Words Samuel Rueesch
December 6th 2023 / 8 min read
The old saying that “no idea is a bad idea” is most likely wrong. Ideas differ in quality and originality.
I’ve written before about how to find venture ideas. So let’s say that you found a venture idea that you are excited about, but what now. It might be good, but is it great? Do you really want to spend the next 5-10 years of your life working on it? Are you convinced enough about your idea that you can persuade investors to invest in it? Spending time stress-testing before building anything is an essential part of the entrepreneurial journey.
It’s true that execution is key in startups, but as an entrepreneur starting with a solid idea makes the whole journey easier, as it might mean you can avoid having to pivot your business multiple times. You can maximise the chance of success by following simple steps that make you take a better decision on whether you really want to pursue a certain idea. And it’s not only about improving your chances of success—testing your idea prior could help you understand if it's worth investing your own time.
Understanding the likelihood of success (or rather minimising the chance of waiting your time on an idea that is not great) of a venture that hasn’t been built yet, with very limited data, is challenging but not completely impossible. We are going to list some practical suggestions on how to challenge your venture idea. In order to do that, we are going to use the well-known framework of desirability-feasibility-viability but with a twist.
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I am starting with desirability because this is most likely the most important question you should ask yourself. Does anybody even want what I am building? And a yes and no answer is not enough. Ask yourself “how much” do people want my product? Focusing on the intensity of the need rather than only the existence of a problem will eventually determine how easy it will be to distribute your product to your end user.
If your users are already actively seeking out a solution for the problem, it will simplify your growth strategy and you will have to spend less on acquisition. Instead, if you have to educate them about the problem and your solution, acquiring new customers is going to become more challenging.
It’s important to understand that needs are not binary—they exist or don’t exist. They fundamentally differ in intensity. What you want to avoid while building a venture that is “nice-to-have” but that is not solving any particular important problem.
Simple steps to test if there is a need for your solution
Fake it until you make it. Before spending too much time building the actual product, just fake it. Build a simple landing page, create a logo for it, design a couple of mockups on Figma. You don’t have to be a designer to do it, and it doesn’t have to be perfect, but visualising your solution will make it much easier for your early users to engage with it and give you initial feedback.
Do some early qualitative research. Speak with your end users as much as possible. Engage with communities and try to understand how much the problem that you are trying to tackle is felt by your users.
Define who your target customer is. While engaging with communities of users that you are trying to solve a problem for, you will start to get an understanding of who your first customers are. Map out different characteristics of these personas like: age, income, job, hobbies, etc.
Run marketing tests. The nice result of interacting with niche communities of users is that you might see that your users are actively seeking out solutions like you, resulting in you not having to spend any money on marketing (this is what could be called your ‘product-pull’). If pull marketing is not a useful method for your idea, test how much it will cost you to acquire new users in an inorganic way (push-marketing). Running a growth test is fairly straightforward by using platforms like Facebook or Google ads.
Solving a problem is great, but if the solution doesn’t create any money it's going to be difficult to turn it into a sustainable business. To understand if your business is viable from a financial standpoint you have to answer two questions:
Are people willing to pay for it?
How many people are willing to pay for it?
Luckily if we followed the steps suggested above, we have opted for a venture that solves a problem that is highly felt by our customer, and so the likelihood that they are willing to pay for it is high. If the financial value created on a unit basis is high enough to cover our operating and acquisition costs, you have a viable business. Unfortunately, this by itself is not enough to make your business a venture-scalable business.
This brings us to one of the biggest misunderstandings in venture capital: not every venture is venture-backable. You can build a highly successful and profitable business, but it still might be not venture-backable. This is due to the inherent economics of a venture capital fund. As a rule of thumb, in order for your business to be seriously considered by reputable VC funds it should have been a projection to reach $100M in revenue (optimally ARR) in 5-6 years or less. To reach that scale you need to have a solution that is appealing to a large customer base.
Testing if your venture idea can meet both points is quite hard. At this point, you shouldn’t spend your time building a comprehensive business case with complex three-statement financial models: it would be overkill and quite a distraction. Instead focus on getting a “feel” on your unit economics. At this stage we don’t want to be certain about your financial metrics, instead:
Simple steps to test if your venture is venture-backable:
Translate how much value you create in monetary terms. Use user interviews and tests (e.g. set up a concierge MVP—see next section—or use the Van Westendorp survey) to understand your customers’ willingness to pay.
