Many people believe they have the skill to evaluate startup opportunities. But in reality, entrepreneurs often overestimate the business model they created, and non-entrepreneurs tend to underestimate new opportunities.
Almost all businesspeople overestimate their own capability in assessing business opportunities.
So did I.
I worked for GLOBIS Capital Partners, then affiliated with Apax Partners. I have an MBA from Harvard Business School. With this background, how could I fail? I thought I had a reasonably strong skill in assessing new business opportunities.
Following my sense, I left VC and jumped into a healthcare startup. Then, I failed. I lost all of my assets (although they were quite tiny from the beginning).
Now I know the difficulty. It is not easy to assess startup opportunities. I also believe, however, that every businessperson can improve their skill step by step to get closer to the master level. After talking with several serial entrepreneurs who have succeeded repeatedly, I came to understand the ten skills you need.
Level 1: Customer interview skill
The most fundamental skill is interviewing prospective customers. When you have an idea to sell a new product or service to the market, you need to ask the market. Good entrepreneurs are generally very good at listening to customers’ opinions.
Level 2: Skill to analyze the industry structure
If you have studied the frameworks of industry analysis, like Michael Porter’s Five Forces, you know how to analyze industry attractiveness. Some businesses, although strongly needed by customers, are in a non-lucrative position. For example, healthcare service ventures are challenging, since the supply of nurses and caregivers is limited in most countries. Web-based services generally find it tough to survive because you have no barrier to entry in general.
Doing an MBA gives you this skill.
Level 3: Skill to assess the capability of the management team
The attractiveness of business depends on who you are. If your team launches a semiconductor startup, for example, your team needs to have industry expertise. If you are to build a labor-intensive service business, the key success factor is your personal leadership skill. There must be a good fit between your business and your team. Otherwise, you are unlikely to succeed.
Level 4: Skill to understand customers, even when the key message is not explicit
Customer interviews are critical. However, interviewees cannot always be trusted to give you the answer up front. For example, one of my student’s teams was developing a software application that encourages communication between married couples. Only after conducting more than ten in-depth interviews, the team found out the fact that key driver of good communication was, in reality, mutually satisfactory sex.
It requires high skill to establish trustful relationships quickly, observe a subject’s life, and find out the market needs that are not obvious at a glance. Interviews often give you superficial answers, so you need to deeply anlyze the customers’ psychology.
Level 5: Plan-do-see cycle
Skillful entrepreneurs are good at making quick trials to understand true customer needs. For example, one GLOBIS student is starting a venture that connects amateur cameramen and young parents who want family photos. The team conducted photo-taking sessions several times so that they could precisely understand customers’ willingness to pay. Entrepreneurs often create a prototype or minimum viable product (MVP) and conduct customer interviews.
Level 6: Skill to find disruption opportunities
Some industries have hidden opportunities for “disruptive” innovation. Disruptive innovation is the concept developed by Prof. Clayton Christensen, Harvard Business School. When a product specification is overdeveloped, beyond the needs of many potential customers, that is a chance for a disruptive innovation. Newcomers may present low-cost, low-spec products that appeal to new potential customers.
Innovators have various opportunities for drastic cost reduction. For example, you may lower the quality of the product. You may vertically integrate the distribution network and simplify the cost structure. Skilled entrepreneurs have a good sense of pattern recognition and are able to identify opportunities for disruption.
Level 7: Sharp understanding of Critical Factors for Success
When I talked with an industry veteran in the online gaming industry, he advised me that he was good at analyzing the key success factor of similar industries. In his case, he analyzed the history of the traditional game console industry and extracted a common theory of success.
In order to assess a new business opportunity, you need to understand what the critical factors for success (CFS) are. For example, when I invested in an animation production, I (eventually) found out that CFS are 1) to have an excellent creative leader who can attract animators, and 2) to have a disciplined process to manage the cost and schedule. It would be beneficial if you can identify the CFS before you start your venture in that area.
Level 8: Neutrality
From a psychological perspective, it is essentially challenging to be neutral. Especially when you have a strong passion in an area, that passion may bias your judgment.
When I was working in a startup that promotes early detection of dementia, I had the strongest passion. That biased my judgment. Although my product was hard to sell and the market was too early to accept it, I did not try to have an objective view.
Level 9: Timing assessment
Even if your product is addressing unmet needs and will certainly be big in the future, you may be too early. Assessing the right timing is critical.
There are two tests to assess timing.
First, ask yourself “Why now?” If you have logical reasons why the same business has not appeared in the past and why it should come out now, then you are passing the first test.
Second, check how customers are ready to accept the product or service. A quick test is to make a brochure that explains your product, show it to your prospective customers, and see if they understand the attractiveness of the product in thirty seconds. If it takes a longer time, your product may be too early, which means you may need a long time to educate the market.
Level 10: Broad knowledge of business models
In advanced economies, there is no attractive market that is obviously attractive for everyone. However, if you have a broad knowledge about various business models in the world, you may develop your own hypothesis. Even when ninety-nine out of one hundred people see no chance in a market, you may have a unique idea about how to grasp the market needs and achieve a profit.
How would you rate your skill in assessing the startup opportunities? I guess very few of you have reached the “master” level. Neither have I. But I hope we can brush up our skills by analyzing many opportunities and by absorbing various knowledge.
Good luck to us all!