This is the second blog exploring a process I developed for helping you find the optimum direction and strategy for your business. In part 1, you captured a wide range of possible concepts, then systematically narrowed them down to just the best few. If you have not already read it, I suggest you go back to part 1 before reading this.

In this part, you will dig deeper into your best business ideas to crown an eventual winner.

Digging deeper on your top options

You narrowed your options down to just a few top options using a quick process based mainly on your experience and intuition. Now you can spend some time exploring only the best strategies in more detail. The fundamental question is, can you win with any of these business directions?

Quantify the pain/need

First off, look at the pain point or desire your solution addresses. Can you quantify that in some way? Using surveys, research, interviews, analyst reports, or anything else, try to put down some hard numbers. How much money does a business lose because of this problem? How many hours does each affected employee waste per week, and what is their typical salary?

Additionally, how does this need stack up against comparable needs for the same customers? If your solution saves a business $500 per employee per month, and you charge $100 per seat per month, that might look like a winner. However, if there is another way the company could spend that money to save even more, even if it addresses an entirely different issue, they are likely to spend there instead. In addition to the opportunity cost of spending on one solution vs. another, there is also a limited capacity of companies to adopt new solutions. They always need to prioritize.

Examine the market

Next, get some solid numbers on the market potential for each of your candidate business strategies. Look both at the original launch market, the "who wants to do what" you used in the worksheet, as well as the potential expanded market of other customers who might need the solution. Find both the number of customers as well as the total potential dollar sales.

Given that potential market size, what penetration is plausible for you? Is this a greenfield, or are there already many competitors? Is there already a gorilla dominating the market? If so, are they vulnerable in some way? Conversely, do they have some network effect or other advantage protecting their position? Is this a space where capturing a few percent of the market would be possible and lucrative, or is this more of a winner take all environment, and do you have a path to become that winner?

Liz, our hypothetical entrepreneur, is going through this process. Her best idea is a device that automatically scans the customer's face and then inkjets/air-brushes perfect makeup on to their face. Liz knows that the makeup, and even makeup device, space is crowded, but can't find any other examples of fully automated solutions. She has a green field in her niche, but lots of competition for the general makeup marketplace. She quickly finds analyst reports showing that the potential market is gigantic.

Competition and alternatives

Now, take a look at the leading solutions to the problem/need. Why are they deficient? Your potential customers are surviving without your solution right now. How? Could they continue to do so without undue difficulty? I have seen many companies providing data analytics tools to businesses currently using Microsoft Excel. The problem is, those people know how to use Excel, it is easy to hire more people with that skill, and switching to a new platform can involve significant effort. Those companies also worry about what will happen if you fail, and they need to switch back. Do you have compelling answers to why a company should adopt your solution and why they should not be concerned about switching?

In general, you need to show that your solution is vastly superior to their current approach to convince them to take the risk and work of adopting yours.

Liz thinks that going from manually applying makeup in a mirror to waving a wand over your face to get a perfect look is a massive improvement. It avoids the need to learn a whole set of advanced skills to achieve professional-looking results.

One of my investments provides a real-world example of a solution being vastly better than the status quo. The company offers a device to detect infections in peritoneal dialysis. There is a tube the comes out of the patient's abdomen and drains collected waste fluid. With this kind of treatment, infection is a severe issue with frequent complications and high costs. The current solution is to make the tube with a flat clear window. The patient holds up a newspaper behind the window. If it is too cloudy from infection to read the text, they need to get to a doctor. Contrast that with the new solution, which monitors the fluid for the smallest signs of infection, and can also observe some other characteristics of the discharge as a bonus. Catching the problem early saves lives and dollars, providing a high return on investment to the insurance companies.

The problem for Liz is that most women are already comfortable putting on their own makeup. While her solution might be far better, she worries that the pain point won't be enough to encourage them to change their habits and buy an expensive new device. She will have to prove to herself and investors that this is a viable product people will pay for.

Defensibility

If you start to get traction in the market, what is to stop a well-funded existing or new competitor from taking it away? Can you create some kind of moat around your customers to keep the marauders at bay?

