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What to look for when evaluating a start idea
1.
Product-Market Fit
2.
Market size
3.
Why now
4.
Distribution
5.
Team
6.
Moat
7.
Business model
(read on)
1.
Product-Market Fit2.
Market size3.
Why now4.
Distribution5.
Team6.
Moat7.
Business model(read on)
1/ Product-Market Fit
“The only thing that matters is getting to product-market fit.” ー @pmarca
What to look for:
High cohort retention
Passionate user feedback
High MoM and YoY growth rate
A product that’s 10x better than the alternative
Willingness to pay
Product-Market Fit“The only thing that matters is getting to product-market fit.” ー @pmarca
What to look for:
High cohort retention Passionate user feedback High MoM and YoY growth rate A product that’s 10x better than the alternative Willingness to pay
2/ Market size
“When a great team meets a lousy market, market wins. When a lousy team meets a great market, market wins. When a great team meets a great market, something special happens.” ー @arachleff
Market size“When a great team meets a lousy market, market wins. When a lousy team meets a great market, market wins. When a great team meets a great market, something special happens.” ー @arachleff
2/ What to look for:
Is there a $1B/year revenue opportunity
A customer base desperate for something new
A growing customer base being dramatically underserved
Over $10b TAM
If the initial market is small, then large adjacent markets
Is there a $1B/year revenue opportunity A customer base desperate for something new A growing customer base being dramatically underserved Over $10b TAM If the initial market is small, then large adjacent markets
3/ Why now
“The thing that I like to assume is every startup idea’s been tried … So, the question is not, has my idea been tried before? The question is, is it the right time for my idea to happen?” — @m2jr
Why now“The thing that I like to assume is every startup idea’s been tried … So, the question is not, has my idea been tried before? The question is, is it the right time for my idea to happen?” — @m2jr
3/ What to look for:
An inflection in technology
An inflection in adoption of a technology
A change in regulation
A change in a long-held belief
A new distribution channel has opened up
Costs have fallen or price points risen dramatically
An inflection in technology An inflection in adoption of a technology A change in regulation A change in a long-held belief A new distribution channel has opened up Costs have fallen or price points risen dramatically
4/ Distribution
“Most businesses actually get zero distribution channels to work. Poor distribution — not product — is the number one cause of failure.” — @peterthiel
Distribution“Most businesses actually get zero distribution channels to work. Poor distribution — not product — is the number one cause of failure.” — @peterthiel
4/ What to look for:
A clear growth strategy
A unique growth strategy
Unique access to to the target audience
A new untapped distribution channel
High LTV/CAC ratio
A clear growth strategy A unique growth strategy Unique access to to the target audience A new untapped distribution channel High LTV/CAC ratio
5/ Team
“If you think about how do you get to the big idea, we call it an Earned Secret. You did something in your past, you tried to solve some hard problem, and you learned something about the world that not a lot of people in the world know.” – @bhorowitz
Team“If you think about how do you get to the big idea, we call it an Earned Secret. You did something in your past, you tried to solve some hard problem, and you learned something about the world that not a lot of people in the world know.” – @bhorowitz
5/ What to look for:
A+ founders
Founders who deeply understand the customers problem
Founders who have a unique insight or an “earned secret” about the opportunity
Founders who have worked together before
Founders who move fast
A+ founders Founders who deeply understand the customers problem Founders who have a unique insight or an “earned secret” about the opportunity Founders who have worked together before Founders who move fast
6/ Moat
“Don’t be the best. Be the only.” — @m2jr
What to look for:
Are there network effects
Are there economics of scale
Are there high switching costs
Is there a potential for a strong brand
Is there exclusive supply
Is there proprietary technology
Moat“Don’t be the best. Be the only.” — @m2jr
What to look for:
Are there network effects Are there economics of scale Are there high switching costs Is there a potential for a strong brand Is there exclusive supply Is there proprietary technology
7/ Business model
“It’s best to invest in pure tech companies. Ask: How much of every dollar invested is going into technology development and how much is going to things like scaling, customer acquisition, subsidizing rides or deliveries, or some physical product.” — @naval
Business model“It’s best to invest in pure tech companies. Ask: How much of every dollar invested is going into technology development and how much is going to things like scaling, customer acquisition, subsidizing rides or deliveries, or some physical product.” — @naval
7/ What to look for:
High margins
Low CAC, high LTV
Short sales cycle
High cash flow
Positive unit economics
High margins Low CAC, high LTV Short sales cycle High cash flow Positive unit economics
8/ For much more, including additional reading on each of the categories, check out the full post. Also, if you have any other things you look for, or NOT look for, I'd love to hear! https://www.lennyrachitsky.com/p/evaluating-a-marketplace-business
