Serial entrepreneur and venture capitalist, Jamie Pride, explains the four key ingredients of an investable idea.
As an investor in startups, I see well over 100 formal startup pitches every year – and probably even more “elevator” pitches. There are many factors that determine if I invest in a company, but when evaluating the “idea”, I test for four key components: desirability, viability, feasibility and adaptability.
Desirability: solve a relevant problem
It may sound crazy, but solve a relevant and important problem for customers and they will beat a path to your door. Of all of the reasons why startups fail, ‘no market need’ is number one. It doesn’t matter how in love with your idea you are, customers need to care about your offering, and they will vote with their wallets.
A solid value proposition is critical. It provides the answer to three important questions:
Who are your customers?
What problem are you solving for them?
Why would they value your solution?
It’s about working out who your customer is, how you are servicing them and what the exchange is. How are you going about that? Your value proposition is about determining the fit between your anticipated offering and your customer’s needs. If you don’t have that value proposition right, then you won’t have a strong business model. The best value propositions are perceived by the customer as meeting an unsatisfied need. To create a strong value proposition, you need to test it with them — their ruling is final.
- Viability: have an effective business model
A business model encompasses the value proposition, the financial mechanism for your business (revenue model, cost structure), your key partnerships, how you get to market (channels), what activities your business performs, and what resources it uses to deliver the product or service.
There are many different types of business model — from freemium, to subscription, to fee for service. Regardless of the type, your business model needs to be viable. For me, and most investors, business model viability breaks down into two key factors, profitability and scalability.
Profitability is mostly understood by entrepreneurs, however, scalability is a term that gets thrown around a lot but is often misunderstood. A scalable business model is one that can dramatically increase revenues without an associated or equivalent increase in costs.
Areas of your business model that you can explore for scalability include:
channels: Can you use different channels?
partnerships: How can you leverage partners for scale?
infrastructure: Do your systems and processes help you to scale?
Use market testing to prove out aspects of scalability early.
- Feasibility: have the resources to get the job done
Much is made of having the right team in your startup, and with good reason. Even if you have identified a desirable value proposition and have built a viable business model, you still need resources to execute. And execution is critical to any startup. Resources fall into a number of categories, including:
human (your team)
financial (your funding)
physical (plant and equipment)
intellectual (brands, patents)
Of all these resources, the most critical to execution are your human resources — your team. Ultimately, execution is about the right people doing the right things. As a founder, you are responsible for both hiring and attracting the right people, then leading them and focusing them on the right activities.
- Adaptability: manage external threats
At times it may seem like your startup is the centre of the universe — it isn’t. Startup failure is usually caused by ‘internal’ events — that is, events that are well within the founder’s control and that, if they know and learn about them, can be avoided. This isn’t always the case, however, and it is important to keep an eye on the external environment, the context in which your startup operates. Examples of external threats include:
being outcompeted by a competitor with a substitute product
a change in the regulatory environment in your industry
a change in social attitudes
a change in capital markets that dries up funding
invention of a disruptive technology
a competitor increasing customer switching costs.
The challenge of being a startup founder is about maintaining an appropriate balance of internal and external focus to ensure you are adaptable enough to change course when required.