Intellectual property, specifically patents, are the most common approach in pitch decks I have seen. Theoretically, patents prevent competition from copying you. In reality, you need to be willing and able to spend the time and money required to take infringers to court to enforce your rights. Additionally, many patents are weak, covering only a tiny aspect of the business. Often competitors can make small changes to avoid infringing the patent. If you are looking to patents to defend you, take a hard and critical look at exactly how strong your patents are.

In a similar vein, many startups look to level of effort and trade secrets to prevent competition. How hard would it be for a team of experts to reproduce your solution from scratch, especially knowing that it is possible and generally how you did it? A few programmer years of effort seems like a lot to a startup, but it may be trivial to a well-resourced incumbent. However, the time required to reproduce the solution might allow the startup to take a strong position before others arrive in the market.

Networks effects can provide robust protections to fast early movers. Some businesses naturally offer more value to each customer the more total customers are on the platform. Social media companies are a classic example of this. If you can take a commanding lead before competitors arrive, it will be hard for them to achieve the critical mass required to un-throne you. If you are considering this path, your plan should involve very rapid scaling if not blitzscaling, to stake your claim before the competition arrives.

Finally, many companies rely on some execution advantage to protect them. For example, they might plan to provide superlative service, making the customers far happier with their solution than the competition's. But, I wonder if they actually know how to do that? Do they have the service passion of a Zappos? If you think that some aspect of your execution will defend your market position, try to be realistic about your skills. Do you have both the ability and passion for that to make it shine beyond what other companies will be able to achieve?

Liz thinks that she can get some strong patents around her technology. Additionally, machine learning improvements from early customers using the system will snowball into an unassailable lead in the quality of the makeup.

Will your target customers pay for your solution?

In addition to overcoming the inertia of the incumbent solutions I covered under "Competition and alternatives," there are many other barriers to adoption.

Businesses exist within a complex web of solutions. Each may interact with many others. In addition to being a better answer to a specific problem, your solution can't disrupt the functioning of those other components. For example, the existing security solution might provide reports to a central business intelligence (BI) platform. Even though your security solution might be far superior, if it does not integrate with that BI solution, the company is unlikely to buy it.

I think about my relationship, as a consumer, to Apple products. I am 100% bought into the Apple ecosystem. I have iPhones, iPads, MacBooks, and Apple TVs. Apple designed them to work together seamlessly. An Android phone might be cheaper or better, but the difference would have to be amazing to overcome the advantages of the tight integration with everything else I own.

Look closely at your target market and customers. Within what environment will your solution function? Interview potential customers to uncover hidden dependencies and possible conflicts that could torpedo your strategy before it even launches.

Price can be another problem. Once you achieve reasonable scale, can you sell your solution for a price that customers will be willing to pay? Early adopters might be willing to spend a lot on the latest gadget, but the mainstream buyers will be less enthusiastic. Will your unit economics allow you to price at a level to excite them?

Liz looked at the low prices for components in inkjet and 3D printers and the availability of inexpensive 3D scanners and feels confident that she can hit an attractive price point. The rapid fall in the costs for these components also argues for why "now" is the right time to launch this company.

Decision point

After performing all this analysis on your top strategy options, does at least one of them still look like a good business? If not, then you have some more work to do. Consider why the ideas are problematic. Are there changes you could make that would circumvent the obstacles you discovered? If the problem is more fundamental, you may need to go back to the beginning of this process and widen your net still further. It often helps to bring in friends or advisors with additional experience and different perspectives.

If you have a direction that passes all the gates, wonderful, you are ready to start work in earnest on this new business direction. Liz thinks she has a winner, and it is time to get to work!

Of course, this is just the beginning of your journey. From here, you should continue to test, experiment, and refine. Even after you launch your company, always look for ways to improve and optimize your business model as you learn about your customers and market.

In the process, you may encounter a roadblock that did now show up in this analysis. That means a pivot. If you know what you need to do to adapt, go do that thing. If not, you may need to go back through this process using your current model as the starting point to explore your options.

Good luck with your carefully chosen path!

Feedback

This worksheet and process is a work in progress. If you give it a try, I would appreciate your feedback, good and bad, to help me improve it.

36. A tool for choosing the best business direction and strategy for your startup. Part 2