Is Your Startup Idea Viable?




As a serial entrepreneur, I learned a lot of lessons from things that didn’t work. These lessons later on shaped my ideas on what would be needed to build a successful startup company. When I became a VC, I realized that these same lessons could be applied to helping evaluate the many businesses that I was getting to see. Whilst the following criteria are by no means a guarantee of success, or the only criteria that you should think about, I do believe they can be very helpful.

So in no particular order, here is a list of six questions that I learned to ask to validate my own startup ideas, that now shape what I look for in an investment. I hope this list will help you validate your idea:

1.  An extraordinary entrepreneur with unique insight

  • Does the entrepreneur show the extraordinary drive, energy, passion, and commitment to take on the tough task of starting a company? And do they appear to have the ability to attract a first class team?
  • Does the idea that you are working on come from an area that you know extremely well and where you have an unique insight?
    • An entrepreneur working in an area where they have no knowledge or special insight rarely works.

2.  Market

  • For B2B startups:
    • Is there extreme pain being felt by an individual or group?
    • Is that individual or group in a position to spend money to solve that pain?
  • For B2C startups:
    • Is there strong enough motivation for the consumer to really want to use your product/service?
  • Market size: are there enough people with this pain/motivation to build a large business?

3.  Product

  • Does this product/service adequately address the need (without introducing new problems in the process of adoption)?
  • Is there long term sustainable differentiation and barriers to entry?
    • The differentiation needs to be strong enough to beat any potential major competitors whose size, distribution, customer base, and credibility, would give them an immediate unfair advantage if they decided to compete, even with an inferior product.

4.  Business Model

  • Can you build a viable business model around the solution?
    • Specifically most startups fail because it costs more to sell their product than they are able to make from the sale. So a big part of a viable business model is determining a cost effective way to sell the product. The other part of it is figuring out a great way to monetize each customer.
    • For more details on this topic, see Business Models, and Why Startups Fail.

5.  Management Team

  • Do you have the beginnings of a great management team?
    • It is well understood that a great management team plays a huge role in increasing the chances for success.
    • A players attract other A players. B players attract C players. Therefore the starting team should ideally be all A players.

6.  Capital Efficiency

  • Can the company be built in a capital efficient way?
    • With lower exit valuations, the one reliable way to ensure both the entrepreneur and VC will end up with a good return is to build the business using a small amount of capital.

Further Thoughts

Two of the most common issues that I encounter when hearing pitches from entrepreneurs stem from the same entrepreneurial trait: entrepreneurs are often by nature very passionate about their particular product or technology. In itself this is a good thing, but unfortunately that passion is often blinds them to some important issues:

  • They don’t focus on how they are going to acquire customers in a cost effective way, as they believe that people will either beat a path to their door, or that their product will go viral as everyone will love it so much they will tell all their friends.
  • They fail to look at whether the need their product aims to solve is important enough to get the customer to overcome inertia and purchase it.

I hate to admit it, but I have made both mistakes myself. In my fourth company Watermark Software, we introduced a document imaging product that was so cool that we got half a page coverage in the Sunday New York Times, and great reviews in all the leading publications. Even your grandmother would have thought the product was cool. However cool did not translate into purchase orders, and it took us another 18 months and two versions later to finally get the product focused on vertical customers in banking and insurance that processed lots of paper before our sales finally took off. This was a painful lesson that I won’t forget.

My hope is that other parts of this web site will help address the question of how to cost effectively acquire customers (see Building a Sales and Marketing Machine), and also help to think through how to balance the cost of acquiring customers with the ability to monetize those customers (see Business Models, and Why Startups Fail). I would love to help  you avoid making the mistakes I made in the past.


About the Author

David Skok

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  • When going after VC money, entrepreneurs should understand that while the financial interest of VC’s can be aligned with that of an entrepreneur, they can never be identical. VC's portfolio is much more diverse than ours. Therefore, after we take VC money, it is not enough that we succeed; we must succeed big enough to make up for their other losses (or losses by other partners of their firm). In general the VC's and their partners are willing to take much greater risk than entrepreneurs alone since in their eyes, succeeding small is as bad as failing big (“go big or go home”). So by taking money from VC, we will substantially increase our own risk profile and force our financial outcome to be binary, either a small piece of a big pie or nothing. My own experience is that with VC investment, your probability of having a zero outcome is not only real but common.

