How to evaluate the quality of a business idea

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This is article #7 in my series How not to build a business. I open up about all the mistakes I made building a software as a service and all the lessons I learnt in the process.

My mistake: being irrationally in love with my idea

I had already started a few businesses before trying my luck with iMenoo, a software as a service catering to restaurants. However, this was the first time my project was not a side hustle. I was giving it my entire soul, left my job and was invested in making it a success.

I worked tirelessly to come up with a first version of a product that I could be proud of. After a few months I was happy with the results. For some reason, I had the unconditional love a parent has for their kids. Since I loved the product so much, I believed my clients would do too and it would be easy to sell. I did not think through how much it would cost me to acquire clients, assuming that it would require just setting up a landing page for prospects to come in droves. Now I understand why “beauty lies in the eyes of the beholder”.

On another note, I came up with the idea for iMenoo being a diner at a restaurant. I thought that my experience would be much better with a dynamic, digital menu. In a sense, I was right. Unluckily for me, iMenoo was one of those products in which the person buying is not the person enjoying the product. As a client, I could empathise with other diners, but it was much more difficult for me to get under the skin of the restaurant owner - since I am not one. I assumed that the solution was great, but restaurant owners did not see it as a problem that they had to solve with high priority.

Last, due to the degree of love that I had for my product, in some sense, I had tied my self-worth to the value of the product. My ego made it difficult for me to be able to recognise what the market was telling me. I felt that if the product was worthless, since it was my brainchild, that made me, in some way, less intelligent and thus, less deserving of admiration.

Learnings

Starting a company is no trivial decision, it is a long-term commitment that, some argue, takes up to 10 years of work at a minimum until a liquidity event occurs. Before deciding to get into a business, it is worth it to give some thought to different considerations which greatly influence the quality of a business idea. The following are the factors I believe to be most important:

#1 Make sure the problem you are solving is painful

You want to become indispensable to your client and, in order to do that, you have to provide them with a solution to a problem that they are suffering deeply. Being able to charge money depends on this condition being true, so I would say it is the most important aspect to evaluate when thinking about the quality of a business. Unless you are scratching your own itch, it is often difficult to empathise with the acuteness of a certain problem. Two good ways to identify a painful problem are: firstly, find out if your potential client is already trying to find a solution. Secondly, imagine your client’s reaction if they could not use the product any more. How disappointed would they feel? At iMenoo this is an interesting experiment to run because before the pandemic we were a nice-to-have, so restaurant owners would not be very disappointed if we took away the product. However, after the pandemic, when physical menus were no longer a thing, we did become a must-have. Timing is of the essence sometimes!

#2 Recurrence is key

This is common sense, but sometimes we do not take it into account. Acquiring customers is not an easy process and bills can pile up, so you have to maximise your lifetime value. A one-time purchase could be buying a sofa. It is a one-off transaction that, at best, only happens every few years. This would be an example of a non recurring business.

It is better to have clients that are in constant need of your services so they will use them repeatedly. I would argue that monthly recurrence is one of the best signals. A good example could be a billing software that customers use on a monthly basis to create invoices for their services. Customers are constantly using your service and, as a result, you are able to charge in the same recurring manner. Additionally, if your customer is consistently using your product, it opens up the opportunity for expansion revenue in exchange for upsells. An engaged user is usually more receptive than a totally new one.

#3 Barriers of entry for competitors

How easy is it for competitors to enter the market? Of course, the more difficult the better. Do you have special knowledge or a patent that makes you a unique player? That is a significant barrier to entry. The same would happen if you have unique technology. However, there is a tendency for technology to commoditise and, as a result, with time it becomes less of a barrier. Think what has happened with websites. A few years ago, being able to code a website was a very difficult skill, only accessible to engineers. Nowadays, we have no-code tools that enable you to launch websites with breathtaking speed. Another powerful barrier to entry are network effects, such as those enjoyed by communication tools such as Whatsapp. Technology wise, Whatsapp does not have a complicated product. Any programmer would probably be able to replicate it. However, so many people are already on Whatsapp that it is almost impossible to compete with it.

#4 How much better is your solution vs. competitors

Connected to the point above is the presence of competitors in your space. If you are creating a whole new category, such as Uber did when they created the marketplace for cabs, there really are not many competitors. The improvements in convenience and the experience as a whole made Uber much better than existing players. This aspect is important because if your solution is not an order of magnitude superior than the solution your clients are currently using, it is difficult to convince them to swap. Nevertheless, markets are usually bigger than we imagine and can fit multiple players, so I do not think being 10x better is an absolute must. At iMenoo, our technology was so simple that it was very easy to replace us. When we tried to increase prices, restaurant owners would find alternatives to our product, such us using a pdf document to show their menus.

#5 How easy is it to find clients

Depending on the business, the channels of acquisition are different. You have to figure out if, for your particular business, there are ways to access clients apart from paid channels. It is great if you have been able to lower your cost of acquisition with paid ads and manage to find profit from all your clients. However, if you become truly successful, you will attract competitors to your space and the margin from paid channels will dry out as other players undercut you. Therefore, it is important to have channels that allow you to access clients with 0 spend. Hubspot does this beautifully with inbound sales, positioning themselves as thought leaders with their blog on sales and marketing.

Again, as it usually happens, B2B sales are not the same as B2C. The former normally have more complex sales and require a sales agent. Imagine how hard the sales process must be for Palantir, a company that sells data analytics tools to government corporations. On the other hand, on the B2C side normally it is easier to access clients. If you have selected a niche, there are always forums, clubs and meetups where you can access your first users. The world is so connected nowadays that the market has become more accessible than ever.

#6 Market growth

Operating in a market which is growing is not a very idiosyncratic advantage because it pushes all players ahead. Potentially, your competitors benefit from it too. However, it is a real tail wind to be working on a space that is growing in and of itself. For instance, I would never recommend to start a company focused on diesel cars, as the space is currently contracting and will be eventually taken over by electric cars. In contrast, an example of a growing market would be the artificial intelligence (AI) space. As of December 2022, the artificial intelligence is growing tremendously and operating in this space will be fruitful as more and more segments start to find uses for it.

Conclusion

For your business idea to be successful, it is not necessary to have all of the traits described above. However, it will be extremely helpful if they do, especially if you are expecting to raise outside money.