Tuesday, November 07, 2006

Evaluating Start-up Ideas - (part TWO)

My entry last week on evaluating start-up ideas netted me some nice feedback. Rereading it, I realize there were a small pile of things that also should be on that list. So, welcome to part 2.

1) Let ideas gestate.

Every new idea seems to be the greatest idea I ever had. Usually it goes something like:

Time 0: get new idea
1 minutes later: (some details)
2 minutes later: start thinking about suit I'll wear when I get to ring closing bell when we IPO

After getting way too excited about way too many ideas, I set myself a rule. Think through an idea for 3 days before I tell a soul. My excitement is usually killing me the first day or so, but by the third day its rather died down. Or, if it isn't, I get a better sense of whether I'm really onto something. Simply put, ideas always look better the fresher they are. You're looking for ones that look good even when not fresh.

2) Consider the size of your market.

If you read Guy Kawasaki's blog you'll see him mention quite often how new companies pitch to him about the immense size of their new market. Guy often chides them for their optimism but even he knows you better believe you do have a big market (and maybe even puff the number in conversations) or you can forget it. Numbers in the hundreds of millions or billions are good - you're really only realistically hoping to glean a smidgen of that.

Consumer markets can be drastically immense. If you're one guy in your basement with an idea that will capture you a 40billion dollar market, that's dandy. Hopefully you have no misconceptions that you'll just own the market yourself (where there's money, there's competitors, and they'll steal plenty, if not most of it before you can penetrate it all) but, the bigger the market, the easier it is to find customers.

Niche markets like hardware stores, developers, and/or mailmen don't suck - so long as you can effectively penetrate most of it - and fast. Simple rule, bigger is better. If big enough (and your idea does actually penetrate it), you'll capture the attention of someone big who will want it for themselves. That either means buying you or chasing you - where the actual outcome happens in the execution (not the idea).

3) "Building a business around a new developer tool" is wrong on so many levels.

Some markets are not only niche - they live in the land of the free. And I don't mean the USA - I mean a market where people are used to getting everything for free.

The software developer inside me keeps coming up with ideas for software development tools. Occupational hazard I suppose. I understand the domain space and understand how to solve the problem. However, development tools are, in general, a really bad place to find good business ideas. Consider that things like Netbeans and Eclipse that took thousands of person-hours to create are given away FREE. Therein lies the rub, developers have created their own culture of giving away tools for free. There is certainly nothing wrong with that, unless of course you think you're going to make a business out of it.

Even then there are niches inside dev tools that are worse than others. Two dollars and an idea for the greatest Java software dev tool ever will buy you a cup of coffee. Java developers are especially used to getting tools for free. In contrast, Microsoft has created a nice culture of getting .NET and windows developers used to paying for stuff. In other words, if you "must" create a developer tool that you intend to sell, stick with Microsoft or some other market segment where paying is an accepted idea.

4) Ideas really aren't worth all you think they are.

Yes I know you're smart. Yes, you amazingly, super-duper wonderfully creative. But in reality, very few ideas are truly novel.

What happens is that two independent technology evolutions (say, the internet and mobile phones) eventually progress to a point where it takes a simple idea to act as a bridge and converge the two. And a product is born. The farther ahead you see that convergence, the more "brilliant" your idea is.

But with every passing day, the distance between the two technologies lessens and your brilliant idea becomes ever so slightly more obvious. In other words, if someone else hasn't thought of it, they will soon. And as more people realize it, the odds of it hitting someone who's looking to start a company increase.

Basically, the winner will be the company that gets things to market fast, creates a marketing and sales infrastructure, and actually makes sales. Don't rely solely on an idea to make it all the way. It has to be supported. If it isnt - at a minimum - it will be stolen (at least in a market sense). You can definitely create a world-class company on a good idea and a great infrastructure. Visa-versa is nowhere near as easy.

And, as an aside, once the technology progressions converge by themselves (apart from your idea) - your idea will probably be made irrelevant (hopefully you cashed out long before then).

5) Competition is good.

If you don't have competition, you don't have an idea. Competition tells you and investors that your idea isn't wacky. If you work 3 years on a product with no challengers, maybe they know something about the day you're going to release and try to make sales that you don't.

Don't be afraid to chase an existing idea if you have what you consider a sub-idea that makes a key difference. Both Altavista and Google did search. Altavista was doing it long before Google started and probably laughed when they heard some challenger Google was going to take them on. I hate to say it but the concept of "stealing ideas" in business is very hard to define. Patents tried to enforce this notion but its so broken (although you still need them of course) that it hardly matters.

Every idea you have is already an extension of some existing idea (Every web 2.0 idea "assumes" the internet "exists". Every "mashup" not only assumes, but steals functionality from 2 or more existing web services). How close your new idea is to old ideas defines how many people will say you stole it. And there will *always* be people saying that.

As a concrete example, I created Mailinator in July 2003. It was first disposable email service that allowed incoming emails to create an inbox as they arrived. There are now a half-dozen copycat sites (some even stole my FAQ questions and license!). Does this matter? Could I do anything about it if it did? Should I try to squash them?

