What makes a Good Startup Idea? Discover the Key Factors to Choosing Successful Ventures 💡

Are you struggling to determine which of your startup ideas is worth pursuing? Wasting time, money, and effort on a doomed concept is the last thing you want.

In this blog post, we'll guide you through the essential factors to evaluate your idea's potential success.

From the problem you're solving to market demand and even regulation, you'll have insight you need to make an informed decision.

Don't waste time on bad ideas - let's get started!

Who are you? 👓

• First, are you a general entrepreneur and mischief maker searching for a cool problem to solve? Or do you have a specific niche that you want to play in? 🤽🏼‍♀️
• Second, where are you in your experience and financial freedom journey? If you’re early, we tend to think you should build a business with a short time to market. Compete in an existing industry vs. trying to build a new industry from scratch. Don’t run before you can walk. 🏃🏼‍♀️
• It’s important to understand where you sit, before judging a startup idea.

What kind of startup do you want to build? 🔨

• Specifically, are you going to bootstrap or go the funded route? Why does this even matter? Let’s add some context…
• VCs and Silicon Valley types have stated time and again that they’re chiefly looking for $1bn dollar opportunities and not lifestyle businesses that can generate a really solid return, but are not ‘venture scale’.
• The odds of building a successful venture scale business are very, very small. And even startups that begin strong, can struggle to find product market fit. What’s more, clicking through the fundraising stages and raising a lot of money can often end up making the founders next to nothing. 0️⃣
• How? The core issue is ‘liquidation preferences’.
• As you continue to raise money, eventually liquidation preferences come in. If the company goes through a tough time or exits for less than the money raised, some or all of your investors will end up accessing that money before you as a founder can get any.
• Our belief is that in shooting very specifically for a $1bn dollar company, your chances of success are smaller. Fewer companies get there, and given the liquidation preferences issue, you won’t make any real money if you don’t get there.
• This is why at Underdawgs we believe that if you’re not, let’s say, a single digit millionaire (we often refer to that as getting to Level 1), then why shoot for the moon and risk it all on an idea that might work, as opposed to building a solid vehicle to wealth that has a higher chance of success? 🏦
• The key caveat being that if your idea is your life’s calling and hill to die on, then obviously go for it. But if you are not yet a single digit millionaire then be pragmatic. First build a cool little business that makes you a millionaire and then, take yourself a level up.
• To reiterate, at Underdawgs our starting position is to bootstrap. 🥾 That means we have some extra factors in regards to bear in mind when judging a startup idea.

Factors to optimise in order to pick a good startup idea

Identify a Problem ⚠️

Work on your own problem… Failing that, make sure it’s at least a problem suffered by someone close. Why? 3 key reasons…

• Empathy: Entrepreneurs who solve their own problems have a deep understanding of the issue at hand, which allows them to develop a solution that truly addresses the needs of the target market. 🎯
• Perspective: Entrepreneurs who are working on solving their own problems are likely to approach the issue from a unique perspective that others may not have considered. This can result in innovative solutions.
• Now, this might seem to fly in the face of what others like Marc Andreesen and Elon Musk have said in the past. They say that industry outsiders are often better placed to upend an industry as they come from first principles vs. reasoning by extension. But the key 🔑 (and something for another video) is to to always come from first principles on any problem you want to solve. Whether that be your own personal one/ industry problem or something new.
• Passion: When entrepreneurs work on solving their own problems, they are likely to be more passionate about the project as it has a personal connection to them. This can lead to higher levels of motivation and drive.
• If you don’t yet have a problem that you can think to work on, then do 3 things:
• Become hyper aware of the problems you face in your home and work life. 🏡
• Speak to the people close to you about the problems that they have in their home and work life. 💼
• Keep a journal of all your observations! 📖
• Jared Friedman had a good exercise for less experienced entrepreneurs to get their creative juices flowing: 🥤
• Think of every job you’ve ever had (as well as internships and life experiences).
• What are the problems that you’ve witnessed?

Vitamin or a painkiller? 💊

• In an ideal world your product or service should be needed by consumers, as opposed to simply wanted.
• It’s one of the best ways to understand early whether somebody is going to be willing to pay for any solution you create to solve this specific problem.

