How Venture Capitalists Can Project The Commercial Potential Of A New Startup Idea

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Building a successful company is challenging under any circumstance. But doing so without knowing your projected return on investment (ROI) is all but impossible. Research shows that 95 percent of U.S. startups fail to reach their goals, largely because they do not know what they can realistically expect to achieve. Their projected break-even dates sail by and their revenue growth rates never materialize because they based those targets on tenuous understandings of their markets.

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Blinded by Inspiration

Entrepreneurs are a bright, innovative, and ambitious bunch. But they can also fall victim to being too close to their ideas and failing to see any potential issues or red flags. When is the last time you heard a mother say her child was ugly? When you devote years of your life to building your dream, it is easy to forget that not everyone will think it is as brilliant and unique as you do.

Gathering objective external feedback to understand whether there is 1) a demand for your idea in the market, 2) a unique proposition and 3) a large enough market is critical to support your plan and convey the strength of your business to investors.

How To Assess The Commercial Potential Of A New Startup Idea

Here are three ways to assess the commercial potential of your startup and improve its chances for success:

  1. Seek constructive criticism

While many entrepreneurs are their own toughest critics, objective feedback can also provide valuable insights. No matter how meticulous you are about researching and developing your product concept, you may not see it from every angle. Its functionalities become intuitive almost second nature because you designed them! You cannot not see how they work.

This is true of your team as well. Internal product reviewers may still be too close to your product to provide an objective review of its commercial potential. Essentially, you are spending thousands of dollars to tell yourself things you already know.

Consider outsourcing to an external review team who can tell you what you are missing. They might be confused by your most prized features or may not see the point of the invention at all. Perhaps they know of similar products that recently came on the market, which means you may need to revamp the concept to gain a competitive advantage. Gathering such feedback will help you identify the flaws in your idea and refine your product into something people will be eager to buy. Food companies do this frequently by utilizing university labs and consultants to organize sensory tests (taste testing) with general population to compare new products with current market offerings.

  1. Conduct a SWOT analysis

One of the fastest ways to determine your company’s viability is to conduct a SWOT analysis, which looks at strengths, weaknesses, opportunities, and threats. A SWOT analysis forces you to clarify what differentiates your company, where you are vulnerable, how you can advance your position in the market, and what external factors could hinder your success.

For instance, your business might be built around a genuinely novel concept, which is your strength, but you may struggle to source the materials or manufacturing know-how to produce it, which would be your weakness. Maybe you have several large partners interested in your idea, creating opportunities to expand your reach. However, you could be threatened by supply chain disruptions or competitors who are close on your heels as you try to create a viable product.

The results of your SWOT analysis can be insightful, and they will help you focus on the areas that are most critical to your business’s success. They will also inform your ROI projections, and having a grounded view of where you are headed will make the company more sustainable—and more attractive to investors.

  1. Know the biggest potential for your service or product

Entrepreneurs often have grand visions for their companies, but they do not always understand their invention’s biggest potential or largest market. Look beyond the next two or five years and consider your core product offering. Are there applications of this technology you have not considered yet? Are there industries outside your target niche that might be able to use what you are building?

As you consider the long-term implications for your invention, your business plan may change. You may see opportunities to sell to different sectors and therefore strengthen your value proposition. This is where using an external review team can prove especially useful, because they can identify the market potential of areas you may not have considered, and they can also expand on the market insights you have guided them to for your invention.

When you are struck with a great product idea, it’s natural to want to dive into it full speed ahead. But if you want your product—and your company—to reach its full potential, you must understand its commercial viability. Vetting your ideas will give you the assurance you need to reach your expected ROI.

About Amy Shim

Amy is the Director of Client Services at Invention Evaluator and has played a key role in providing service and support to large U.S. institutional investors and technology companies. Previously, she worked in the finance sector specializing in client relations at Western Asset Management Company, Moody’s Investors Service, and Northwestern Mutual.

Additionally, Amy has served as a strategic adviser and consultant to several innovative companies developing low carbon vehicles. She holds a BA degree in economics from Smith College and an MBA from the University of Oxford, with a concentration in Technology Strategy and Marketing.

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