I have been on the receiving end of thousands of business plan pitches over the years. Of those, I've invested in seven and so far, three of those pitches have turned into real companies that were sold for over $2 billion. A fourth one, still a private company, was valued last year at $4.3 billion.
As a result, I have formed some ideas about what makes the difference between a great business idea and a less great one. Not surprisingly, I recommend taking my advice with a grain of salt because I believe that luck plays a very big part of any of the success I've had picking companies in which to invest.
Nevertheless, I am confident that if you can convince me that your business idea passes four tests, there is a much better than average chance that it could be the beginning of a successful company.
Here are four questions to ask yourself to determine whether your next startup idea is a good one.
1. Is the idea aimed at customer pain that rivals have not relieved?
This first test is the hardest. After all, it is very hard fo find a problem that other companies have not figured out how to solve. Unless you target an unsolved problem, a customer would be better off buying from an established supplier since they are less likely to run out of money.
Another challenge you must overcome to pass this first test is that often the reason no companies have solved a customer's problem is that it's not a big enough problem to be worth paying to solve. Too often I have seen business plans for problems that are "vitamins" -- e.g., something that a customer ought to need but really does not consider important enough to pay for.
Simply put, to pass the first test, you have to find customer pain that is annoying the customer so much that if you were able to make that pain go away, the customer would keep buying from you as long as your solution continued to be the best available solution.
One useful hint for aspiring entrepreneurs is that I frequently see successful pitches from startups that are taking advantage of recent trends in technology, demographics, and economic factors that create opportunities to build new solutions that incumbents struggle to create.
Listening to customers with empathy and finding these trends could lead to an idea that passes this first test.
2. Do you and your co-founders share a deep passion for solving the problem?
Passing the first test is not enough -- after all, to build a business you need to work 80 to 100 hours a week sometimes. And during those long weeks, you might not be getting paid -- choosing to invest sweat equity to get the idea off the ground. Unless you and your co-founders are passionate about solving the customer pain you've found, you will never have the stamina to keep working hard enough to succeed.
And it's not enough for you to have that passion -- everyone on your team has to share it. If you have one or two free-riders on the team, I will certainly pass on your pitch.
3. Is the market opportunity for solutions at least $2 billion?
You can't build a significant business -- say with at least $100 million in revenue -- unless you are targeting a large market. A rule of thumb many use is that a startup can't get more than 10 percent market share. So to reach significant scale, you should be targeting a market that is at least $1 billion -- though I prefer $2 billion to be on the safe side.
It is usually not difficult to find researchers who have estimated the size of the market you want to target.
4. Can your team design, build, and service a market-leading solution?
If you can pass all three of these tests, I might be interested. But you would still have to prove that your team had the ability to design, build, and service a product that could gain a leading market share. The easy way to convince me of this is to show me that your team has a previous track record of success and that based on your customer research and technological ability, you can develop a product that customers will gladly buy and use.
If your idea does not pass these four tests, my advice is to keep trying until it does. Otherwise your business will probably struggle to raise capital and may not even get off the ground.