Before starting Livemocha, I always thought the idea for starting something would come in an aha moment ( followed by a frenzy of activity building the site and launching to success).
The idea for Livemocha did not happen overnight. It took a lot of steps to get to that point. I was recently thinking about this process as one of my friends was asking me for my thoughts on his ideas for a new venture.
For someone starting out new - how do you get from a general idea that you want to start a company to your vision, then product and eventually market.
If you want to launch a product/company where do you start?
Brainstorming for Ideas
Are there are any areas you are passionate about or know a lot about - e.g. Say you have been teaching at Kaplan for GMAT preparation and think there is a better way to do this or you have been taking guitar classes for a long time and think there is a better way to do this online or through mobile. Maybe you care about solving the issue of kids getting better math education and want to build a site for that.
Other options are to consider solving problems you are facing or services you will find useful. This usually will be a consumer product. E.g. I find it hard to find nannies through craigslist - maybe there is an opportunity to build a service to do that. If you or someone in your team has been dealing with customer requests or sales in the enterprise area and have an idea of what products people are asking for - that could be an enterprise opportunity.
When you are considering ideas, write these down. You don't need to evaluate or dismiss them immediately. Consider the most promising idea and start to flush it out. When we were starting Livemocha, a promising idea would usually take weeks to flush out.
Evaluating your ideas: How do you identify the good idea
Essentially each step in this process of evaluating your idea is to remove the various risks associated with a startup and try to pick the one with the best shot. There are external risks (market, regulations etc.) and internal risks (team, execution, raising capital etc.).
Step1: The first step that I recommend is to do a search if someone else is doing the same thing. More often than not, you will find someone else has had a similar idea and is already out there. Usually if they have 6 months lead over you and that's the only thing they are doing it will be tough to catch up ( unless you can raise more capital or you have a unique twist on the idea). How crowded is this marketplace?
- If there is already someone doing this - estimate the amount of traffic they get and registered users etc. Essentially how big are they? You can use alexa, comscore, compete to guess how much traffic they have. Look at the management team, the product and see how they have executed.
- Any other market reports? For e.g. when we started Livemocha we found lots of market research estimating the size of the market, distribution of learners etc.
- If someone else has already done the same and you don't have a significant differentiation, then you should consider something else instead of taking them head on. If they are already a well funded company with a few million users, it will be hard to take them head on. You have to figure out how you are going to approach this space.
Step2: If you feel you have a reasonable shot at building this service/product - evaluate the business risks. How big do you think the market is? What will your business model be? ( Its ok not to have this figured out but atleast hopefully you are building in a market thats growing and has revenue potential). I have a post about this earlier - this is an important step, do not build a website thinking you will be able to sustain it on advertising. Also think of people's propensity to pay - while 3d photo albums might be cool, its an unproven model whether people will pay for it.
If your idea has done reasonably on these first 2, evaluate the product risks. A good example is building a new search engine thats significantly better than google in say image search. The opportunity is definitely big but the product/technology risk is very high. For many websites the product risk is not high.
At this point, if you feel like your idea is worth pursuing, you should start flushing out the next level of detail - what does the product look like, how long will it take you to build it. What team will you need. How much money do you need to launch it? Then you would create a business model based on your assumptions. How much would you charge, how many people do you think will buy. ( create a hypothetical model based on traffic and paying assumptions). How are you going to acquire your initial customers - is it adwords or PR (estimate how much it will cost etc.). Getting distribution is a hard challenge.
Differentiation or Barrier to Entry:
Assume people will copy your idea if there are not already 20 people working on something similar. Consider what barrier to entry you can create with your product? This way when someone does copy your idea ( and they will soon) - how will you sustain. These barriers can be network, content, operational, low cost of customer acquisition etc. E.g. Its not very hard for Microsoft or Google to build a site like ebays but its going to take a long time to get over the network effect of - merchants/buyers.
If its only going to cost you $50k to launch it and there is no barrier to entry then you have a challenge as others will get in and its hard to compete. E.g Lets say you are building a site where you are categorizing youtube videos yourself. Assume the site costs 50k to launch and 10k monthly to continue categorizing. What is your barrier to entry if someone else does the same thing? One idea would be to have your community users also start doing it, that is hard to replicate once you have a 100,000 users doing this.
Go through the steps in detail. Its better to have wasted 2 weeks and throwing away an idea than wasting a few years chasing down the wrong path. We threw away a lot of ideas before Livemocha passed our litmus tests. It took us a good 2 months from the initial concept to finally making the decision and in that time we had a lot of stuff flushed out.
One thing I have learned over the past 3 years, is that no matter what you choose to do, building a successful company is hard. So you might as well pick something you care about.