To have a successful startup, you need a great idea in a growing market, a great team, a great product, and great execution. Thus, before you write a single line of code, you need to evaluate if your idea is worth spending years building it.
I have founded two companies (one exited, second in progress), led product & engineering at two startups acquired both acquired by public companies. Over the last 10 years, through several mistakes, I developed some questions on how to evaluate startup ideas.
The following are the four questions that I ask myself when I’m evaluating a startup idea for founding, investing, or even joining a company.
1. Are you working on the right problem?
A good problem usually satisfies one or more of the following criteria.
- Is the problem popular: millions of users have this problem
- Is the market you’re in growing: a 20% YoY growth is good
- Is the problem needs to be solved urgently: painkiller vs. vitamin
- Is it expensive to solve the problem: gives you defensibility if you can build it
- Is the problem mandatory to solve: regulatory, compliance, security
- Is the problem needs to be solved frequently: hourly, daily, weekly
2. Is your solution novel or a derivative of existing solutions
If you are doing what everyone else is doing and do it better (cheaper, faster) you get incremental results. But if you do what no one else is doing you get exponential results.
It is better to build a different product compared to building a derivative product.
A derivative product requires the base features from existing solutions and plus your unique features. A derivative product increases your time to market and capital requirements. Moreover, if you’re just a better product, customers might still buy the solution from existing trusted sources.
On the other hand, a differentiated product attacks the same problem in a novel way that helps you cut through the noise and avoid competition.
For example, Point took a novel approach in offering a home-equity line of credit.
3. Are you competing or creating a new category?
Don’t Compete. Competition is a distraction. More you look at the competition; more you look like it; more you act like it; thinning your margins. There is a lot your competition is not doing. Do that.
For example, instead of competing with incumbent banks and attract their customers with a cheaper, faster product, build a product to serve the underbanked. The incumbents are not going to focus on these customers. It’s hard to compete with the incumbent’s distribution channel and financial resources.
Chime, for example, built a bank for the underbanked and doesn’t compete with the incumbents.
4. Do you have an unfair advantage?
Your unfair advantage has to be related to your startup’s growth. Here are some examples of unfair advantages:
- Founder — Founder Advantage, e.g. deep domain expertise
- Product — Is your product 10x better (faster or cheaper) than your competition
- Insights — Knowing things that others don’t know yet.
- Acquisition — Channels that you have access to that can help you grow organically
Whether you’re a founder evaluating an idea for your next startup or thinking of joining a startup, I hope these questions add value in your decision making.
If you’re looking for ideas, I recently wrote about finding startup ideas that are worth pursuing. 3 Ways To Find Your Next Startup Idea
I write about entrepreneurship, ideas, leadership, and intellectual life. If you enjoyed reading this story, follow me to get notified for future stories.