A No-BS Way to Turn Concepts Into Companies

How To Identify and Validate Marketable Ideas

Growing up, you might’ve heard the story of how Issac Newton was bonked on the head by a red apple falling from a tree, leading him to exclaim, “Eureka!” and discover gravity. One can imagine that a similarly striking moment of inspiration is the Big Bang moment behind some of today’s billion-dollar tech companies. Instead of “Eureka!” the founder says “Wouldn’t it be great if…” The story is always more complicated than that. There was a falling apple, but it was in Newton’s mom’s Cambridge garden, and it didn’t hit anyone in the head. Similarly, there is no single lightbulb moment that suddenly turns into a company. 

Discovering something—whether it’s gravity, a deep technological innovation, or a business opportunity—takes time. It’s a process, and where there’s a process, there is at least one checklist. Before we even think about what makes a business concept “marketable”, let’s start with what makes a business feasible:

• It solves a significant problem for a target market. This is the most important question: does the proposed business make or do something that addresses a specific, acute pain point or need in the market? There are many things that would be “nice to have,” but few true must-have solutions to problems that needed to be solved yesterday. The most durable businesses do something indispensable.
• Someone is willing to pay for it. There has to be a compelling value proposition or convincing argument that the business’s solution is significantly better than alternative solutions. Customer awareness of the problem is necessary but insufficient; they have to value the solution enough to invest in it. Put more crudely: You want customers to want your thing more than their money.
• Sustainable cost structure and profit potential. A business must be able to provide a product or service at a price that the market will bear and ensure business survival. This means that the sum total cost of producing and delivering the product is less than the price customers paid, and that the price is acceptable to a sufficient number of customers to make staying in business worthwhile.

This basic rule of three applies to any type of business, from hair salons and restaurants to law firms and semiconductor manufacturers. Of course there are other baseline requirements for business feasibility: that the resources needed to produce a product are available, that the technology required to do something either already exists or can be developed, that there’s some understanding of the target market, and that the business complies with relevant laws and standards. Those are table stakes.

There are several recurring themes that take a business concept from “feasible” to “marketable”. 

• Scalability is chief among them. Scalability means more than just repeatability; it describes a business whose costs do not increase linearly with growth. It’s what separates small business from big business. By example: It might cost $100 to produce 100 units ($1 per unit), but it costs $700 to produce 1,000 units (70¢ per unit). That’s scalability. 
• Differentiation is quite literally what sets a company apart from its competitors. Differentiators include unique or innovative features, a product’s design and quality, and less obvious factors like branding, pricing strategy, or even customer service. 
• Market timing is, as the saying goes, everything. The annals of business history are filled with tales of promising companies that failed because they entered the market too early or too late. Some factors (like macroeconomic conditions) are outside the entrepreneur’s control, but others (like riding a wave of technology adoption) can be anticipated.

Let’s say an entrepreneur has an idea for a business. Does it make sense for her to suddenly quit her job and devote every waking hour into turning her dream into reality? No, of course not. Undertaking a new venture is, by definition, risky business. To mitigate as much of that risk as possible, a diligent entrepreneur will try and validate the concept before devoting a lot of time and resources to it. But what does that process entail? There are several low-cost approaches to consider:

• Thorough market research will help any entrepreneur garner a baseline understanding of the industry, target market, and competitive landscape. The outcome of this research is to validate that a market indeed exists, and may reveal gaps and unmet customer needs.
• Customer interviews may seem like an abstract exercise in business anthropology, but they can yield insights into the real-world problems and mindset of their target market. The questions asked by a potential customer in your target market could influence product roadmaps by revealing the priority of certain planned features.
• Putting up a landing page, even if the product or service does not exist quite yet, is an inexpensive way to validate customer demand. For the price of a domain name, some search and social ads, and a bit of time, one can get a pretty good gauge of market interest. Put up an email waitlist form and you’ll have a list of prospective customers who are actively searching for your solution.
• Building and launching an MVP (Minimum Viable Product) is perhaps the most definitive validation an entrepreneur can get from the market. It doesn’t have to be pretty, but your MVP should do the thing you want it to do, even if it’s rough around the edges. Get your MVP in front of prospective customers and you can expect a lot of valuable feedback.

Where Business Ideas Come From

More often than not, a business idea starts as a gut-level hunch more than a lightning bolt to the brain. Newton’s fascination with gravity kicked off by watching an apple fall in his mom’s backyard, not upon his head. Indeed, life and career experience leads many entrepreneurs to start their own business.

Entrepreneurs tend to have a problem-solving mindset. Some of the best business ideas are really an exercise in scratching one’s own itch. This perspective leads to innovations that solve their personal problems, but to also identify when the need for their solution is more widespread. 

