Many people believe they have the necessary skills for start-up opportunity assessment. But in reality, entrepreneurs often overestimate the business model they created, and non-entrepreneurs tend to underestimate new opportunities. That means almost all businesspeople overestimate their ability to assess a start-up opportunity.
So did I.
I have an MBA from Harvard Business School and years of experience working with start-ups and venture capital. I’ve worked for GLOBIS Capital Partners and the affiliated Apax Partners. With this background, how could I fail? Surely, I thought, with all that education and experience, I must have reasonably strong skills to assess start-up opportunities. So, following this certainty, I left VC and jumped into a healthcare start-up.
And I failed. I lost all of my assets (small as they were quite).
Now I understand the difficulty of assessing start-up opportunities first hand. It is not easy to assess new businesses. But that doesn’t mean it’s impossible. Despite my harsh reality check, I believe that every businessperson can improve their skills step by step and eventually master business assessment. When I set out to do this, I started by speaking with several serial entrepreneurs who have enjoyed repeated success.
And as a result, I came to understand the ten skills you need for accurate start-up opportunity assessment.
Start-up Skill #1: Customer Interviews
When you think about assessing a start-up opportunity, you’re probably already considering the business model, the return—maybe even IPO feasibility. But really, the most fundamental skill for evaluating a start-up opportunity is interviewing prospective customers.
When you decide you want to help someone, what’s the first thing you do? You ask them what they need. Otherwise, your efforts to help run the risk of completely backfiring. Similarly, when you set out to sell a new product or service to the market, you need to ask the market what it needs. Good entrepreneurs are generally very good at listening to customers’ opinions.
Start-up Skill #2: Industry Analysis
If you’ve studied the frameworks of industry analysis, like Michael Porter’s Five Forces, you know how to analyze industry attractiveness. Some businesses, though strongly needed by customers, are in a non-lucrative position. For example, healthcare service ventures are challenging because the supply of nurses and caregivers is limited in most countries. Web-based services generally find it tough to survive. You generally have no barrier to entry.
How do you acquire this skill? Honestly, googling only gets you so far. The best way to get well-rounded understanding and practice for industry structure analysis is to get your MBA.
Start-up Skill #3: Team Assessment
The attractiveness of business depends on who you are—and who you have working with you. If your team is launching a semiconductor start-up, for example, you’d better be sure you have industry expertise onboard. If you plan to build a labor-intensive service business, the key success factor is your personal leadership skill.
If you want an accurate start-up opportunity assessment, make sure there’s that fit between the business and the team. If you don’t see this (and it can’t be remedied), best to invest elsewhere.
Start-up Skill #4: Deep Customer Comprehension
Customer interviews are critical. However, interviewees cannot always be trusted to give you a true or accurate answer, especially right away.
For example, one of my MBA student’s teams was developing a software application that encourages healthy communication between married couples. Only after conducting more than ten in-depth interviews, the team found out that the key driver of good communication wasn’t honesty, romance, or frequent texts to check in throughout the day. It was, in reality, mutually satisfactory sex. It’s perhaps unsurprising that this didn’t immediately reveal itself in initial interviews!
It requires a high level of 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 analyze customer psychology. Without that analysis, your start-up opportunity assessment will be found wanting.
Start-up Skill #5: The Plan-Do-See Cycle
Skillful entrepreneurs are good at making quick trials to understand true customer needs, and this is evident in any start-up opportunity they present. Entrepreneurs often create a prototype or minimum viable product (MVP) and conduct customer interviews.
For example, one GLOBIS MBA student was starting a venture to connect amateur cameramen and young parents who want family photos. The team conducted photo-taking sessions several times to precisely evaluate potential customers’ willingness to pay.
This is called the Plan-Do-See Cycle. An all-too-common mistake from amateur entrepreneurs is assuming planning and implementing is enough, and that any rough waters at the start of a venture will work themselves out. It’s good to have faith in your product, but you also need to learn to adjust to the market.
Stat-up Skill #6: Disruption Opportunities
Many industries have hidden opportunities for disruptive innovation, a concept developed by Professor Clayton Christensen of Harvard Business School. Essentially, when a product specification is developed beyond the needs of potential customers, that is a chance for a disruptive innovation (and a prime start-up opportunity). 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 might lower the quality of the product. Or you could 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.
Start-up Skill #7: Sharp Understanding of CFS
One expert I talked with was a veteran in the online gaming industry who had mastered the art of analyzing key success factors of similar industries. He told me how understanding the history of the traditional game console industry helped him extract a common theory of success.
In order to assess a start-up opportunity, you need to understand its critical factors for success (CFS).
For example, when I invested in an animation production, I (eventually) understood the CFS were 1) to have an excellent creative leader who can attract animators, and 2) to have a disciplined process to manage the cost and schedule.
Understanding these CFSs from the start, or even before the start, would have been beneficial, to say the least.
Start-up Skill #8: Neutrality
From a psychological perspective, it’s not easy being neutral. Especially when you have a strong passion in a particular area—passion can cloud your judgment. It creates bias.
When I was working in a start-up that promotes early detection of dementia, I had the strongest passion. That affected my judgment. I wanted to get the product out there ASAP because I understood (and was so sure) it was going to help a lot of people. I couldn’t see how hard my product was to sell, or how it was much too early for the market to accept. I was so passionate, I didn’t even try to have an objective view.
Identifying a valuable start-up opportunity isn’t only about assessing the product/service or team. It’s also about assessing yourself and assuring you have the right mindset of neutrality so you can see all the possibilities—and obstacles.
Start-up Skill #9: Timing
If a start-up opportunity is addressing unmet needs in the market, it’s sure to be a success—eventually. Keep in mind that you may be too early. If you haven’t considered the right timing for a product, service, or even business, your start-up opportunity assessment is incomplete.
There are two ways to assess timing.
First, ask yourself, “Why now?” If you have logical reasons for why the same kind of business has not appeared already and why it should come out now, then congratulations! You passed the first test!
Second, ask yourself, “Are customers ready to accept this product or service?” That can be hard to determine, so try this: 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 longer for them to get it, your product may be too early. That doesn’t necessarily mean you have to give up, but it does likely mean you’ll need to spend a long time educating the market.
Be sure to consider that extra time in your start-up opportunity assessment.
Start-up Skill #10: Broad Knowledge of Business Models
In advanced economies, there is no attractive market that is obviously attractive for everyone. However, a broad knowledge of various business models across the world will serve you well. It can help you develop a hypothesis. Even when ninety-nine out of one hundred people see no chance in a market, that broader knowledge may give you a unique idea about how to grasp the market needs and achieve a profit.
So to find real start-up opportunities and assess their viability, the final skill is simple: learn all you can. There’s really no better mindset for any business leader than to never stop learning.