One of the most common questions I get is: which startup idea should I work on now? Interestingly enough, it’s one of those questions where having experience seem to not be relevant to the eventual answer; I’ve heard the question from everyone, from dorm room first-time college student founders to experienced startup operators who have had successful exists in the past. Over the years, I’ve developed what I think is a useful framework for going about answering that question.
It’s important, however, to note that this framework only works if you conform to the conventional belief of startups (i.e. that it should launch quickly, reiterate relentlessly, shoot for maximum growth, etc.). If that’s you, then all startup ideas can be divided into two buckets, or can exist at two ends of a spectrum: 1) ideas with market risk, or 2) ideas with execution risk.
Very few startup ideas straddle both types of risk; as a matter of rule, first-time founders should not go for such an idea.
Now, let’s break down the two different risks.
Startups with execution risk presents less risk of the two options, but it doesn’t make it any less challenging to scale. In this category, the market is already established, and more importantly, customers already know that they want the product. It’s not a shot in the dark, and there’s no huge R&D budget necessary to prove that such a demand exists. Startups with execution risk usually benefits from an earlier predecessor who have taken on the risk of proving market demand and refined a playbook on how to go-to market, acquire and retain customers, and define the unit economics.
Because of all these factors, startups with execution risk can just focus on building, instead of figuring the more conceptual ideas (i.e. will the idea even work?). Some examples of startups that focused on execution risk vs. market risk:
- HelloFresh (based on Blue Apron).
- Jumia (based on Amazon).
- Flexport (incumbent industry with pent up demand for a technological solution).
- Zoom (based on Skype).
- Afterpay (based on Affirm).
Startups with market risk, on the other hand, have to go out and prove that their product is something that, 1) people actually want, and 2) people are willing to pay for, at scale. Although startups with market risk are much more difficult to execute on, the potential payout/reward for being successful is also much larger. This is primarily due to the first mover’s advantage: the company that enters the market first will usually end up defining the entire market on their terms, and it is on those terms that they succeed — big.
However, in the earliest stages, startups with market risk will have to figure out how to introduce the product (i.e. the messaging), create/manufacture something that has never existed before, get approval from regulators, etc. all without knowing whether or not there’ll be customers who’ll end up paying for their creation. Without the deepest conviction, it is difficult to create and sustain momentum to build such companies. Some examples of startups that focused on market risk vs. execution risk:
- Airbnb (you should trust that a platform will vet its users closely enough that you won’t get murdered or raped living in a stranger’s home).
- Twitch (a company can actually make tons of money by allowing users to stream the video games they’re playing for free on the Internet, and allowing other users to be involved in the experience of viewing the game being played out in real time).
- Stitch Fix (yes, personal stylists are a thing, but it’s not immediately obvious if this is something mass consumers want; the conventional thought here is that most people can dress themselves, until they’re rich enough where doing so poses a risk).
- Birchbox (are customers willing to pay for, on a consistent basis (the same way they pay for cable, Internet and utilities), a box of beauty samples (not even the whole thing!) to be delivered to them monthly so they could be up-sold on higher ticket items?).
- Point (sure, homeownership is every American’s dream, but why do you need to own 100% of it? Why not just 10% (if that’s what you can afford)? Or 84%? Point reinvents how we think about homeownership for a new era where homeownership seems out of reach to student debt-burdened Millennials).
In recent times, the idea that a startup should not just have product/market fit, but also founder/product fit (i.e. is the founder the best suited individual to solve the problem?) has gotten traction in the venture community. One of the most reliable indicators of which risk a startup founder should pick follow along the same lines: how does the personality of the founder fit with the type of risk? Is he naturally an innovator (i.e. market risk), or competitor (i.e. execution risk)?
Don’t get me wrong: there are small overlaps in the Venn diagram, and the two risks are not 100% mutually exclusive. Jumia, the company that launched the Amazon of Africa, may have had a template to go by, but they still had to innovate on the logistical front — cash on delivery, very weak to non-existent delivery infrastructure, poor mapping, etc. But by and large, answering the question alone can provide some clarity, and it is one that has proved to be reliable time and time again.
Not Michael 