Evaluating a Business Idea
Russ Siegelman formerly of Microsoft recently spoke at Stanford University on Evaluating a Business Idea. Its important to note that his ideas seemed to be biased toward a Silicon Valley-like version of technology product innovation–although not exclusively. Here are my notes from his insight into evaluating entrepreneurial and disruptive technology start ups:
1) You define “success”–You determine goals, metrics, and benchmarks.
2) Porters 5 forces–Isn’t so good for determining success for startups (I think some limited truth here)
3) You’ve internalized the problem–You know and understand it inside and out (You become a super expert–he teaches a class on this at Stanford)
4) Motivation of the entrepreneur–”Pure profit mentality doesn’t speak to staying power or passion of entrepreneur.”
5) Trends–What trends can you ride? (iPhone) How do you parlee that into an advantage? [Serge one of the cofounders of Google seemed to suggest to prefer]
6) Better mousetrap vs Groundbreaking (Brave New World) Model of Entrepreneurship–Better, faster, cheaper (Risk vs. Reward tradeoff–higher risk with higher disruption)
7) Business model innovation–Can be powerful. For instance, Google’s network effect
8] Product and market fit–Is there a tight linkage? How do you drive fulfillment and excitement with customer?
9) Market size (his ideas were contextualized with VC standards–which seem absurd in the case of someone who wants to create a small service firm and make $50,000 to $100,000 in take home pay.)
10) Timing–market dynamics (You don’t know till you try. You don’t want to overcommit)
4 kinds of risk: product, market, team, and financial risk (market risk is the hardest to deal with)
11) Contrarian–don’t seem obvious/out of left field (???) Risk increases reward. (Caveat: not all right…however)
12) The Great Debate: Would you rather have a great team with a poor market or a poor market with a great team??? (its a debate–Russ favors a great market opportunity–growing fast)
Russ provides a couple other suggestions around these issues:
1) Minimize failure with risk management (???)
2) Often morph/pivot. “Revision is a natural part of the evolution.”
3) Minimal viable product/mitigate risk. Get something going with minimum risk. Get something out to see if its viable. (“Don’t spend a dime more than the minimum.”
4) Phase it in according to the data you get.
5) You don’t necessarily have to raise money (specifically VC money)
Siegelman said “I want to hear three things: 1) You’ve done your homework. You’re an expert. You’ve thought this through. 2) Look at the financial slide (this cues the assumptions–how you’ve thought about it) 3) I want to hear the experts that say this is real. If I know someone who is better–shame on you.”
How was Google new/innovative given 5 search engines at the time? Cleverness/Contrarian. Nothing wrong with being a follower.
One Caveat: Siegelman thinks of experts as people in the field–not as much as academics. He highlights, “Those interviews [with expert practitioners] are worth their weight in gold.”
He does seem to leave out at least three areas–but I don’t really fault Russ given his time constrains:
2) Skill set and strengths of founders/employees
3) The Lean Startup and Customer feedback model for product development. Its a model based on the work of Steve Blank at Stanford–except in relation to the need for product/market fit and a slight mention of customer validation. Steve Blank’s model provides a way to create product market fit or at least find it. To be fair, Russ does speak to 80 to 85% of the issues Steve does–for instance he correctly emphasizes, “There is no substitute for talking to customers, people who have failed, people who have succeeded/are market leaders. I just wished that he had made it more explicit vs. the current model of technology start up development. Overall, however, some excellent insight from an expert on the topic of technology start ups and business idea evaluation.
Here are the Stanford Library resources for Evaluating Entrepreneurial Opportunities.