Heuristic scorecard for startup opportunity evaluation
The Startup Scorecard is a simple assessment tool that builds upon the 6 Market Dynamics core concept. The scorecard is organized into 6 themed groups, which a practitioner can then assign letter grades to, based on their subjective assessment of how well an opportunity conforms to the heuristics provided for each of the 6 market dynamics. In order to make best use of the Startup Opportunity Scorecard, the entrepreneur (or investor) should first understand these heuristics, then evaluate their idea according to these heuristics and provide a letter grade for each grouping.
Heuristics are rules of thumb that are derived from experience or generally accepted truths, where formal empirical methodology may be impractical. Heuristics of often seen in the field HCI/Usability where heuristics guide the design of user experience. A design is then tested and optimized through user feedback and A/B testing but heuristics are helpful for developing initial prototypes and for guiding intelligent A/B hypotheses, which expedite the process of arriving at an effective design. Similarly, we believe the process of designing a startup business can be made more efficient with the support of an effective heuristics model. Lean methodology can then be used to fine tune product-market fit.
Understanding the Heuristics
Below is a brief description of each of the scorecard at a high level. It is helpful to understand the underlying startup heuristics at a deeper level, if you are not already familiar with these concepts.
The ideal customer wants something the market hasn’t yet delivered. The size of this market should match your ability to compete and ability to deliver justify solving the problem. Validate you can control means of customer acquisition along the way.
1. Unmet Need or Desire - The best opportunities come from helping others. Find a need or desire that is not yet solved, where the customer is so passionate they’d happily pay for a solution. The challenge of following the money for a young startup is that if can lead you into already mature (competitive) markets that are already saturated. If you’re early stage, you want to avoid such challenging market climates.
2. Right-Sized Market (or Segment) - Select a market to service that meets your needs and abilities. You must have enough opportunity to warrant the effort. Be weary though of large markets, if you do not have significant funding or aggressive plans for growth.
3. Reliable Access to Customers - Traffic acquisition channels cannot be relied upon for the viability of your entire business. It is a single point of failure that has the potential to destroy your business. Acquiring organic traffic (SEO) from Google was a great opportunity for many content businesses but the feast has quickly turned to famine as Google has changed ranking algorithms. Gaming apps have suffered from changes to social platforms like Facebook and MySpace. To remain viable longer term, you must have viable and diversified customer acquisition and profit models.
Every market has a natural lifecycle driven by innovation and circumstance. Look for new demand or interest in something that wasn’t possible just a couple years ago. Be a “fast follower” into a validated emerging market rather than speculating on new opportunity.
7. Recent Innovation Enabler - Opportunity to enter a market diminishes as a market matures. Thus, look for something that was not possible 2-3 years ago. In technology the timeframe for this lifecycle is about 10 years, and seems to be getting shorter with each additional innovation wave. To take advantage of a positive competitive climate, you need to be started quickly so you’re entrenched when the market capitulates and supply outweighs demand. If you’re not ready when that happens, you’ll have difficultly surviving the ensuing market consolidation.
8. Demand Already Established – Despite the importance of getting started early, you need to be careful about pursuing unproven markets or opportunities. A startup can waste a lot of time and money pursuing an idea or worse, waiting for an insight to become profitable. It is better to let someone else do that hard work and instead take a “fast follower” approach. If you can see an area that someone else has recently validated, you can come in quickly enough to still be part of the early solution for customers, but your efforts are spent on developing a better solution rather than searching for a market.
9. No Signs of Commoditization – The end of every opportunity lifecycle is marked by excessive competition fighting for market share. An early indication that a market is entering this phase is to look for signs of commoditization of the innovation or technology you are pursuing. The innovation enabler that created this opportunity may be more than 3-4 years old now and as a result the word has spread. Barriers of knowledge and access to this innovation have fallen and new competitors are beginning to flood the market. Avoid markets where you observe such a dynamic forming if you are not already well established.
Look for opportunities to maximize returns without excess capital risk. Look for opportunities to start cheap and to realize higher margins through focused efforts and economies of scale. Avoid locking up too much capital.
13. Low Sunk Cost – The capital you must commit to develop a solution is sometimes a necessary cost but should be minimized whenever possible. This is capital you may need for operating costs later and the risk premium is high if you haven’t yet validated demand for the product. Look for opportunities that require less up front capital, or which you can build slowly and begin to validate and monetize slowly, rather than committing all the capital up front.
14. Working Capital Float – Some businesses require large commitments of working capital every month but the return on those investments can be as 3-4 months out from the time the capital was committed. This is common in businesses such as lead generation, manufacturing, or consulting, As a result, the company will need to “float” 3-4 months of cost indefinitely. This locks up significant working capital, exposes it to risk, and may require a high interest loan, representing cost. It is better to avoid this financial dynamic when possible.
