Everyone dreams of building a unicorn. All of us get brilliant ideas every now and then. Out of each 10 business ideas a person has, only one or two can get funded. Even after funding, success is not guaranteed. Seventy percent of funded startups fail within the first three years. According to CBInsights, a startup has a 1.28% chance of becoming a unicorn. In our previous post, we discussed the common factors in multi-billion dollar firms. In this article, we will show you the signs that your idea is worth billions.
Before spending money and effort on your idea, check its market. The markets of startups that become unicorns have a lot common factors. If you checked these factors, you will find that they are either inventing new tech, attracting a new segment, entering a high-growth market, or at the beginning of an emerging tech hype cycle. We will go through each one in more detail.
Products with slight improvements over existing ones have a very low chance of success. Many unicorns have created new markets by inventing some sort of new tech. This tech can be for saving time, money, lives, or effort. If a form of tech doesn’t save any of these, no one will bother to use it. For example, SpaceX invented the concept of the reusable rocket. Reusing a rocket reduces the cost of launching satellites into orbit and delivering supplies to the space station. This type of rocket disrupted the rocket launch market and lured away many clients from rivals.
Not all unicorns started by creating a new tech. Attracting a new segment through existing technologies can create a unicorn. For example, Uber didn’t just steal existing taxi clients, it drew new riders who had never relied on taxis. According to The Economist, Uber boosted the riding market in New York by 18% in just two years. This growth was due to the fact that Uber serves taxi-starved areas outside Manhattan’s central business district (CBD).
The timing of a product’s introduction can play a decisive role in creating a unicorn. Those products introduced in high-growth markets have a high chance of being successful. For example, in 2007 Apple launched its iPhone. After this launch, the smartphone market grew exponentially. During the same year, Google introduced its smartphone OS “Android”. In addition, Google made it possible for any smartphone company to use Android in its phones. Today, Android phones constitute more than 86% of the global smartphone market. If Google hadn’t been fast enough in introducing its OS, it wouldn’t have been that successful.
Emerging Tech Hype Cycle
The hype cycle is a branded graphical presentation developed and used by the research firm Gartner. Once a new tech is created, its inventors make lots of promises about the problems it can solve. However, many of these promises are not commercially viable. After some implementation of this new tech, people’s expectations drop, and they may even withdraw their investments. Later, the tech will keep maturing slowly until it is stable and robust. You can read more about it on Gartner’s site. To make it clear, we will discuss one of its charts that was released in July 2017.
The graph says that interest in some AI products (like virtual assistants) is inflated and will soon drop. This was actually what happened in the past six months. Facebook scaled back its investments in chatbots due to the high failure rate (70%). Moreover, Facebook killed its flagship virtual assistant “M” a few days ago, as it was found to be not scalable. In addition, many firms around the world dumped their assistants, as they failed to understand user enquiries. Accordingly, this chart proved to be very accurate.
How to use it to evaluate an idea?
To be on the safe side, stay away from those technologies at the top part – “peak of inflated expectations”. When you have an idea for a new product, check the most recent version of this graph. The best phase during which to invest is “the innovation trigger”, which is the very beginning, followed by “the trough of disillusionment” phase, which is in the middle of the graph. Introducing a product using a tech from those in the peak is risky. During this phase, you may have a hard time convincing people that your product is viable.
Product value is the perceived benefits of using a product or service. These benefits can be functional, self-expressive, or emotional. Each product can have a unique mix of these benefits.
Most products we use have functional benefits. Products with these benefits save time, effort, or money for their consumers. For example, Airbnb saves lots of time when one is searching for remote hosts. Uber also saves time and money over the use of traditional taxis. Social networks save a lot of effort in connecting to friends and family members. If your product will rely on these benefits, you must offer a value that no rival offers. In other words, your product must be the best one in the market in terms of speed, ease of use, or price. If it cannot be the best in any of these metrics, it won’t create a unicorn.