Urgent

• Ask yourself ‘Do people require this product right now?’… If not ‘Do people require this product in the very near future?’ ⭐
• Without a healthy injection of urgency from the user to solve their given problem, it’s not likely your product or service will get the momentum or conversion rates that you want.
• You can create at least some urgency via good marketing. The more real that urgency is, the better it is for your startup’s prospects.

Pricing power

• It’s all well and good establishing a great problem that lots of people need solving quickly. But that does not mean it’s be a great business.
• So, try to veer towards a problem that is highly prized. 🏆 Then make your offer so valuable that consumers will pay premium prices without question. In the words of Tim Ferriss - price high and justify

• For example, Jeff Bezos has said multiple times that when he took over the Washington Post, the immediate shift was charging a lot from a small audience to charging a little from a large audience.

That’s the inherent beauty of software - there’s no marginal cost, so you can sell at a lower price. However, just bear in mind that when you’re launching your startup a low price means thinner margins and less profit to plough back into making the product better.

• If you’re going the fundraising route, cool. But in an ideal world it’s obviously better to control your destiny with pricing power vs. relying on the continued investment from others.

Frequency

• Frequency is a massive help when forming habits and building a reliance on your product or service. Other things being equal, it’s great to build a product or service that consumers require time and time again vs. a one-off service that solves their problem in a single instance or purchase. It allows gives more chance for reactivation notifications and with it higher retention rates.
• Once again, be pragmatic about the kind of startup you’re building. 🏗️ If it’s a long term savings platform, you’re not trying to bring your users in every day. In fact, frequency of usage might be a negative KPI. If you’re trying to build a competitor to Instagram and LinkedIn, then clearly Time in App and frequency of usage are pretty core.

Some final thoughts on choosing a great problem💭

• Don’t suffer from Schlepp blindness… aka if it looks like a ball-ache don’t necessarily shy away from it. 🔎

• Paul Graham got this point down in one of his seminal essays on startups. Bottom line, founders would rather not grind stuff out if they can avoid it with another easier problem to solve.
• But instead of shying away from those types of ideas, Graham points out that if something looks hard on the face of it we should attack the problem with an open mind in order to test a couple of things.

1. Is it actually as hard as it seemed at first?
2. Will schlepp be a big value unlock and create a really big business for us? In which case, it might be worth staying the course.

Warning : ⁉️ Do not confuse this with building a deep tech startup with 3 year R&D cycle. That’s something else entirely.

• A problem that your company can solve and not one where your primary offering relies on any third parties coming through for you.
• This is something Marc Andreessen referred to about corporate partnerships in his blog (the Moby Dick theory of big companies) - relying on a corporate partnership can kill startups as they move so unpredictably and slowly.
• But again, if you can create the solution end-to-end, and launch on your own whilst a corporate partnership simply acts a rocket fuel to turbo charge your distribution, then it’s super interesting. More on that later….

Great Market and Big Opportunity

Growing quick! 📈

• A rising tide lifts all boats. There’s no point going into a market that’s stagnant or declining.

Real trends vs. Fake trends 👔

• Sam Altman introduced highlights one of the most important concept of a great growing market. Real trends versus fake trends (2.00), and how vital it is to be able to recognise the difference between the two. Let me expand.

• Altman provides us with an easy methodology to recognise our trend as real… Early adopters of your product will use it religiously and tell all their friends about it.
• On the other hand, whilst a fake trend may be purchased and talked about, it doesn’t possess the same degree of obsession and retention of users.
• So, here virtual reality might (currently) be identified as fake trend and AI a real trend.
• Whilst VR headset sales are pretty good, the usage data lacks the intensity of, for example, an iPhone.
• In Bill Gross’ legendary TED talk on what makes a successful startup, he identified timing as the key variable. I hypothesise that this is basically jumping into a ‘real trends’ early-ish and letting it carry you. 🦘

Good Startup Ideas exist in Good Idea Spaces

• When starting to think about potential start-up ideas, Jared Freidman asserts the importance of entrance into a space that will have a reasonable hit rate. 👊🏼
• You want to be entering a prosperous field, not a declining one.
• The bonus of such an area, as Friedman says, is that each time you fail, you will learn more about the idea space you are in. This inevitably edges you closer to the right answer. ✅
• In a great idea space, you are in a good position to bump into a good idea, as you may consistently be just one level of abstraction out from that massively successful start-up idea.

