How to get sustainable business transformation right
Sustainable corporate change is a challenging feat to pull off. Julia Binder examines the barriers and drivers of change to increase your chances of success....
Innovation
Why a “great idea” is probably a bad idea
Many entrepreneurs think that having a brilliant idea is the hardest part of starting a company. Raphael Grieco explains why they’re wrong – and reveals the eight key factors that truly drive startup success.
In venture capital (VC), the allure of the “next big thing” is perpetually tantalizing. Entrepreneurs approach VCs daily, eyes gleaming with the conviction that their idea will revolutionize industries, disrupt markets, and yield exponential returns.
It is a seductive narrative, one that has captured the imagination of investors for decades. However, the “great idea” is often a mirage, a deceptive oasis in the harsh desert of startup reality. To be clear, oases are rare, and idea quality alone is a poor predictor of startup success.
While innovative concepts are undoubtedly crucial, they merely represent the first step in a complex, multifaceted journey toward building a successful, scalable business. Being fixated on groundbreaking concepts often blinds both entrepreneurs and VCs to the myriad other factors that determine a venture’s viability and potential for significant returns.
By shifting the focus from the initial spark of an idea to the complex ecosystem which must exist for it to thrive, venture capital investors aim to refine their investment strategy, mitigate risks, and ultimately increase the success rate of their portfolio companies. This approach also should serve as a valuable framework for entrepreneurs to critically evaluate and strengthen their ventures. Beyond that “great idea” here are eight key factors that entrepreneurs and investors should consider:
1 – Product-market fit:
CB Insights reports that 42% of startups fail due to a lack of market need. To establish this, entrepreneurs must conduct robust market research and customer development. Venture capitalists prioritize startups with evidence of strong product-market fit over those with merely novel ideas. Rdio launched in the US as a paid streaming service before Spotify did, and despite meeting a need for such services, it failed to meet actual customer demand because of a lack of research about business models. Customers were simply not ready for a paid subscription.
2 – Execution capability evidence:
The first-mover advantage is overrated, as it becomes less potent when the first mover fails to have enough time to establish effective barriers to competitive entry. This is particularly true in financing technology. VCs usually tend to focus on teams with proven execution ability, often favoring those with domain expertise and prior startup experience. Boo.com launched in 1999 as the first B2C eCommerce company in multiple countries but got liquidated in 2000 even though it raised $135m. Its poor management decisions did not survive the dot-com bubble.
3 – Competitive landscape:
With 19% of startups failing due to getting outcompeted. venture investors assess not just the current competition but the potential for new entrants. Startups must demonstrate sustainable competitive advantages. Myspace in the early 2000s was one of the forerunners in contemporary social networks and media but was quickly outpaced by Facebook as the latter promoted a more fluid newsfeed and less invasive advertising.
Ideas that can't demonstrate viable unit economics receive lower priority.
4 – Unit economics:
Some analyses suggest that profitability is reached by only 40% of funded startups. VCs scrutinize customer acquisition costs, lifetime value, and path to profitability. Ideas that can’t demonstrate viable unit economics receive lower priority. Jawbone went from a $4bn valuation to zero, and despite massive consumer demand, the company struggled with low margins.
5 – Market timing:
There is no surprise why VCs like to ask the founders the question “Why now?” when 18% of VCs named in one Stanford University paper published in 2016 cited timing as the most important reason for failure. VCs evaluate market readiness, technological infrastructure, and consumer behavior trends to gauge optimal market entry timing.
6 – Scalability potential:
While only 0.14% of US startups become unicorns, other pieces of research suggest that there is only a 0.00006% chance of building a billion-dollar company. The point being, in the abundance of investment opportunities that will for the most part fail, investors prioritize business models with clear paths to scale and the potential for exponential rather than linear growth.
For every seven new product ideas, six fail due to a poor understanding of customer needs.
7 – Regulatory environment:
Regulatory issues contribute to about over 7% of startup failures. Venture investors conduct thorough due diligence on regulatory landscapes, favoring startups with clear compliance strategies and adaptability to regulatory changes.
8 – Behavioral economics:
For every seven new product ideas, six fail due to a poor understanding of customer needs. VCs value startups that demonstrate a deep understanding of customer psychology and behavior change models.
Successful startups require more than just innovative ideas. Investors prioritize ventures that excel across multiple dimensions: strong product-market fit, exceptional execution capabilities, clear competitive advantages, sound unit economics, appropriate market timing, high scalability, regulatory savviness, and deep customer insights.
When evaluating potential investments, investors must look beyond the surface appeal of “great ideas” and conduct rigorous analysis across these key factors. When assessing startup investment opportunities, you could develop a comprehensive scorecard incorporating these factors for startup evaluation, while also conducting a retrospective analysis of your portfolio to identify correlations between these factors and startup success, and eventually enhance your due diligence process to more deeply probe these areas in potential investments.
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