Value creation in startups

Value creation and commercial viability in startups

I have been involved with start ups and smaller companies for over 10 years now and there is still nothing like the energy which comes from people living and breathing their passion. For me, and most other founders, being able to work within the exact field and do the exact things that we are passionate about is what truly creates a meaningful work life. Most founders also dream about being able to make a good living while doing it, but for many it stays a dream.What I have found interacting with and advising startups is that they are often doomed in achieving their, often large, financial goals before they have even started out.

The founders always love what they are doing but they will in most cases struggle to make money, not because their idea is bad, but because they have not taken the time initially to evaluate the idea and more specifically find the best angle for pursuing it. They therefore spend a long time struggling to find the right market fit for their idea, often going through several pivots which ultimately leads to wasted money, loss of motivation and sometimes even giving up on the dream.

Making sure that you have a good and commercially viable idea, with strong value creation, as well as a good approach from the beginning is therefore critical to achieve success in as short a time frame as possible.

In evaluating new ideas I have found that the ones that seems the best, and most often ends up also being a commercially success, have, from the beginning a good answer to one or more of five different questions. These questions are:

Are you creating value for anyone?

Does your startup solve a problem for a group of people? And is this value creation large enough for people to want to pay for it?

I have had many founders tell me that everybody they talk to are loving their idea or product. But in my experience this is often very misleading, as it does not say anything about the true size of the value created. Is it just a nice-to-have thing but not worth buying? Or is it something people would need and be willing to pay a monthly subscription to get?

Figuring out who your stakeholders are and the level of value that is brought to each of them is critical determine as fast as possible, as it can both guide the further development of the product to make it even more valuable to the right group of people, but also keep you from wasting time figuring out the right product market fit.

Are you creating something unique?

Make the world go from 0 to 1 as Peter Thiel writes in “Zero To One”. By that he means that the companies that are often the most successful are the ones that creates something that the world has not seen before, essentially taking the world from having none of these types of products to having 1 of them, whereas less successful companies often create something that already exists (taking the world from N to N+1).

Of course, a novel and unique idea still needs to create value for people, as it would otherwise not be worth much. For example, I might be able to create a unique product by attaching rocket engines to a skateboard, but if there are no people who gets any value out of my rocket driven skateboard, the idea will fail.

Making a product that takes the world from 0 to 1, while creating value for a group of people, is often a very good indication for a commercially viable product.

Are you (radically) changing the way that people do things?

Another good indication for a product or idea with a large commercial potential, is if it changes and improves the way that people do certain things. A huge example would be the development of the mobile phone which meant that people no longer needed phone booths and could talk while traveling, which created a lot of value for a very large group of people.

Are you significantly improving an already successful product?

By basing an idea and approach on the improvement of another successful product already in the market, you have a much greater chance of being able to create a financially viable company. This is because the product has already been accepted by the market, and by improving on it you will most likely be able to quickly capture market shares from the original product. A good example is Google that launched their search engine in an already crowded market, but because the product was so much better, they became popular, captured customers and grew quickly.

Are you moving a good, existing idea to a new geographical area?

Even with ongoing globalization and with the internet not having boundaries, a good idea often still have its strongest following in a specific geographical area, often the place it originated from. While the company grows it slowly expands is geographical footprint, but for a long time, there will be large opportunities for other companies to start with a similar idea in another part of the world. Again, by creating something that has already been shown to be commercially viable, it is possible to reduce the risk and grow fast. Of course, there is always the risk that it will not work in this new area because of cultural differences, but this can often be quickly explored.

 

These are the five questions I have found to be critical to get right when building a new product or company. Of course, there are examples of successful companies that have gone a different route but by consciously thinking about how your idea or product fits the questions above before investing too much time and energy into it will allow you to evaluate the potential early on and tweak it to ensure that you waste as little time as possible.

 

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