A better tactic is to simply out-market them and introduce new features. Protecting an idea nearly impossible, working to continually better serve your customers isn't. (And, by the way, the idea for Mailinator wasn't mine. It was Jack's).


So there's 5 more. I have a feeling I have another handful brewing, stay tuned.


Thursday, November 02, 2006

Have a great startup idea? Hmm. Maybe not.

Over the years I've started a small handful of Internet/software projects/companies. Examples include Mailinator, Preemptive Solutions, Inc., and Classhat. Actually, I've started a large handful but no one knows about most of them because they were (in no particular order): dumb ideas, unsuccessful, too hard for me to complete. Given that I now rate any new idea I get according to a set of rules that helps me filter out good ideas from bad. At least, whatever I consider bad. Keep in mind these rules are for the canonical one or 2-person pre-startup - if you have 8million in VC, there's a lot of other magic you can do.

Here they are:

1) If there is no business model, its a hobby, not an idea. I love compiler optimizations. I wrote a Java optimizer soon after Java came out. I spent months trying to figure out how to turn it into a business. But guess what, people don't pay for optimizers, or compilers, or even runtimes. At least not without a strong sales team telling they need that. By and large most ideas I get are about things that I'd love to work on but have no real business model (ala my Classhat project took several years and is, absolutely, a hobby). There's nothing wrong with hobbies, as long as you know what they are.

2) The best ideas make your customers money. If your idea can say "If a customer uses our product, they will make X% more money" (where X is a positive number, even if quite small) - you have won the game. Importantly - I did not say the customer will save X% more money. I said they'll make it. That's a big difference. Saving money is great, but you are then faced with the mission of convincing your customer that if they spend $100k on your product now, it will pay itself back in 8 months. It's way way way easier to say "Use our product and you make 2% more money (of which we get a cut). Don't use it, and don't." Who wouldn't buy that?

3) The best place to be that I know of is B2B2C. That is, you want to be a business that serves businesses that serve consumers. If you're B2C, then welcome to some important challenges. One is to get people to pay for your stuff, which in this Internet world, we're not all that happy about doing. Secondly, welcome to support hell. Its very hard to provide consumer support (and you see many complaints across the net). It takes a lot of support people and a lot of money to do it right, which is why it rarely is. If your idea plans to charge consumers, I'd definitely think twice unless you can ramp up a support system fast. Thirdly, you'll need a powerful infrastructure (apart from support) just to handle large numbers of small transactions. Its harder to sell 1000 $10 widgets than 10 $1000 ones.

On the other hand, if you're simply B2B, life isn't so bad. Big ticket sales but encompassing the market is harder. Sales cycles are long. Again, you might need a faster ramp-up of a sales and marketing infrastructure (which you are going to need eventually anyway), but you're probably ok if the idea is generally good.

4) If you're going B2C, look for revenue models that don't come right from the consumer. Given the last point you're probably thinking I'm crazy given things like youtube or myspace or facebook or google. I'm not (at least I don't think I am). All those places dodged the problems of providing support and tracking sales by giving away their services for free and making money on the backside (whatever that is). Often that's advertising revenue. Often its partnership deals. Simply put there absolutely is an Eyeball Business Model. If you can get the eyeballs, you can sell them. Just try to do that instead of charging them directly. They'll be ornery about it and demand support.

5) Revisit every bad idea every once in awhile. Why is AJAX hot? Because its enabling things technically that weren't enabled before. Are any of these mashups really novel ideas? Not usually. Old ideas become new again by new technology, faster computers, etc.

When the computer game Doom came out it included very little novel technology. All the 3D math and graphics tech had existed for years. The guys at ID were just the first ones to realize that personal computers (as opposed to graphics workstations) at the time had finally gotten powerful enough to do it all in realtime.

Every time bandwidth gets faster for cheaper, previously bad old ideas become new and shiny (e.g., video over the Internet). Mobile phones seem really ripe. Apps and usability currently sort of sucks. Thats really hampering a ton of uses. With every new advancement however, its going to open up new doors.

6) Do your best to create a system of recurring revenue. Advertising on websites and such is easy. But things like packaged software is hard. Why does Microsoft change the doc format every time it releases a new Microsoft Word. Surely it probably includes new features, but why can't old versions just ignore those and load the file (which is really text right?) anyway? Because they don't want it to. They want you to buy a new version of Word to get all the new features (even if you just write letters to your Aunt Edna and would never use them). They want recurring revenue.

Doing that with packaged software is harder and often somewhat transparently greedy. Heard of "software as a service"? That is of course, really, "software that we can just keep charging for". Bottom line is if tires, light bulbs, or razors never wore out, the economics of those businesses would be radically different. Getting more money from your customers (hopefully while providing value to justify it) is a good way to go.

If have an idea that follows #2 above (making your customer money), do your best to simply take a small cut. Small cuts add up and the customer has no risk in trying your product.

Edit: There is now a part TWO to this article.