For example, Square was founded by Jack Dorsey and Jim McKelvey after McKelvey—a glassblower—lost out on a lucrative sale because he couldn’t process credit card payments. Forgetting a thumb drive on the MIT campus is what inspired Drew Houston to start Dropbox. Sara Blakely hacked together the first pair of what would become Spanx before a party because she needed an undergarment that wasn’t visible under fitted white pants. So many entrepreneurs get started by saying, “I can’t be alone in wanting a solution like this.”

Entrepreneurs with a problem-solving mindset are proactive at identifying pain points or opportunities to optimize and improve on the status quo. Thoughtful analysis can help identify the root cause of the problem, thus revealing a potential solution. Thinking creatively can bring some joy to whatever you want to build. Most importantly, however, is the ability to be decisive. Ideas need a careful and sometimes ruthless editor to come to fruition.

Building Your Business From The Ground Up

If an entrepreneur has a business idea, where do they start? They’ve validated the idea, have a list of excited potential customers, and are ready to take the leap. The first order of business is to make it all official, which means setting up a legal entity, securing intellectual property, and formalizing a working relationship between all the founders of the new venture.

Setting Up a Legal Entity

Forming a company is fairly straightforward. You’ll have to make a decision about what type of legal entity is right for your business. Many entrepreneurs start by incorporating a Limited Liability Company (LLC), but institutional investors typically only invest in C Corporations. Although one can incorporate a company in any state in the U.S., investors and entrepreneurs alike tend to prefer Delaware due to its business-friendly regulatory environment and extensive business case law.

It used to be the case that an entrepreneur had to hire a lawyer to spin up a legal entity, but currently there are many online services that automate the process with software. These services are typically much more affordable than a traditional law firm. Whether an entrepreneur chooses an online service or a lawyer, they can expect the service provider to handle a lot of the nitty gritty aspects of starting a new business, including:

• Drafting and filing articles of incorporation
• Filing for Foreign Qualification, which allows you to do business in a state outside the company’s main jurisdiction. (A company incorporated in Delaware but based in Chicago would need to file for Foreign Qualification with the state of Illinois, for example.)
• Getting an Employer Identification Number (EIN) 
• Finding and retaining a registered agent, which serves as the legal and regulatory point of contact
• Research and obtain necessary business licenses

Securing Intellectual Property

As far as protecting intellectual property goes, it starts with what’s known as an IP Assignment Agreement. Having such an agreement in place ensures that the company—not any individual founder or employee—owns the intellectual property created with company resources. It may be tempting to try and patent the invention behind a new product or service, but patent filings are both costly and complex to draft and file. Unless the company is founded on the basis of a deep technological innovation (like a new drug, a unique method for manufacturing microchips, etc.), patents aren’t much of a priority, at least at the outset. With a good IP Assignment Agreement in place, there is time and opportunity to file those patents later. 

What should be a high priority from the start, though, is laying claim to the company’s name and branding by filing a trademark application. That prevents competitors and would-be imposters alike from using the company’s name and brand elements. If successful, a company’s trademark portfolio alone can be worth a considerable amount.

Raising Money

Not every business needs to raise outside capital to get off the ground. For those that do need to raise outside capital, waiting to do so for as long as possible is usually the right thing to do. Why? Assuming a business is making progress, whether that’s building its product or growing its revenue, the company is likely to be more valuable over time. That matters because raising capital entails selling equity in the company. Raising capital at a lower valuation means that founders and employees give up a bigger slice of the company to investors. That might not seem important when valuations are in the single-digit millions or less. After all, what’s a couple of percentage points between friends, right? Quite a lot, actually. Every basis point matters if the company could potentially be valued at $1 billion or more someday.

This raises one final question: What makes a business investable? In short, investors need a plausible argument for how and why a venture could be worth billions of dollars. Because of the power law nature of venture capital returns, it’s common for VCs to invest only if they believe their investment could “return the fund.” In other words, if an investor manages a $100 million fund, and they want to invest $5 million, they need to be convinced that the value of their stake can grow 20x.

What does that mean for the types of companies that get outside funding? Venture backable companies typically operate in big or soon-to-be big markets. Think software, advertising, pharmaceuticals, manufacturing, and financial services. VC-backed companies usually have good founder-market fit. All things being equal, a restaurant scheduling platform founded by a restauranteur is more fundable than if it was founded by someone without restaurant experience. And finally, venture-backed startups have some sort of defensible intellectual property—the secret sauce, if you will—that, even if the business fails to thrive, can be acquired.

It Starts With an Idea

Armed with the right information, starting a business isn’t exactly corporate sorcery. A new business starts with an idea for a solution to a problem that many people have. Even if it takes a few minutes to scribble an idea on the back of a napkin, it’s likely that years of experience brought an entrepreneur to that point. Starting a business is, from a paperwork perspective, pretty easy. The hard part is identifying the right problem to solve, figuring out the right way to solve it, and then getting as many customers as possible to buy into the solution.