar question is how do you find the pain point or the problem statement? Honestly, you will find tons of pain points, they are NOT rare. At first glance, you will like many of them but when you drill down deep and spend enough time thinking about them, you will start unlocking closets where the skeletons are hidden.
At this time, realize does it make sense to run this idea and what value do you pass on to the customers, mostly you will pivot.
These thoughts are coming from my own effort and experiences while running my Startups.
Let us say you found that golden idea which you believe will make you the next unicorn. Therefore it’s quite obvious, you will start hunting for a solution but pause here. There is another task that can break your heart, which is customer feedback and conducting market research, wear the cap of a product manager and creating a business map, you can consider the following as a framework and fill in as many key points as possible.
Once you get the hang of the framework, you will naturally look at each product from the same lens. Later, it’s all about strategizing and hitting the goals.
Market Size
Market size indicates the watermark level, how large or big the market is? Who will be your target customers and where are they located?
Look at the market as a funnel, where at the top is TAM and SOM at the bottom. Businesses must focus on SOM and create strategies to reach out to those customers, fast and effectively with minimal capital burn out. Here the important thing is to identify the REAL Obtainable Market. Steve Job’s video gives excellent insights as to how to segment the product and therefore who could be the target customers (professionals in the video).
Investors want to know if they can make 10x returns from your business in the next 5–10 years and the best way to show them is by showing the growth. According to YC, a startup growth:
A good growth rate during YC is 5–7% a week. If you can hit 10% a week you’re doing exceptionally well. If you can only manage 1%, it’s a sign you haven’t yet figured out what you’re doing.
Key points:
- Size (TAM, SAM, SOM)
- Growth metrics
- Channels : Modes to reach out to customers?
- Go-To-Market : How will you acquire those customers?
Traction — Customer Validation
What makes and breaks a startup is this single parameter ‘Traction’. If you could create traction you are in the game. This is quite tricky and one has to be creative to demonstrate a genuine traction,
Mind well ‘genuine’ is the word here.
But before impressing investors with a letter of intent, customer interviews, wish-list, etc. You must ask yourself, are you convinced enough with the customer feedback and is the problem real? Will they use your solution, what is the value are you giving to the customer? Is this a Need or Want? How frequently will they use your solution?
If you are not convinced, what are the grey areas and correct them. Trust me this is the best time to pivot.
Product-Market-Fit is not one time activity, but a constant pursuit.
The sooner you make your product fit for the market the better for your growth and easy user acceptance.
Key points:
- Customer feedback: Interviews, polling, online questionnaire, wish-list, etc.
- B2B: Letter of intent, Contract, Pre-sale, Paid pilot, etc.
- Value creation: Need Vs Wants.
- Be creative and get the true customer’s voice.
Team
The next important aspect after traction is the ‘Team’. This is the force that is going to challenge all odds in the way of startup.
StartUps are hard and drains lot of your energy, capital and at times gives you hardship. It all that starts with celebrations may not end in happiness.
There has to be a perfect mix of business and tech co-founders. Co-founders must have been honest, hard working, great temperament, open to ideas, care for each other, remain calm and composed when challenges come. Experience and maturity matters a lot.
Key points:
Must read, founder dating playbook.
Competitive Advantage
YC loves new/unique ideas, market and thinking but with growth tag attached to it. Mostly, startups are either solving old problem with 10x improvement or creating a niche to acquire customers.
On one side what ‘Facebook did to Orkut’ on the other hand ‘what GCP/Azure/… could not do to AWS’. Thats because there is not enough improvement for customer to move to new vendor.
AWS is 6 times larger than the next 12 competitors combined
Well, there are other aspects too like: first movers advantage, hard to dislodge customer, etc. But all this can override if you have 10x improvement in your product.
Why now?
Explain the conducive environment/situation that will act as catalyst for your startup and hence Why now is essential.
Key points:
- Ways to differentiate, 10x improvement
- Ways to be more efficient
- Entry barriers
- Why now?
Business Models & Respective Metrics
Largely, these are the nine types of business models you might have for your business, if it doesn’t get covered in the below then its usually called “moonshot”.
If the business is in seed stage, your pre-product validation should give you high level insights, (caveat: pre-product validation must be an honest effort and not for investors), but post seed round following metrics becomes your daily dose of oxygen. You want your metrics to grow else it’s hard to raise the next round. In the beginning, struggle is constant and increasing with every passing day. One of the most common advice given by YC is:
Do things that don’t scale, in the initial stage of startup.
The pressure of growth always haunts you but it also keeps you fixing things.
Various business models and their metrics, explained in the most excellent way.
- Enterprise
- SaaS
- Usage Based
- Subscription
- Transactional
- Marketplace
- E-commerce
- Advertising
- Hardware
Roadmap
Two essentials roadmaps that investors are interested in:
- Product
- Business milestones
A road map is like a short and long term Agile plan for you and your company. It can drive the company in the right direction if planned accurately with details. This are essentials the OKR for a business and hence require planning, execution and strategy to achieve them time to time.
Ask and Usage of Funds
Remember, Investors are also humans. Be empathetic towards them and provide them clear, simple, legible stuff. Don’t overcomplicate as they might not know all the details of your business domain. Tell them a story which is easy to understand and digest.
When asking for funds, tell them how much and how you are going to use it. One must have a product and business roadmap ready to reach to this point.
An entrepreneur fails once and fails again and then again but one thing that never dies is the pursuit for success. Let me know your learnings and thoughts?
