Startup or global enterprise, the fundamental questions are the same.
It can happen at any point in a company’s lifecycle. The big idea. You think that you should enter additional markets with your existing enterprise, create a new company to take advantage of another market, or launch an idea into a business that can create an entirely new market from scratch. The question immediately following the big idea is always (or should be) how big is the opportunity, really? Well, actually, the answer to that is more easily parsed into five basic questions, each of which has the potential to be a make or break when it comes to real-world outcomes.
1. What problem are you trying to solve?
All too often, the rationale for launching a new venture is founded on the notion that something is possible, regardless of whether that thing (product or service) actually solves for some underserved human need. Take Uber for example. While it may be tempting to say that the success of Uber was based on the fact that they created an app for ridesharing, there really wasn’t a pre-existing pervasive problem one could define as, “not having an app for that.”
The problems Uber solved were far more fundamentally human. The first, I’ll posit, was that anyone who has tried to hail a cab on a downtown street, anywhere near rush hour, has felt at least a twinge of humiliation as they flailed their arms about only to be passed by multiple cabs that already contained passengers. Uber solved for that.
The second issue with the traditional cab experience that caused most people discomfort was that moment of performing either the financial or moral calculus of determining a proper tip as they are trying to exit a cab. Using Uber solved for this as well (even though until recently that tip didn’t actually go to the driver).
And finally, Uber bridged a divide across income strata within the society. There were people who wanted and could afford to be driven. And there were people willing to drive them for a nominal fee. Uber facilitated connecting these two parties while simultaneously removing any potentially uncomfortable acknowledgement of each other’s’ financial status.
The point of this is simply that before your company invests in delivering a new product or service, you should be able to answer how it will satisfy a real human need (see: Maslow), and hopefully how it does that better than existing, cheaper or convenient alternatives.
2. How many potential customers have this problem?
If the previous question required soul-searching speculation, properly understanding the size of your target segment requires research, cold hard math and a little informed guesswork. First, assuming you have a hypothesis of what type of person to whom your new venture might appeal, you’ll want to know how many of those folks exist in your trading area, and also understand the size of the market for existing alternatives. You can find that information in a number of ways.
In the US, you might consult the US Bureau of Labor Statistics, US census data, or purchase any number of research reports available through sources like Mintel, or Nielsen. Ultimately, it comes down to a function of how many people fit the demographic or professional profile you’ve outlined for your target, adjusted by what percentage of them are currently using an existing solution.
3. How many of those customers are willing to pay to solve it, and how much?
Here, the question is really, of those potential customers in your assumed target, how likely are they to be attracted to, and commit to adopting or switching to your proposed new solution. The uncovering of this could take on a number of forms. Qualitative research, like focus groups, or quantitative surveys could be used to get a rough estimate of desire.
You could probe for price elasticity information among those who claim interest. In the end, the conservative interpretation of any of this kind of research would incorporate some form of discounting—meaning more people will claim interest and intent than you can count on actually converting.
4. How often will they need to solve the problem?
So, if you know roughly how many people might want to pay for your new product or service, and how much they may be willing to pay, the next logical data point when determining the real magnitude of opportunity is how often do they need it? Is it a one-off purchase? A subscription? Seasonal? Annual?
5. How protectable/defensible is it?
In a perfectly competitive market, every player gets an equal share and profit margins quickly drop to zero. No one should enter that kind of market. So, the question anyone embarking on a potential game-changing venture should ask themselves, is what is the barrier of entry for your competitors? Do you have protectable intellectual property? Do you have an operational or cost advantage that is not easily replicated?
In his book “Zero to One, Notes on Startups and How to Build the Future,” venture capitalist Peter Thiel frames this question around the idea of whether your insight or I.P. is capable of effectively creating a monopoly. And, more importantly, can you defend that monopoly long enough to recoup R&D and return a high multiple for investors before any real margin-eroding competition takes root?
And that’s just stage one.
This is obviously by no means a complete list of the outstanding questions facing any new venture. They are simply a start to providing the intellectual checks and balances to the emotional excitement of a new business idea. You still have questions about product and/or experience design, branding, positioning, messaging, media, and distribution strategy to answer, just to name a few. But those are posts for another day.