Products with self-expressive benefits provide an opportunity for consumers to communicate their self-image. Unlike with functional benefits, products with this type of benefits may not be the best in function and can be very expensive. For example, Rolex watches don’t provide an additional function over traditional watches. However, wearing a Rolex conveys wealth and social advantage. Many brands depend mainly on self-expressive benefits, such as Louis Vuitton, Rolls-Royce, Chanel, etc.
Sadly, most startups cannot offer self-expressive benefits in their early stage. Such benefits require lots of resources that most startups do not have. In addition, all brands need a long time to promote products with self-expressive benefits. Due to their limited resources, startups have a very short time during which to build and launch their products.
Products with emotional benefits give consumers a positive feeling when they are purchased or used. Many goods with functional benefits provide emotional ones to attract new clients. For example, some products consume less energy than others. Consuming less energy means less carbon dioxide emission, which is good for the environment. Although it rare to find a unicorn that began with emotional benefits, startups may use them alongside functional benefits to attract new segments.
Scalable firms are those whose revenue growth rate is much higher than their operating cost growth rate. For example, Facebook is one of the most scalable corporates in history. Facebook generates its revenue primarily from ads and promoting posts to users. Accordingly, the more users it has, the more revenue it gets. In addition, adding users requires very little cost as compared to the site’s lifetime revenue. The following chart (taken from Statista) summarizes Facebook’s revenue and net income throughout the past 10 years.
In 2015 and 2016, Facebook’s revenue grew at a rate of 54%, from $17,928m to $27,638m. During the same period, its net income increased from $3,688m to $10,217m – a growth rate of 177%. Their net income growth rate was three times higher than their revenue growth rate. Scalable firms usually have a very high return on investment (ROI). Accordingly, most investors prefer to put their money in scalable firms like Facebook, Uber, and Lyft. Below, we will discuss how to know if your startup (or idea) is scalable.
There are two types of costs: variable and fixed. Variable costs are money spent on each client transaction. For example, Starbucks’ variable costs are all the expenses it incurs in preparing a cup of coffee. On the other hand, its fixed costs include wages, rent, furniture, coffee machines, etc. In simple terms, production size does not affect fixed costs, while variable costs are completely linked to it.
Firms with a high variable-to-fixed-costs ratio are considered low-risk, but are unlikely to scale. Although firms with a low ratio are considered risky, they have the chance to be scalable. This chance stems from their having a lower unit cost as production increases.
Generally speaking, labor-intensive sectors are typically not scalable. On the other hand, firms with fewer staff can be scalable. For example, WhatsApp reached its $19 billion value with only 55 employees. The same applies to Nextdoor, it reached its $1 billion in worth in 2014 with a team of 106 members. The ability to maintain a low number of staff members without affecting operations is a sign that your idea is scalable. To reduce the number of staff members, firms can rely on either automation or outsourcing.
Automation involves using computers to complete tasks typically done by humans. For example, Amazon Web Service (AWS) enables anyone to set up a virtual server without getting help from its support team. AWS automated the process of allocating hardware, installing an operating system (OS), and setting the network configuration. This way, it kept its support team focused on tasks that require human intervention. In addition to reducing headcount, automation improves the client experience, reduces human error, and saves lots of time.
Outsourcing can be another option for firms seeking to reduce their headcount. Some firms consider outsourcing because it gives them a chance to focus on what they are superior at doing. For example, Uber is one of the unicorns that relied on outsourcing. Instead of hiring drivers and buying cars, it outsourced these tasks and focused on developing and marketing its app. This way, Uber reduced its headcount, operation costs, and many other risks. Certainly, not all jobs can be outsourced. Founders should carefully decide which tasks to keep for their staff and which to outsource.
Reducing customer acquisition cost is one of the challenges you must overcome to have a scalable startup. Most successful products were designed to minimize client acquisition costs. For example, when people register for LinkedIn, they are asked to allow the site to send invitations to all their email contacts. From users’ points of view, this feature gives them the chance to expand their professional network without effort. On the other hand, for each new user, LinkedIn can send tens or even hundreds of invitations to other people. This way, LinkedIn increased its user base exponentially without spending a dollar. WhatsApp, Facebook, and Twitter used the same concept.
