Venture Capital

How To Distinguish Good Business Ideas From Bad Ones

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John Popel is a seasoned Chief Commercial Officer, CMO, CRO, CEO, Head of Growth. Marketing, sales, PR and strategy worldwide for 20+ years.

Whether you are a business development executive, a startup founder or a venture capitalist, you are facing new business ideas all the time. In the world of venture capital (VC), there is no lack of intriguing concepts and ideas. The trickiest part is to distinguish the promising ones from those that are doomed. Startups are so counterintuitive that if you trust your instincts, you’re sure to make many mistakes. In this article, I’ll be sharing four major indicators to help you distinguish the promising ideas from the bad ones. 

A good idea for a product or service does the following:

1. It solves a real problem for real customers.

By “real problem,” I mean that there should be a narrow group of people who desperately need your solution. The people who are already paying to tackle the problem are still not happy with the solution they have. By “real customers,” I mean people who are ready to pay you for your solution. 

For example, consider a social network for iPhone owners. It might seem promising because there are currently over one billion active iPhones in the world and the iOS user base tends to cling tight to the Apple brand. If you got just 1% of them, you would have millions of users. Later on, you can monetize some of them for a huge profit.

Unfortunately, statistically, that won’t work. The thing is that when you try to attract users, you will most likely never hear “I don’t need that,” or “I will never use that.” Usually, the initial feedback is more like, “Maybe I will try it later,” or “I can imagine me or somebody using that.” 

Don’t fall for the trap of customer praise and hypothesis. Seek for problems of a narrow audience with an urgent need; trust not their praise, but the money they invest into fixing their needs. The best way is to work on something you yourself want and would pay for if another company offered it. 

2. It addresses a problem consisting of at least two characteristics: urgent, expensive, mandatory, frequent.

Those characteristics provide users with sufficient motivation to start using a new product or service, or to switch to one. 

An urgent problem is one that needs to be solved very quickly. If you have a tight group of people who want your solution so much that they’ll pay for it even with a no-name beta, the idea is probably good. The expensive problem implies that people have been paying a lot trying to solve it; thus, you can charge a lot. The mandatory problem is illustrated by a situation when people have to solve the problem because the government forces them to do so. And finally, my favorite type is a frequent problem. These are the kinds of problems people encounter daily, weekly or monthly.

For example, consider face masks. During the Covid-19 pandemic, face masks became urgent, mandatory and frequently necessary. That clearly explains their market growth when pandemic measures were globally implemented. 

3. It will help solve a specific problem.

Take the SISP approach to filter business ideas. That popular VC acronym means “solution in search of a problem.” It’s a common mistake to develop an idea about a solution first and then try to find a problem matching that solution. We see this happen when founder-engineers are extra excited about technology or when founder-marketers focus only on the new tech or hype case.

For example, consider Uber for electricians, an app where you push a button and get an electrician. It’s completely obvious how it works, but it says nothing about why people need it — and what makes them willing to pay good money for it. What problem does this solve? For whom? Why is it hard for them to solve it right now? Meanwhile, only the answers to those questions will show you how to market your product, how to pitch its value to customers and what benefits of your solution you must harness for that. 

Remember, customers don’t buy the what; they buy the why.

4. It has many competitors in the market.

Despite it being counterintuitive, a crowded market is a good sign because it proves that there is a demand and that none of the existing solutions are singularly satisfactory. That is one reason VC and seasoned angel investors are more skeptical about ideas with no competitors at all. Worrying that you’re late to the party is one sign of a good idea.

Usually, any fast-growing business idea (a startup) that is successful should enter a market with existing competitors (hopefully armed with some secret customer insight) or enter a very narrow market that will grow soon. 

For example, when Google, Uber and Yelp entered the market, they were tiny teams with sharp customer insights. They entered markets dominated by huge companies, and yet they still became the market leaders. Meanwhile, Microsoft and Facebook reached the leading positions by dedicating their focus to a narrow group of customers, which extended exponentially later.

If your idea addresses the acute pains of a specific group of customers, people are already paying for a solution and there are already competitors, you have all the reasons to proceed with that idea. Not all ideas that check these boxes are good startup ideas, but nearly all good startup ideas do measure up.


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