Potential startup founders are always looking for ideas to implement, when they should be looking for problems to solve. Customers pay for solutions, but there is no market for ideas. I’m often approached by people with a “million dollar idea,” but I haven’t seen anyone pay that for one yet.
Equally often, I see startups who are on the road to implementing an idea, but haven’t figured out what problem it solves – the business plan waxes on eloquently for 20 pages about how great this product and technology is, but never gets around to defining the problem (investors call this the “solution looking for a problem” syndrome).
A related “red flag” in a business plan is a missing competitive analysis section, or a short paragraph that essentially says, “this product has no competition.” My reaction is, if there is no competition, then there is no market demand for your product, so why are you building it?
Luckily, many startups are smart enough to keep morphing their idea, until it finally fits a real-world problem, and they can move forward in the marketplace. Unfortunately they could have saved themselves much lost time, money, and heartache if they had just focused on identifying the problem before they built a solution.
Smart startups also don’t forget that startup ideas are solutions for someone, and companies have to make money. The way to make money is to make something people or companies need (not necessarily what they want). Here are five solutions from an old essay by Paul Graham on “Ideas for Startups” that are even more relevant in these tough economic times:
- Automate a labor intensive process. This is the traditional realm of computers. Lotus 1-2-3 applied it to accounting spreadsheets, and Google applied it to information mining on the Internet, but Henry Ford even applied this principle to auto manufacturing. There are still millions of these opportunities for startups out there.
- Fix something that’s broken. In business, it seems to me that the traditional banking business models are broken or at least no longer fit the purpose. On the other end of the spectrum, Internet dating sites don’t seem to work. There are thousands of them, so they must be offering something people want. Yet they work horribly, according to most people who have tried one.
- Take a luxury and make it a commodity. People must want something if they pay a lot for it. Yet most products can be made dramatically cheaper as technologies improve. This opens the market opportunity, you sell more, and people start to use it in different ways. For example, once cell phones were so cheap that most people had one, people started using them as cameras and Internet devices.
- Make something cheaper and easier to use. Making things cheaper means more volume and more profit. For a long time making things cheaper made them easier, but now even cheap things are too complicated. Computer applications today are cheap, but often still impossible to use.
- Take a current solution to the next level. Solve the currently intractable problems that impact all of us. Tackle the global warming problem, predict where earthquakes will occur, find alternative energy sources, cure cancer, and unlock the keys to aging. There is no shortage of opportunity here.
Combine these with the value of a good understanding of promising new technologies, and the value of having associates with complementary skills to extend your thinking. Problem solutions are the ingredients that startups are made of. Start solving a problem today that you can use as the basis for the “idea” for your next startup.
That means the target market must be large (at least $500M), proven and growing, with revenue potential of at least $50M within five years. Initial investment targets are usually larger than $2M, sometimes up to $25M or $50M. To make this work, you will need an initial valuation of at least $5M. Current market conditions should still convince you to be totally thorough, thoughtful and aggressive in your approach and presentations. But now is the time to get started, and remember to work friends, family, and angels before you tackle the big boys.