Disclaimer: Even before I write this post I know it's going to appear very buzzwordy. I'm going to attempt to make it as practical and actionable as possible.
How do you know your idea for a company has potential? I'm not talking about superficial halo effect success metrics like VC funding, co-founder excitement or press. I mean how do you structure a rigorous examination of the potential of your idea?
I looked online briefly and didn't really find any compelling information. Google offered "10 Ways to Know if You Have a Good Business Idea" which seemed to be the online equivalent of a tax "expert" at a strip mall. First Round's new First Search tool offered Chris Dixon's "Why You Shouldn't Keep Your Startup Idea Secret," still not exactly what I was looking for. Sequoia has a brief but interesting post on "Writing a Business Plan" that is definitely worth checking out.
So it seems there may be room for some examination of the structured diligence that could be applied to the brainstorming session of a co-founding team. Below is that examination. It is still a work in progress but, like most helpful frameworks I think, it breaks the problem down with 3 main components; the thematic layer, the strategic layer and the tactical layer.
Thematic Layer
The math of venture requires funds invest in companies that have, as Sequoia puts it, "legendary" potential. These legendary companies generally take advantage of tectonic shifts in history. These shifts can be difficult to identify by incumbents since they have a financial incentive to believe in the stability of their value proposition. As 'The Sovereign Individual' points out "if you know nothing else about the future, you can rest assured that dramatic changes will be neither welcomed nor advertised by conventional thinkers...the tendency will be to downplay the inevitability of these changes." Famous themes that led to the development of legendary companies include:
- Increased necessity and potential of personal computation as a tool and platform
- Efficiently and effectively organizing the worlds increasingly abundant digital information
- Allowing the world to maintain, build and share social connections online
Examples of decades-long themes that could form the core of a company today could be:
- Increased decentralization and modularization of information and cultural production
- Increased regulatory burden on data-centric technology companies
- Pervasive perceptual computing as a new consumer interface
Resources that help with the thematic layer diligence of a company idea:
- Technological Revolutions and Financial Capital, Carlota Perez
- The Rise and Fall of American Growth, Robert J. Gordon
- The British Industrial Revolution in Global Perspective, Robert C. Allen
- A whiteboard
Strategic Layer
Assuming you are able to get funding, ship product, get customers... what is your company's competitive differentiation that allows you to keep those customers and what gives your company escape velocity? Is it internally building a proprietary database? First mover and product leader? Brand differentiation? Design differentiation? Interestingly in First Round's 2017 State of Startups only 5% of founders said they think they could fail because a "competitor outdid them."
Resources that help with strategic layer diligence:
- The Innovators Solution, Clayton M. Christensen and Michael E. Raynor
- Creative Confidence, David M. Kelley and Tom Kelley
- Zero to One: Notes on Startups, or How to Build the Future, Peter Thiel and Blake Masters
- Crossing the Chasm, Geoffrey Moore
- Stratechery
- Public company filings, SEC Edgar
Tactical Layer
Getting from 0 to 1: The hardest, loneliest stage. Where do you start, what are your priorities? How much runway do you have? Which verticals do you start with? Who do you know in VC? Who could you convince to join in the earliest stages? Who else is out there trying to do what you are doing (be honest)? Why are you a better team to build this company instead of them?
Resources that help with the tactical layer of diligence:
- First Search, First Round
- High Output Management, Andy Grove
- The Hard Thing About Hard Things, Ben Horowitz
- Experience