How to evaluate startup ideas?
This article is based on a talk Y Combinator partner Kevin Hale gave in 2019.
Many of us come up with really creative startup ideas, unfortunately people quite often start to immediately think about the nitty gritty details such as the name of the company, branding, the exact technology that is going to be used, and the list goes on. In his talk, Kevin Hale provides us a great framework that we can use to evaluate our startup ideas before we get lost in the details.
So what makes a startup idea good? According to Kevin, there are three parts that you have to critically think about. The first component is the problem that you are trying to solve. A great problem is something that a lot of people face frequently, it is growing, urgent, expensive and mandatory to solve. An example would be an idea which targets 1 million+ people, it grows at 20%/year, it needs to be solved now due to some change in legislation and people face this problem hourly, or at least multiple times per day. Of course, there are not so many examples like this, and Kevin recommends that your idea has at least one of these characteristics.
The second part that makes a good startup idea is the solution. Maybe there is a new technology that no one has applied in the area that you look at. It could also be a different way you approach a common problem which allows you to solve it 10x faster or cheaper than all other solutions. Although the solution is a very important part of a good startup idea, Kevin suggests not to start here. Far too often people will try to apply technologies on various markets without ever validating its need by potential customers. This is called the “technology push” method compared to the customer centric “market pull” method. To read more about the differences between the two, check out our article.
The third and final part that makes a good startup idea is the insight, or as Kevin puts it, the unfair advantage that you have. Maybe you are 1 of 10 people in the world who can solve the problem. Another example could be a product advantage, when your product is 10x better than the competition. Acquisition could also be your unfair advantage, if you can grow by word of mouth, spending £0 to acquire new customers. If you get stronger as you grow than you might have a monopoly advantage. This is particularly the case for companies with the network effect and marketplaces. Lastly, the market could be an unfair advantage if it grows at 20%/year by itself. Again, Kevin suggests that you have at least one of these unfair advantages, though he ranks the market type to be the weakest.
In this article we looked at Kevin Hale’s framework to evaluate startup ideas. By critically looking at the problem you are trying to solve, your angle to solve that problem, and assessing what unfair advantages you have, you can more competently decide whether to discard or explore your startup idea.