You might have several ideas to start a new company but are not sure which idea is the right one or has the biggest potential. The recently launched startup school by Y Combinator addresses this issue with an outstanding podcast episode. Here are the most important key take-aways.
A startup is focused on growth
Before you actually start a company it’s important to understand the playground you choose. A startup is designed to grow really quickly. Fast growth is everything. Profitability comes second. While it’s totally fine to also launch a company that is not growing quickly and considered as a “normal” enterprise or SME, it’s important to understand the implications if you launch a startup.
If you want to build a rapidly growing company your startup idea is basically a hypothesis – why your company can grow quickly. So it’s important to also treat it as such: test and learn as much as possible about it.
The basic structure of a startup idea
A startup idea basically consists of three key parts. The problem, the solution and the insights.
The problem you solve basically sets the initial conditions. It’s crucial to find problems people actually care about. There are several characteristics that make a good problem:
- It’s popular, meaning millions of people face it.
- It’s growing – usually characterized by a growing market of 20+%.
- It’s an urgent problem – people want an instant solution for this.
- It’s expensive to solve – and therefore a good basis for your business.
- It’s mandatory – e.g. through new laws or regulations and need to be solved.
- It’s frequent – meaning it needs to be solved multiple times (per day ideally).
If your startup is not taking off, it’s most likely due to the absence of these points mentioned above. While you don’t need to have all the characteristics of a good problem in your startup, you should have at least a few of them, like 2-3.
As already mentioned above, it’s crucial to start with a problem people have and care about and not with the solution. There are many great technologies and solutions out there that nobody cares about because they don’t solve a good problem. Hence, you will not be able to create a fast-growing company around this solution.
Once you’ve found a good problem, test things out, learn by trial and error and validate or falsify your hypotheses to move towards a good solution. Here it’s important to prove that you can actually build the things you sell to potential clients and investors – a track record of your team certainly helps, but mainly proven execution and delivering on your promises is the best you can do.
In the third and last part of your startup idea you explain why your solution is going to work. This basically describes your unfair advantage that separates you from other people or companies trying to do the same thing. Your unfair advantage needs to be related to growth, otherwise it won’t be an attractive explanation to potential investors. It’s also crucial that you have one or several unfair advantages; otherwise you most likely won’t succeed.
Here are 5 types of unfair advantages a startup can have:
- Founder advantage: Only applies if you are a super expert on a specific topic e.g. you have done lots of research in a very specific deep tech area, hold a PhD and several patents. This usually applies to max. 10% of all founders.
- Market advantage: Meaning you operate in a market that is growing 20% or more year over year. This alone is the weakest advantage you can have but still a good position to be in.
- Product advantage: Your product is 10x better than the competition, e.g. faster, cheaper, etc. and people will notice this immediately.
- Acquisition advantage: You successfully set up user acquisition channels that don’t cost you any money e.g. viral loops or word of mouth. Any paid channel does not count as an advantage because as soon as you’re successful, competition will enter the market and prices will increase, so this paid acquisition is not a sustainable advantage.
- Monopoly advantage: Peter Thiel probably describes this best in his book Zero to One: your company basically becomes stronger the more you grow. This is mainly a result of network effects and marketplaces where the winner takes all.
These 3 core components of a startup idea should give you a good overview of what to focus on in the early days when thinking about your next venture. Think the ideas through with the problem in mind, validate it with potential users and see where you have an unfair advantage and you might be able to build a successful company.