Popular 🎉

• It’s important that the problem you’ve identified is one that a lot of people are struggling with.
• The concept behind broadening one’s market scope is simple; if more people have the problem, then more people will need your help. Hence, it’s best to avoid identifying problems that only effect a small number of people.
• That doesn’t mean you don’t niche down into a specific audience. However, a big audience is a massive help, as there’s less pressure on your funnel having high conversion rates.

Your vision for the solution should get your audience pumped 💪🏼

• What is your vision of the future that you believe should be true, by solving this problem?
• When you‘ve got a solution to the problem expressed and down on paper, then you can start speaking to people who also have that same problem.
• Now some of my product peers might say you shouldn’t find a solution too early…I call b.s. on that. 💩
• Of course, you don’t know the exact shape of the solution. But, by having an idea of a problem to tackle and your vision for the future, you almost inevitably have some thoughts on how you might solve that problem.
• Speak to users. When sharing your idea on how to solve that problem with them it should prompt a strong reaction and not something flat like ‘Sure, I might use that one day’.
• I remember when I started Upside and was doing some problem and solution interviews before we got into building it.
• We had a few mockups of how it would work and the reaction was kind of positive but not ‘wow, that would be so cool’. I think I was just sub-consciously anxious to start my next thing.
• On reflection it just wasn’t a solution that people really desired given the problem itself wasn’t one that they truly identified as a ‘hair on fire problem’. Vitamins not painkillers… Avoiding these kind of problem/solution combinations cannot be over stressed.
• One important thing to keep in mind when you’re speaking to customers is making sure that’s you’re asking probing and exploratory questions vs. you leading users to the conclusion that you want. If they don’t want or need what you’re selling you want to know that as soon as possible! There’s a helpful book on this called The Mom test by Rob Fitzpatrick.
• For an in-depth guide to User Research, check out our blog!

Avoid the mistakes of others ❌

• When you’ve decided on a specific path, make sure to check out previous players in this market.
• There will almost certainly be some people and companies who have failed before.
• Better than just reading about the company, actually reach out to that business’ founders for a chat.
• Whilst it might seem weird to reach out to people who’ve failed in the space you’re thinking of heading into, you’ll be surprised how open they are to sharing their learnings and warnings of why this problem is going to be a lot harder to solve than you currently think.

Platform shifts 💻

• A computing platform shift is the emergence a dominant new medium for human to computing interaction. ⌨️
• There’s been several already in computing’s short history. A few of these are mainframe to the personal computer, the rise of web browsers and the emergence of smartphones. 📱
• A few questionable platform shifts that are happening are the rise in voices like Siri and Alexa and also VR/AR.
• The most obvious current platform shift though does appear to be the rise in AI.
• Platform shifts present a huge opportunity for startups because they create a hyper-growth market and an opportunity space for new solutions to big problems. 😃
• Taken at its extreme, people are already discussing how ChatGPT might challenge Google’s search dominance!
• This is the opportunity for a fast and nimble startup to disrupt established players. 🤾🏼

• During a platform shift, there's a lot of uncertainty, and often a technical gap between large companies and their staff, who are positioned to exploit that technology. 📺
• Additionally, platform shifts often lead to the creation of new markets, which can be a huge opportunity for startups to establish themselves as leaders in these emerging industries. For example, the rise of the smartphones created new markets for mobile apps and related services.
• Finally, platform shifts often bring about changes in consumer behaviour, providing an opportunity for startups to meet new consumer needs and preferences. This can lead to significant growth and valuable exits for startups. 💲

Public Policy changes ©️

• Generally speaking, avoid regulated industries if it’s not your ‘chosen industry’. With that said, if you are going into a regulated industry how can you make it work to your advantage? 😉
• Keep an eye out for a large change to industry regulation. It presents an opportunity to adapt faster than the slower moving big companies.
• Depending on the specific legislation, adhering to it quickly can provide:
• First mover advantage with your audience and boost your potential as a legitimate moat. The burden of meeting regulations is meaningful, so a lot of companies avoid it altogether.
• A moat against the other small and nimble startups that may have otherwise decided to solve the problem you are also solving.
• Public policy is however a bit of a strange one. And meeting regulation does not necessarily mean you’re going to build a great business. Clearly. All of the above still matters. This can just be a extra sweetener in respect to defending against other companies. 🍬
• Do also keep an eye out for mega legislation like Open Banking as they can have a gigantic impact on the industry.
• And bear in mind, that new public policy starts long before it’s passed into legislation. This graph byelegantly outlines the 56 steps (!) involved from thinking up and discussing new public policy, to getting it passed, and then making sure its adhered to.

