It’s not a secret I spend quite some time in startup centric communities (online and physical, here in Iași, Romania), and I stumble upon a number of new startups that want to hit it big. It’s always nice to see people looking at the startup path as a viable alternative to traditional “safe” employment.

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But I can’t help myself to judge the idea and potential of these startups. I always try to understand the details as clearly as I can, and figure out if they are going to hit it big, or if there is something there that I think will put them in a difficult position to grow.

That’s why I always liked TV shows like “Shark Tank” or the Romanian equivalent, “Imperiul Leilor” (Lions’ Empire).

Here is my 5 criteria I judge startup ideas by.

The industry

The industry is key. This is probably the most influential criterion as it dictates:

• the size of the market (the more niche it is, the smaller it is)
• how much competition there is (some industries see much more competition than others. For example, the food and beverage industry sees a lot of competition, and there isn’t that much space to grow there).
• barrier to entry (industries where there are a lot small businesses that can be potential clients are easier to enter than the ones where only a few big players exist).
• how much money can be made (in some industries, the profit margin is slim, and in some, the profit margin is higher. This dictates the willingness of potential customers to invest in new tech, thus affecting how easily you can sign them up to use your products).

The business model

Customers are at the heart of a company and the business model, with its two components, offers a glimpse in the future of the company.

• the target customer base dictates how much effort it is needed at the beginning, how much harder it is to scale, and how much money there can be made.

  • B2C is often the most difficult one, because consumers are very skeptical of newer products, they are particularly averse to subscriptions, cost of distribution is somewhat high because you have to spend a lot of money to get to them, and conversion rates are somewhat low.

  • B2B is my favorite one, because businesses operate on clear metrics, and they can be persuaded to buy into your products if you can either save them money, or you can make them money. The main disadvantage is that the sale cycles are longer, but at the same time, once you close them, they tend to stick around for longer.

  • B2E and B2G are not my cup of tea, as I find them to have a VERY HIGH barrier to entry, and usually this kind of products require much more than just good execution (ex. insider contacts that can open some doors and dialogues).

• the monetization methods are the bread and butter, and in combination with the type of the customer base, they can make or break the whole business model.

  • Subscriptions are popular for a reason, especially for the B2B segment, as they lower down the initial onboarding costs for clients, offers them a way to try it out first before they fully commit to it (increasing trust) and also offer a way to fund the development of the product longer-term, so the clients can receive updates and new features. In my opinion, this model rarely works with B2C because consumers don’t have that many “repetitive” needs that justify buying a subscription. The only way that I see for subscriptions to work with B2C is to put content access behind the subscription (like the streaming services do). Then you basically sell access to content, rather than software.

  • One time payments are more popular with the B2C segment because customers are more likely to buy things when they want or need them, rather than pay for a monthly subscription.

  • Marketplace with a commission: this model is probably the hardest to build since you have to solve the “chicken and egg” problem: a first, you need buyers to attract sellers, and sellers to attract buyers. In this situation, you need to attract them through various financial incentives, which balloons up the costs requires for the business to start up.

  • Ads: one other popular monetization method, it works for free client facing products that want to build a high retention and usage rate, as this type of revenue scales with the amount of time people spend using your app or product. For example, free content platforms or games can use this successfully, while other one-time usage kind of apps will struggle using it (for ex. public transit tracking apps).

The founders

Even with the right idea, a startup can still fail if the execution sucks because the founding team doesn’t have the expertise to execute properly, or the team splits.

So, in the founding team, there are two main criteria I would be looking for:

• at least one of the founders to have relevant experience in the industry they are building the startup for. If they have it, it means that they have the insider industry knowledge required to navigate the market, and some connections inside the industry they can leverage to gain feedback and validation.
• the founders should have complementary skills: the main areas that need to be covered are tech, sales and business strategy. I don’t believe that single founders can’t succeed, but the data shows that teams succeed more often.

Differentiator

Here, I am going to say something that will probably shock some people: I don’t believe in differentiators. Every startup person obsesses about “what can you do better that the competition”, “what sets you apart?”, “what is the unique value proposition?” etc.

But me, personally, I don’t believe the place to ask these are in the initial phases of a startup. I think this will come in at a later stage, once you find some clients, get feedback from them, and iterate on the product based on that feedback.

From these iterations, some details of the startup will emerge, and one of them could be this differentiator, but it has to come from the market’s needs, not pre-planned as part of the pitch.

I believe that building a business is a “solution search problem” in a space where you don’t have a lot of data, and this search process should look something like this:

1. find some potential clients in the industry you want to target (based on your past experiences)
2. get feedback about their problems
3. propose solutions and have them use them
4. get feedback about the solution and iterate
5. in the meantime, do the same with more and more parties, so a more concrete and reusable solution emerges, and that will be the final product.

It’s not desirable to be unique only for the sake of uniqueness. Uniqueness comes as a consequence of exploring a market in some way people didn’t explore before, and listening to feedback other people didn’t listen to before.

Skin in the game

Another great indicator of a startup that has a better chance of surviving and growing is how invested is the founding team.

More than often, people get an idea and immediately start pitching it around for funding. Even before they put some of their own money in, which I think is a pretty obvious red flag.

If you, as a founder who supposedly believes in the idea and the startup, is not willing to put some money where your mouth is, why would others?

You have to take some financial risk to build it and prove it. This way, the founders are less likely to fight, to split and to give up on the idea, because they have to put their egos aside and take care of the resources they already put in.

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