15. Economies of Scale - Look for opportunities where profits increase with volume (scale). Supply, development, and distribution costs all diminish on a per-unit basis when working in volume. As a result profit margins and competitive advantage both increase. Economies of Scale is a double edged sword however – it is ideal from the perspective of achieving maximum returns but these opportunities are highly desirable and will attract many competitors, with significant investment. Note – If you have financial backing and a commitment to aggressive growth, economies of scale is a requisite part of that mandate. If you are bootstrapping or seek to build a lifestyle business, this can signal intense competition you may not be seeking.
A good product will be a direct response to a customer need or desire. If the value is well articulated and the customer is passionate about your new solution, the reason to buy will be compelling. Consider deterrents also – are their high switch costs and is the solution easy to use and understand?
4. Customer Focused Solution – It can be tempting for engineers to focus on building something “cool” with technology, or for business folks to focus on the largest theoretical profit opportunity. While these both have their place, they should both be secondary priorities to addressing the customers fundamental unmet need or desire. If you don’t get that right, the opportunities to build scalable tech or scalable profits will never materialize. Keep zen-like focus on developing a simple but highly targeted solution for your customer.
5. Low Barriers to Adoption – Minimize the challenges a customer may face when considering adopting your product. Look for indications they haven’t already invested heavily in a competitive solution. Are there any common workflows or platforms already heavily adopted by your target demographic? If so, you want to integrate with those frameworks in order to connect easily with existing process and use patterns. Finally, when designing your product, make your solution incredibly easy to use and understand in an effort to minimize the learning curve. These are all examples of one simple idea – make it as simple as possible to begin using your product.
6. Clear Value Proposition – value can be defined as the total benefit you provide minus the code of the solution. The value of your solution must be clear, compelling, and significant. Even if the cost of developing your product is minimal compared to its monetary cost, if the problem you solve or your approach to the solution is of significant value, you will spend much less time having to convince people to try your product.
Avoid being marginalized by excessive undifferentiated competition. That drives margin compression, commoditization and market consolidation. Look for inefficient markets where there’s still ‘play’ and find ways to develop a sustainable competitive advantage.
10. Clear Market Inefficiency - In an optimally efficient market, a single competitor will become the dominant solution provider and command the large majority of opportunity and profit. Markets are inefficient when they’re new, fragmented for reasons such a geographic barriers or lack of discovery. An old stagnant market can be inefficient in other ways since it no longer provides an optimal solution and is ripe for disruption. Market inefficiency is the slack a startup needs to get a firm footing.
11. Low Barriers to Entry - Avoid a fight you cannot win! A market can be much harder to enter if a competitor already has a mature offering that you’ll need to spend significant time and money catching up with in order to compete. You’ll also want to avoid any markets where a dominant competitor has already achieved economies of scale and can thus product cheaper than you or can afford to acquire customers at a higher cost – they will use this leverage to increase their dominance and to eventually starve you out of the market.
12. Differentiable Position – An effective way to reduce competitive pressure, is to remove yourself from direct competition – you need to clearly identify a viable positioning strategy with this in mind. You may offer a similar solution but if you are not directly comparable then you are also not directly substitutable, meaning you will have some inherent advantage for a subset of the market. If you are early and develop economies of scale quickly, you can become the cost leader. In a more mature market you might focus on customizing a solution for a specific market segment’s unique needs, or your product might be inherently unique by focusing on a killer feature or user experience.
Just because an opportunity exists, doesn’t mean your team is likely to succeed. Does your team have an inherent competitive advantage for the endeavor? Do you possess deep knowledge, technical skills to deliver, & access to key partners and resources?
16. Subject Matter Expertise - Does your team possess deep knowledge of the market you plan to enter? You’ll need to have a deep understanding of the market dynamics, the players within the market, and how to position yourself among these players. You also need an intimate understanding of the prospective customer and what they’re lacking so you know how to address their needs and desires. Without this expertise, you risk never finding market fit and never getting off the ground.
17 . Functional Competence – Understanding the customer and the market is not enough. Your team needs the technical competence to architect a an effective solution. This is not a one-time project that you can easily outsource. Rather, someone needs to be looking full time at iterating the product in response to constant learning from the subject matter expert, and looking and developing internal business processes and systems, with the goal of automating as many aspects of the business and products as possible. Without this expertise, you risk not ever reaching scale or efficiency enough to maintain a competitive advantage.
18. Supplier Partnerships – Very few businesses exist in a vacuum or are the source of every component needed to offer a compelling solution. eCommerce merchants must either manufacture or source their products, consulting firms must acquire talent, and software companies leverage open source platforms, 3rd party technologies, and data APIs. Relationships with suppliers are critical and you need to secure and continue to nurture these relationships. If a competitor is able to establish a favorable supply advantage, they will also have favorable customer acquisition and will take market share from you later.