How to Evaluate Your Business Idea

Note: I’m teaching entrepreneurship at two Chilean universities this semester. During How to Build a Startup’s fifteen weeks, we provide the frameworks you need to take an idea to launch. Here’s class 1’s lesson.

Tons of people have business ideas. Some of them start. Many don’t. Most that do fail. While you can create a successful business from a mediocre idea via top notch execution, it’s much easier if you have a solid business idea. So how do you pick a startup idea? And validate it to figure out if it’s a good idea or not? Let’s go through the process.

Ycombinator’s Paul Graham wrote a great post about how to come up with startup ideas. It gets at the heart of evaluating a startup idea. Start here, read it now.

Ok, you’re back. If you’re being lazy and didn’t read it, go read it now. If you insist on being lazy, Graham believes that the best startup ideas have three things in common:

They’re something the founders themselves want, that they themselves can build, and that few others realize are worth doing.

We took Graham’s three important points, added a few more and created a five point framework to evaluate startup ideas. This framework works for all business ideas, not just tech startups. It’s important to evaluate your idea before you get started. If you don’t you risk spending time, money and effort on an idea that fails when you could have prevented failure from the beginning.

Run your idea through this framework answering these questions to yourself as you go. At the end, rank your idea 1-10 in each category, 10 being best.

Validation 

Does your idea solve a problem someone has? Is it a problem people want solved? And is it a big enough pain that they’ll actually pay you to solve it?

Domain Knowledge

Is it your problem too? Do you really feel the pain? Would you use your solution to the problem? Do you know anything about the industry? Do you have any connections to potential first customers? Why are you the best person to make your idea a success? Just saying “because I have the idea” doesn’t count.

Market Potential

How big is the market? Is it big enough that if you succeed in meeting your goals you’ll find a reward big enough to justify all of your hard work?

Scalability

Can it expand to more people quickly? For each hour of work, do you gain exponentially more users or profits? Or for each hour you put in, you get a linear increase in profits or users? Facebook is highly scalable, running a small town bakery is not.

Note: if evaluating a traditional business, weight scalability much less, as it is less important.

Do you enjoy it?

Do you love the industry you’re working in? Do you feel a need in every fiber of your body to solve this problem? Or are you just trying to solve the problem to make money?

Startups are hard. You’d better love your industry or you will lose motivation at the first challenge. The most successful entrepreneurs eat and sleep their ideas. They love their industry. It’s in their DNA.

Entrustet as an Example

So lets use my last company, Entrustet, as an example to evaluate an idea using our framework. Entrustet is a service that allows you to create a will for your online accounts and computer files. I started it in 2008 as a senior in university and t was acquired in 2012.

Validation – Does Entrustet solve a problem people have?

Although millions of dollars of digital assets are lost each year when someone dies, the vast majority of people don’t want to pay for a digital will. – 6/10.

Domain Knowledge – Is it my problem?

When I had ExchangeHut, my previous business, our lead developer was the only one who had all of our server, database, credit card processing and analytics passwords. If he’d been hit by a bus we would have been screwed. I have many digital assets and connections in the legal industry. I have this problem. – 9/10

Market Potential – If we are successful will the payoff be big enough?

Nearly everyone has digital assets worth protecting. The market is huge. – 10/10

Scalability – Can Entrustet spread massively?

Each sale brought more people, but many people didn’t like to talk about digital death. Our best sales channel was via attorneys, which required time and hand holding. – 6/10

Do You Enjoy it?

I started Entrustet because it was a great opportunity and it seemed fun. After a year and a half, I realized I enjoyed figuring out the law, but didn’t enjoy working with lawyers and social media mavens. I don’t love digital death and working in estate planning. 3/10.

Overall – 34/50

Entrustet was a good opportunity that was strong in market size, domain knowledge, moderate in scalability and validation and very weak in the enjoyment factor. I’m not a fan of death. If I had to start from scratch, I would have paid more attention to the idea validation and the fact that I didn’t love digital death.

Your turn

Now evaluate your idea. Walk through the steps and give yourself a score. If you are weak in any area, brainstorm how to fix it. Can it be fixed? What are your next steps to improve your score? If it hasn’t been validated yet, don’t worry. We’re going to cover that in the next class. We’ll teach you how to not build something nobody wants.

I’ll end with another Paul Graham money quote:

Why do so many founders build things no one wants? Because they begin by trying to think of startup ideas. That m.o. is doubly dangerous: it doesn’t merely yield few good ideas; it yields bad ideas that sound plausible enough to fool you into working on them.

For example, a social network for pet owners. It doesn’t sound obviously mistaken. Millions of people have pets. Often they care a lot about their pets and spend a lot of money on them. Surely many of these people would like a site where they could talk to other pet owners. Not all of them perhaps, but if just 2 or 3 percent were regular visitors, you could have millions of users. You could serve them targeted offers, and maybe charge for premium features.

The danger of an idea like this is that when you run it by your friends with pets, they don’t say “I would never use this.” They say “Yeah, maybe I could see using something like that.” Even when the startup launches, it will sound plausible to a lot of people. They don’t want to use it themselves, at least not right now, but they could imagine other people wanting it. Sum that reaction across the entire population, and you have zero users.