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How to evaluate your startup idea

By Matthew Grimes,
Reader in Organisational Theory & Information Systems and Academic Co-Director of the Entrepreneurship Centre at Cambridge Judge Business School
 

 

The first article in a new series in collaboration with Cambridge Judge Entrepreneurship Centre.

Matthew Grimes, Reader in Organisational Theory and Information Systems and Academic Co-Director of the Entrepreneurship Centre at Cambridge Judge Business School discusses how to evaluate your startup idea

The two models of entrepreneurial success

As entrepreneurs, you are often handed two models of what a successful startup idea is supposed to look like. On the one hand, your ideas are supposed to be bold, path-breaking, disruptive. You are told that the goal of your ideas should, therefore, be to move the world “from zero to one”.

On the other hand, you are told that your ideas are works in progress, that “no idea survives first contact with the market”, that startup ideas are at best hypotheses or educated guesses, and that the goal is to let your ideas evolve such that you can achieve “product-market fit”.

In research that I have conducted with entrepreneurs in the context of accelerator programs and business incubators, I have referred to these different approaches as the “founder as visionary” versus the “founder as scientist” models of entrepreneurial success.

Whilst the founder as scientist looks to explore existing customer demand in order to meet it, a visionary founder is interested in creating new customer desires and thus building new markets.

The point here, however, is not to suggest that you should choose one of these different approaches, but instead that in today’s startup climate, you are called to pursue both.

Whether explicitly or implicitly, these models of entrepreneurial success simultaneously affect how early-stage investors and other stakeholders evaluate your ideas, and thus they should also shape how you evaluate the quality of your ideas.

How investors evaluate ideas

But how is this possible? How are you to evaluate your ideas both as scientist and as visionary when these models of entrepreneurial success appear to require foundationally different mindsets and behaviours? It may be useful to take a quick detour into social psychology to consider how audiences typically evaluate ideas.

As individuals, we are bombarded with new information. In order to function we tend to quickly categorise that new information, placing it into pre-defined boxes – what social psychologists refer to as our cognitive schemas or mental models.

This is particularly true under conditions of uncertainty, such as that which tends to characterise the process of innovation.

As angel investors attempt to make resourcing decisions, for instance, the first step of their evaluation process is to categorise your idea. Does it fit? Does it look like other similar ideas that have succeeded recently? Does it “ring” of something which might solve a problem that lots of people or businesses have?

However, shortly after evaluating your idea’s fit, investors then turn to evaluating your idea’s distinctiveness. Does your idea stand out? Does it have the ability to push beyond or span multiple categories – to disrupt our predefined “boxes?”

Scholars refer to this dual need for ideas to simultaneously fit in and stand out as “optimal distinctiveness.”

Does your idea fit and stand out? How you can find out

So, at this stage you should ask yourself, “Is my startup idea optimally distinct?” And to figure out the answer to this question, it’s time for us to get practical. There are many different methods for assessing an idea’s “fit,” and indeed you may be familiar with a number of these approaches. While I don’t have the space to be exhaustive, the key principle to recognise is that these methods often vary in their cost but also in the quality and reliability of the information you are able to glean in order to evaluate this fit.

So, for instance, you might consider evaluating the fit of your ideas by running a systematic evaluation of keyword search trends across various search engines. Such an analysis is relatively simple and can be accomplished freely or cheaply, providing information—albeit, less reliable information—about whether your startup idea might address a problem for which individuals are already actively searching out a solution. On the other end of the spectrum of cost and informational reliability is the method of prototyping and pre-sales. By developing a working prototype with which your potential customers can interact and purchase the product in advance, you are likely to obtain much stronger, albeit more costly, information about whether customers are interested in your particular solution.

But what about the distinctiveness of your idea? To evaluate the degree to which a startup idea stands out against the competition, many founders tend to rely on the old 2x2 approach, whereby they reflect on the most critical two dimensions upon which the industry tends to compete, placing the competition into one of the four resulting quadrants. Subsequently, they illustrate how their new company is placed in the top-right quadrant, thereby surpassing the competition. The problem with this approach is that it assumes that in order to stand out, your company must try to compete on the same dimensions as your competition.

However, there’s a reason why scholars have referred to such an approach as a “red ocean strategy”—it’s because if you take this approach there is destined to be “blood in the water” as your product or service is reduced to an undifferentiated commodity. The alternative then, which I would suggest, is to swim for bluer oceans. As you think about the factors on which most of the industry competes, what problems or customers have they completely ignored? If you cannot yet answer this question in a compelling way, it means that you have more work to do with carving out the novelty of your startup idea. To conclude, I’ll note that I’ve witnessed too many startups fail, because the founding team viewed themselves as entrepreneurial visionaries but lacked the ability to experimentally test their ideas. But I’ve also witnessed too many startups fail because the founding teams were so quick to embrace experimental methods like the “Lean Startup” but then lost sight of the bigger vision of change.

Your startup ideas provide the foundation and the trajectory of your business, so it is worth taking the time to properly evaluate those ideas - assuming the roles of both visionary and scientist as you do so. By embracing both roles, you will help to ensure that those ideas fit in and stand out.

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