  • Denny, You raise a very interesting point. For businesses that do not believe that they should be “going big”, venture capital may not be the right thing. This highlights a need to make sure that you are aligned in strategy with your investors.

    On the following: “So by taking money from VC, we will substantially increase our own risk profile and force our financial outcome to be binary, either a small piece of a big pie or nothing. My own experience is that with VC investment, your probability of having a zero outcome is not only real but common.” – Would you not also agree that it is possible that you could also reduce your risk profile by bringing in some experts to help with the challenges of making your business successful? And that having the extra cash, and support with future rounds of financing during tough times, could possibly reduce the risk of going out of business?

    VCs can also be extremely critical to help in attracting the kind of top class talent to startups that can make all the difference in whether they can succeed or not. Many of those people simply won't join startups that are not correctly financed, and don't have the strong governance that a good investor board will insist on.

    In my own 25 years of experience with VCs, I also had some bad experiences. I worked with 15 different VCs in five different companies, and learned that it was extremely important find out who were the good VCs. And to do that, you had to do reference checking with their companies, particularly the one's that weren't doing all that well, to see how supportive and helpful they could be.

    It sounds like your own experience was not that positive. I would hope that you would not group all VCs into that bad bucket. Some of us work extremely hard to be helpful and supportive to our portfolio companies!

  • dennykmiu

    David, thank you four thoughtful response. I think you would agree if I were to say that we could all benefit if there were more quality control in the VC profession. Good luck.

  • This is a great list, thanks for publishing.

  • This is a great list, thanks for publishing.

  • Thanks for sharing this information! Keep up the great posts!

    Cory Levy

  • Martin Deale

    Thanks for sharing your wisdom and considerable experience with these thoughtful blogs!
    Keep them coming!!
    Best regards
    Martin Deale

  • Martin Deale

    Thanks for sharing your wisdom and considerable experience with these thoughtful blogs!
    Keep them coming!!
    Best regards
    Martin Deale

  • Very well said David. In fact getting “paying” customers is one of the most important part for a startup.
    There are tons who will do signup for free but are the people really using you product or they are just there for numbers sake.

  • I like the distinction between B2B and consumer, but I think it is more clearly defined with “does this decrease pain” or “does this increase pleasure”

    There are two different markets with different ways of acquiring customers. I don’t know all the ramifications, but I saw the contrast several times where your strategy tips diverged.

    The other distinction i noticed was in either monetizing users or overcoming customer acquisition costs. Free customers that you profit indirectly through (e.g. advertising) are different than paying customers, who 1) have to overcome a pain point & 2) have to be profitable. In both cases the costs, both of development and customer acquisition need to be overcome, but the numbers are calculated differently through direct or indirect payment, as well as the strategy for acquiring them.

  • That’s a fallacy that is used to hide the inefficiency of venture capital.

    Banks (once upon a time) were willing to make many more loans over a much broader area, and their diversity did not demand higher returns. Contrarily, they were (once again, once upon a time) satisfied with modest returns, specifically because of their diversification.

    Venture capital used to be for very high risk individual projects that required disproportionately large capital over disproportionately large time periods. The idea was that a bank loan could be repaid gradually, but a venture was something that demanded a waiting period before any possible return.

    That was the differentiating factor (once upon a time.)

  • Aaron, you make a good point. I have written elsewhere here about the value of non-paying customers (see The Value of Free: That post doesn’t directly address what you are raising, but does discuss the value of working to acquire free customers.

  • Aaron, when you say “that’s a fallacy”, could I ask you to explain what you were referring to?

    The rest of your comment raises another question: when you say: that was the differentiating factor, you didn’t then go on to say what you think is the situation now.

    Thanks, David

  • Serandez

    Excellent posting, thank you.

    As an entrepreneur “wannabe”, I’ve written a business plan and believe that it answers the six questions you pose. The difficulties I’m seeing when analyzing the plan from the point of view of a prospective VC are one of two related issues: (note that it’s a service industry)

    1) How to demonstrate conclusively that specific sales techniques which have worked in the past to draw customers would work again and be able to be sustained; and
    2) That the price point of the service would not be matched by competitors, considering they have kept their price points in the same ranges for decades despite heavy competition.

    In other words, how does an entrepreneur represent something which in theory should be true but in actuality cannot be proven? Is common sense or logic enough to sway a VC about something that is a potentially core issue?

