Friday, December 2, 2011

The Problem with Good Ideas


As a startup accelerator and coworking space for entrepreneurs, we see a lot of good ideas. Unfortunately the sad (but very necessary) reality is that not all good ideas are worth doing.  In fact, approaching good ideas in a disciplined manner with structured execution can lead to financial returns that are 2-10 times greater than ventures that proceed without this qualification process.

So how can you tell if an idea is worth doing? First and foremost, you need to determine that your idea is one that can be turned into a profitable company, within reasonable risk parameters, within a reasonable amount of time. Especially in today’s economy, you have to move fast and smart to make the most of your good idea. “Good idea” risks are varied, but generally fall into a few main categories that can be assessed prior to launching most new ventures.

Problem #1 – No Market Demand
We see brilliant ideas that offer clever new products and services on a regular basis. With that said, the aspiring entrepreneur needs to ask, “What problem does my product or service solve?” If you can identify a specific deployment for your “solution”, then the next question should be “What is the cost of not solving this problem – and what is the cost of my solution that I am offering?” Is the consumer motivated to take action based on this simple view?  Is it a big enough difference to tip the consumer on just simple economics?

Without demand from the consumer, many aspiring entrepreneurs face longer marketing cycles with higher odds of failure.  It’s better to have a market place need that is already in place than to create a brand new market for a problem that no one thought needed to be solved. One caveat—products like the “Snuggie” (blanket with sleeves)—defies this assessment model. If you don’t mind the risk of creating a new marketplace on this basis- go for it. But make sure you understand the risks involved in making this bet. Conducting effective due diligence like this can make all the difference.

Problem #2 – Addressable Market
So you have identified that the product and solution equation compute in your favor. How about the scale of economics? If the marketplace has millions of prospective consumers then you are definitely onto something. But what about if the marketplace is significantly smaller? How many competitors are in your space that you must now fight for market share?

“Total addressable market” is a term that considers the entire marketplace revenue opportunity without much regard to competitors. While this looks great on paper as a chart inside of a business plan, it is not a realistic assessment of what can be realistically achieved. A better approach is a serviceable market assessment based on factors such as geography, target market feature sets and pricing and service models.

Having competition is not a bad thing. In fact, our view is that it is often a good thing to have some form of competitor that offers some version of part of your solution.  Creating a brand new market for a product or service that has never before existed can be very costly.  "Blue Oceans" and "Red Oceans" are great ways to look at markets, but don't completely abandon the pragmatic market assessment view. If one looks for competitors that have similar target markets and offerings, the addressable market size assessment becomes much clearer.

Is your market size big enough to make for compelling and sustainable financial returns?

Being able to assess your good idea through more due diligence and understand the addressable market is critical in understanding if the risk-reward relationship to launching your idea is worth doing.

Problem #3 – Internal Rates of Return vs. Risk/Reward
To truly understand if a good idea is worth doing, you have to look at the cost of capital vs. the potential financial gain. Often times, we will ask the trick question of “If you raised a five million to make one million…is that a good deal?” The answers lies as much in the amount of time it took to make that return on investment (ROI), as it does on the risk to obtain it. Conversely, if you raise a million to make ten million, that sounds like a pretty good deal. But if it takes 20 years to achieve that ROI, that equates to a meager 12% internal rate of return. This is clearly below par for nearly any investment consideration from venture capital, private equity or even angel investors.  It should also be below your threshold, too.

Consider all of these elements into the return calculus and your ability to evaluate your investment of time and money into your good idea.  Hopefully the good ideas worth doing will become much easier to distinguish through this process. 

Problem #4 – Execution “X-Factors”
Is your product or service scalable? Is it replicable in other markets? Can you repeat the service model or deployment mechanisms for continued success without undue risk? Does your idea have barriers to entry that are low enough for you to achieve but high enough to keep others out?

Barriers to entry could come in the form of capital requirements, domain expertise, industry insight, rolodex (access to opportunities), having the right people and agility to execute, and many other factors.

A good idea that is difficult to execute is problematic to investment consideration. Once an idea moves beyond “idea risk” and into the real challenge of “execution risk”, the capital requirements become bigger and the risk becomes greater. If your product or service does not pass muster on these critical factors, then you may want to reconsider before launching.

Problem #5 – The Human Factors
Having the right people on board your team is everything. This doesn’t mean you have to recruit the best and brightest and keep them on your bench waiting for work. But it does mean knowing how to find them–and utilize them–when the necessary time comes. This is one of the strongest benefits to working with business incubators, accelerators and sometimes even coworking spaces with the right people.

Here is another human factor consideration that can rear its ugly head against your good idea. Is the founder or team coachable? Coachability is hugely important for many successful startups. No one knows everything, and the startup team that blindly (and deafly) executes their business plan and is tone deaf to good advice from the right people should expect more trouble hitting their milestones of success.

Nothing can replace “been there, done that” expertise and wisdom that is often the result of narrowly escaping the dire consequences of a plan gone wrong...then made right. Seeking relevant, timely advice and then having the capacity to make smarter decisions is essential for a good ROI. If your good idea is lacking the right people or is unwilling to be coached by qualified mentors, then your good idea immediately becomes more risky and may not be worth doing. Participation from the right people at the right time is a key to your success.

Last thoughts
There are many other considerations that can be factored into the go/no-go decisions of launching your next BIG idea for a startup company. Here are a few more:
  • Do you possess enough “cross domain” expertise to build the right product and service, and then bring it to market? Think in terms of both insight and job function.
  • Are you prepared for the incredible time and effort that your good idea will demand to be successful? No matter how good your idea may be, it will likely take twice as much time and money to execute.
  • Do you have the “will to win”? Easier said than done, but when work needs to be done at midnight, are you prepared to do it? The startup world is a results-based economy. While effort and good intentions are appreciated, the only thing that ends up mattering most is results. Be prepared for this reality.
  • Does your product or service have Intellectual Property rights that can be protected?  This is a very valuable asset not to be overlooked.
  • Understand the likely financial outcomes for your good idea. Does this mean a long term profitable company with no exit? Or does this mean a potential or likely acquisition for a variety of reasons? Take time to understand the path your company will likely have to take.  Both the work involved and the type of investment capital you seek will become clear.
Blindly executing your good ideas without taking stock of the financial outcome is never a good idea. If you can detach yourself emotionally from your good idea and approach your concept with discipline, purposeful scrutiny and a dose of “prove it” skepticism, this can make all the difference between wasting time and money in pursuit of an ill-fated idea, or launching the next BIG thing.

Incubators offer services to help supplement missing expertise and talent. Accelerators offer a disciplined approach and tempo to forced execution through a set of circuit breaker milestones. Coworking spaces can offer collaboration, hooking up with new ideas and partners and a place to maximize your productivity while working. By design, Think Big Partners and bizperc combine all three of these essential ingredients to help turn you good ideas into a good idea worth doing.

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