Although this concept is employed primarily by social networks, other sectors can still utilize it. For example, many sites give their users a discount or gift if they refer a new client. By doing this, they use their existing clients to do most of the marketing effort for a relatively small fee. Startups that can acquire new clients with little or no costs have a big chance to become scalable ones. On the other hand, those that cannot reduce their customer acquisition cost have very little chance to scale.
Business model describes how your startup will generate money. Finding the best model for your product is the most important factor in your startup’s success. For example, Facebook depends primarily on the advertising model. If its founders had decided to use any other model (like subscription), it would not be a unicorn. In our previous article, we listed the models most used by unicorns.
Most unicorns get commission or brokerage fees for each sale. This business model is famous among unicorns because it requires little or no investment in the goods they sell. For example, the world’s most valuable retailer, Alibaba, carries no stock. The world’s largest accommodation provider, Airbnb, owns no real estate. The world’s largest taxi firm, Uber, owns no cars. All these firms provide platforms to sell others’ products or services and get a commission from them.
The best market in which to operate is one that is fractured among many players. If a single player dominates the market, you may not be able to compete. These types of players have financial and marketing muscles that you may not have. On the other hand, fractured markets provide a chance for startups with limited resources to evolve and grow exponentially. For example, when Airbnb launched, its market was fractured among many small players like Hostels.com, Bedandbreakfast.com, and couchsurfing.com. This gave Airbnb a chance to become a unicorn in just two years.
Market barriers that prevent new players from entering your market can boost your chances of success. These barriers can be patents, trade secrets, exclusive assets, trademarks, etc. These barriers may make your startup capable of competing with giants even if it has limited resources. In addition, the existence of any of these barriers will make it easy to convince investors to fund your startup.
Before working on your idea, consider its market size. If its total market size is less than one billion dollars, your idea can never create a unicorn. You must conduct some research to identify the addressable and total market size before you build the product. The total market size is all that is spent in your market, while the addressable market size is the portion of the total market that your product can serve. Having a big market with fragmented players is a sign that your idea can be a multi-billion-dollar one.
Testing the need
It is an old and by-now universally accepted concept that the Customer is King. Customers are the ones who decide which products to use. Accordingly, building a product based without testing their needs can rarely succeed. Many founders spent a lot of time building products without testing the users’ needs. After launching, they found that their assumptions were incorrect.
To avoid losing your efforts, validate your idea in the early stage. To do so, you can use Google Trends. This tool can show you if people are looking for products similar to your idea. It can also show you if their interest is increasing or falling over time. In addition, it can tell you the people’s interest in your rivals’ products. Finally, it can tell you the best locations in which to sell your product.
In addition to Google Trends, feedback from real clients is very important. Try to identify a sample of your product’s prospect users. Afterwards, contact them to see whether they like your idea. If your idea has never been done before, try creating a minimum viable product (MVP) before contacting them. Once they have something to use, they will provide you with tons of useful feedback. For example, Mark Zuckerberg and three of his classmates built a product called Facemash as a MVP for Facebook. It was a very simple site for Harvard students to check on whether their pictures were hot or not. This site simply showed two pictures side-by-side; users would choose which picture looked better.
Some founders may avoid seeking feedback because they are worried about having their idea stolen. If you must protect your idea in the early stage, consider filing a provisional patent. This patent will cost you $65 and can be prepared in just a few days. You can find lots of online resources that show you how to prepare such a patent yourself. It is worth noting that this type of patents will not protect your idea from being stolen. However, it will give you a one-year period during which to file a non-provisional one for your product. You can use this period to check the market need with some potential users. If it sounds good to them, consider investing in a non-provisional patent (which will cost thousands of dollars). However, if the product doesn’t sound good to them, you can discard it and look for another idea.
Have any questions? Feel free to post a comment below!