Estimate how much it will cost you to deliver and distribute your solution. If it’s a software-based idea, this step is pretty straightforward. Your costs will mostly be a combination of cost of acquisition (CAC) and development costs. Instead, if it’s a tech-enabled solution it also includes operational costs.
Build a scenario based financial model. Build a very simple one-page, bottom up P&L model that only includes the very key financial metrics. Put a lot of emphasis on unit economics and play with the different ratios (e;g. LTV/CAC, Payback on CAC, operating margin). Instead of adding too many rows and details, focus on building scenarios. Build scenarios with conservative numbers and compare them with more optimistic scenarios.
Play with the variables: a financial model at this stage is a living document. Most likely the input numbers that you used are wrong, but that’s fine. As you gather more information through tests, update the numbers and see how your projections change. Learn more about financial models here.
[Note: NOT BEING VENTURE-BACKABLE DOESN’T MAKE YOUR IDEA WORSE]
Feasibility is often defined as the technical capabilities needed to build a certain solution, but in early-stage startups it is much more productive to think about the capabilities needed to build an MVP. Or another way of looking at it, what is the first feature or product that I can create that will deliver the most value to your customer with the least amount of effort?
We are focusing on the MVP rather than the “full” solution at this stage for the following reason: having an idea for a venture that is very large and difficult to build is not necessarily a negative thing. Bold visions that solve big problems are very much welcomed in the venture ecosystem, and if the vision is compelling enough, you can get the required funding even if the end product is years away from hitting the market.
Nonetheless as an entrepreneur endeavouring in such a vision, you still have to show some early traction that signals that you are going towards the right place—especially to investors. This is exactly why MVPs are important: think of the MVP as a stripped down version of your end vision that shows progress. Progress could be shown as a form of technical progress, for example am I progressing in the development of the technology needed to solve a particular problem, or customer traction, are my customers interested in my product, this could include things like sign up or pre-orders. These signals will make sure that you can show traction to investors in order to get the required financing needed to build your full vision.
Simple steps to test how difficult it is to show early traction
Spot the core features of your product. It is always important to have a clear understanding of what the core features are of your product or service that you want to build. Often founders tend to present venture ideas with too many features: instead you should spot the one “thing” about your product that solves a unique problem for your users.
Map out the product in a service design blueprint. Blueprints are extremely useful to develop a deeper understanding of the technical and operational complexities of your product or service. Service design blueprints are often an overlooked tool by founders, but it’s a quick and easy way to visually represent the front end journey your customers will experience in combination with the background tasks you will have to set up to make the journey happen. More information here
Write down the human capital needed. After mapping out your venture idea, start to build an understanding of how many, if any, people and skills you need to build a first iteration of the product. Do you need engineers? Designers? Sales? This will help you understand how much, if any, seed funding you will need to start things off.
Build a concierge MVP. Optimally, you as the sole founder or founding team, will have enough skills to start building a first and simple version of the MVP. It doesn’t have to be anything fancy, indeed at this stage the product can be delivered in a manual way without the need of complex backend automations. The key of a concierge MVP is to gain some traction and start learning from the users that you serve. Rather than a commercial product, a concierge MVP is a product for you, the founder, to better understand the user and optimise your vision so it can create the most value for them.
Chiron, a business that’s recently spun out of our Venture Studio, was aiming to prove demand for their fibromyalgia self-management and support platform, and whether they could rely on users to interact with their app on a daily basis. The team built a simple concierge MVP via Whatsapp automations managed by founder Carron with four users over a two week period. The basis of that feedback has helped them flesh out the requirements and features for their mobile app, as well as underlining the fundamental demand for the product.
In summary, the three ingredients desirability, viability, feasibility are the essence of a great venture idea. In a perfect world we could formulate what makes the perfect venture idea as follows: you want to find an idea for a solution that solves the biggest possible problem, you want to maximise the volume or amounts of users that are affected by the problem while minimising the effort you have to put in to solve the problem. There you go, if your problem meets these criteria, you have found the sweet spot of venture..
Obviously having an idea that perfectly checks all of these marks is almost impossible, but it serves as a template for you when you evaluate your venture ideas. And don’t be dismayed if your idea does suck: this is all part of the game. It’s about recognising what makes it bad, pivoting, and trying again.
Find out more and apply to our Venture Studio
Sam Rueesch is a Venture Designer at Founders Factory, generating and validating concepts with our corporate partners to go through our Venture Studio. He has an MA in Service Design from the Royal College of Art.
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