Do you have a mediocre start-up? Well, do you have good answer for these 7 questions?
Does your start-up suck?
OK, I agree you have passion. Good for you. Huge first step.
But first you need great answers to these 7 questions if you want people to invest their Money and Time in your idea.
If you do, I’m in. We are in. Everyone is in. We will all make money.
If not, find something better. Your time is extremely valuable.
Not all companies will have great answers for all 7. If they don’t have great answers, it doesn’t mean that they won’t succeed, it just means that it will be harder. Also, I am consumer product focused so if you have a complicated medical device, this article may not be for you.
1. Are they really solving a Problem for the market? I’ve heard that in Textbooks (that I don’t read) they call it Product/Market Fit. First, you need to know who their customer is and you need watch that customer interact with the product. If you are not the targeted customer, then don’t try to interpret the product. I’m a married, middle aged, fat dad; am I the the targeted customer? If not, then my opinion doesn't matter much.
You should see that ‘oh-shit’ moment when that customer touches the product. You will know. Ask to see the data (survey, etc.) from the market that show fit.
2. How big is their TAM? Total Addressable Market (TAM) is the total annual revenue size of the US/Global market. TAM matters if you want to see explosive growth. Bamboo Ski poles? Cool but the market is too small, too seasonal. Big TAM gives you runway.
3. Are they disrupting an old Stodgy Market? Uber, Green Mountain Coffee, Traeger, and Yeti all were ninjas that quietly built their business under the nose of an incumbent that was too slow, too entitled and simply not well run. They did not keep up with their customers and ignored what was happening in the stores they used to rule. They had not innovated. The startup should know who they are attacking, and they should have a clear plan on how they are going to win market share.
4. Does the Product have a Barrier to entry for competition? Can you buy your company time by keeping competition away? And to be clear, competition is going to come HARD when you start to win. Intellectual Property, complexity of manufacturing, complexity of supply chain, complexity of technology can all serve as a barriers to entry. Anyone can make a headphone. Anyone can make a t-shirt or a beanie with a logo. Etc.
5. Is the business profitable and can they drive improving gross margin? does the business have enough profit to compete? If you are successful and the inevitable competition drives average sales price (ASP) down or when Product cost increase, does the business have gross margin to weather the fight? Small margin businesses simply don’t allow the runway to build a business. Constantly raising money to try to prove profitability, dilutes the ownership of the founders and causes you to be conservative when you should be aggressively investing into the growth of your business
6. If the product is a Branded play, does the company know how to really build a brand? Brand Starts and end with #1 above - really solving a problem for a market. Brand is the magic. Brand building is hard. Does the company know their Net Promoter Score? What does it tell you? Is the company patient to not chase revenue at expense of the Customer/Product Sales hierarchy? Brand takes patience and not many people know how to build it.
7. How good are the leaders of the business? Great leadership have a passion for the business and have a motor. They eat and sleep the problem and will grind it out. It also helps if they have built a business before; there is hard-earned wisdom from doing it multiple times.
I have more questions I would ask (culture, etc.) but if I only had 7, these are the questions I would choose. If a business has great answers to all of these, then it is special. Invest.