‍

• So, if you’re going to have first mover advantage, it helps to understand what’s going on earlier in the process.
• And again, if this is your ‘industry’, then you’d be wise to get to know the key people involved and get a seat at the table of public policy creation.

Are you one of the top ten in the world at this very thing? 🔝

• For the sake of completeness, this is worth mentioning.
• Are you a 1/10 worldwide founder who can solve this problem?
• If that’s true then you have a massive edge and clearly passion in that area. In this case, it makes sense to pursue that idea.
• Most can skip past this - you can be great, really smart, super technical etc. The truth is simply most people haven’t picked such a specific niche that you are a 1/10 globally.

Fast time to market

• Think 3 months to a fully realised MVP; though we do believe in shipping early and regularly on the journey to get there.
• We do not believe in long internal R&D cycles. These make us miserable… I caveat this with that fact that this view may well change once you’re rich.
• This relates back to what kind of startup are you building… Long R&D cycles are typically the deepest of deep tech companies. But do not conflate long R&D with commercially successful.
• AirBnb, Uber, Stripe - none of these companies had a long time to market. My preference is to make time to a fully realised MVP as short as possible.
• Keep in mind, whatever your initial estimate for time to market is, double or triple it. For those of you who have shipped an MVP before, you’ll appreciate this fact. That’s a major reason why we are doing everything we can at Underdawgs to speed up time to market and some of the things we’ve learned have really blown us away. One for a future video!

Avoid regulated industries

• As pointed out above, we simply avoid regulated industries. They only really make sense if you’re already wealthy, it’s where your industry experience lies, or it truly is a ‘hill for you to die’ on problem.
• Some argue that an ability to get through a regulatory framework is itself a competitive advantage. Maybe. But from my experience in a number of regulated startups, it has a few problems. ⚠️
• Your future success now fully lies with the approval of another organisation. Whilst some legal setups are smooth and efficient (like the UK’s) some regulatory environments are the wild west 🤠 and the only way to get things done is to grease the wheels and hope they’re fond of you.
• It just slows things down and hurts the morale of the product and engineering team in particular. These are people who want to ship the product! 🚢
• I know how to handle a regulated environment should we ever need to. But my starting position is no, this is not where Underdawgs will play. Let’s get to Level 1 first.

Potential for corporate partnerships

• Startups are effectively about i. Building a great proposition ii. Selling that proposition.
• Large corporates are extremely helpful with the latter - helping you get your proposition into the hands of their own customers. 🖐🏼
• This massively helps with those early months in winning your first paying customers.
• It does somewhat cap the upside I think, as you’ll typically have to agree to something like a large percentage of the company being sold as a strategic investment or even an exclusivity agreement. But on balance, and with the goal of getting to Level 1, we think it’s an avenue that makes a tonne of sense.
• But corporate partnerships take a good while to come to fruition. They do not particularly care about you… ⌛
• You’re an interesting enough distraction that might when day go live with them. But there’s always the risk it drags and drags. I would say this is the norm of what I’ve experienced…
• Be empathetic. The people at these companies are massively busy.
• Do your best to sign an agreement early, and don’t rely on any one partner - be the belle of the ball and have a bunch of offers. 💅🏼 The FOMO can speed things up drastically.

A market that is not winner takes all 🎖️

• This would probably be the most controversial to the Silicon Valley types. They tend to love seeing this opportunity with the startups in their portfolios. The next Google or Facebook!? Peter Thiel calls these natural monopolies.
• We however prefer to keep it simple. Give us a large and growing market that happens to be quite fractured. 💔
• That tells me we can get in and get our piece of the pie. 🥧

Wrap up and what to do next?

• Have an idea? Run it through the above criteria… Be honest about where it sits. If it doesn’t sit well in that specific criteria don’t necessarily kill it, just have your eyes open as to the fact the odds are even tougher now. But that doesn’t mean you can’t get it done. ✔️
• Final word…don’t be desperate for something to be true. Help yourself and lead with sincere enquiry. The quicker you prove you’re wrong, one way or another, the less the risk you’ve taken on. The initial idea is just the start…
• We are just trying to maximise the chances of stumbling into product market fit. It just doesn’t typically look like what you think it will.