  • My apologies for the delayed reply to this. It got lost in the email flood.

    Unfortunately there is no way to “demonstrate conclusively” that the past will be a perfect predictor of the future.

    For your question 1), if you were presenting to me, I would be looking to understand whether the product or service had the same level of sales complexity, whether the value proposition was as strong, and whether the competitive environment looked similar. That would help me decide if I would believe in the past being a reasonable predictor of the sales techniques. Marketing is much harder to predict based on the past, as success is greatly dependant on how “hot” a product is.

    For 2) the fact that they have not responded to past competitors, is a better indicator that they would likely continue the same strategies.

    I hope you are successful in getting your message across to the VCs you are talking with!

  • Enjoying your articles – thanks.

    Can “old school thinking” kill SaaS even when B2B interest and a viable light touch model exists?

    On the topic of team – If an apparently well positioned SaaS idea has early indications of traction and low direct competition, but has been waiting a long time for technological enablers to fall into place (Smart Building market) – do you believe a team becomes stale ? Various technological dependencies were simply not available for us to get to market (B2B Smart Meter reading penetration being one). This meant that we had to survive hand to mouth doing consultancy until a “lighter touch” market model opened its doors. It also meant going through several technology iterations and  team member turnover.  
    Having got to revenue after a long wait (years) and seeing early signs of product / market fit, we know our clients, but I worry that we are long in the tooth.  Poor branding / low awareness of social networking  – make it is a huge ask to step up through the marketing gears on long term f&f funding. 

    So is fresh blood required in a long learning curve market, or do new social networks not matter “so desperately” or is organic reference based growth acceptable while “in the trough”. – Interested to hear your views – thanks James

  • Hi James, you ask a very good question. There is no doubt that a company that has been around a while and growing slowly with non-product revenue will look pretty stale to an outside investor. You are almost better off creating a spin-out around the new product, and painting a fresh picture, showing growth. If you don’t yet have that growth, it may be too early to do that, as that story won’t be particularly credible either. The key here is getting customers that are excited and buying, and if you have that, everything else can be made to fall into place.
    Best, David

  • Hi David  – Thanks for taking the time to answer (again) –

    let me pay it forward to your readers.
    Your insight was crystal clear – and the response exactly described the approach we took (four years too early) and not having your very wise warning we could not heed it.

    Let me state this clearly “Do not burn fast until you have a revenue source – and never over estimate that”
    >> it may be too early to do that, as that story won’t be particularly credible either”
     (the credibility being the killer)

    However we survived, with six years R&D and consultancy blood in the game and a move to Switzerland  – backing off the consultancy in the UK to work exclusively on the SaaS model (for four years) supported by Stirling revenues was a little “ballsy” – Stirling fell 50% and revenues with it 
    The exchange rate £/Sfr. then 2,47  now a measly 1.23 – A dependent family make it no easier.

    It hurt – I mean we were actually rather than literally or  figuratively hungry sometimes – we lost all partners (bar one who is now nearly retired) and all staff – regrets?  Not one !

    The PoC we had four years ago won prizes in the UK and so we recruited a great younger Geek (who we could never afford  but is now one year in with no salary and on a handshake and two young children  – fully vested (at least fully in my eyes! ) . He will co-found with significant equity when we are at revenue.  (This will dilute my years of input – but lessons are meant to hurt else they do not stick!)

    I feel this is also very important and underestimated with your handshake you pass something you can never buy back – A  “like” is simply not investment – though it should be  – and twits trust tweets.   Yes lawyers are needed – but the paperwork should be an aide-memoire to agreement , rather than a novelty when you sign it.

    It helps that we know and trust our first client – a thought leader in our market, and have retained trusting B2B connections with our existing  partner routes to market  (Major Energy Utilities in UK and now Switzerland/ Germany) because stale is also secure!

    And I think the VC market underestimates the odds against  Clean Tech sky rocketing early – a tipping point in a brave new real-world environment will take time to find even in a more buoyant market (which it apparently no longer is )

    We also figured out a new route to market (you prompted David – it was a “lights-on” moment like a “crest that is reached” on skis   – It will need some re-jigging but can be zero-touch and we know that clients have built their own solutions for the problems we solve both inexpensively and better and straight off the web – so we believe that “now we have built – they should come” – (why else build it ?) BUT we will keep experimenting until we find out why they didnt!

    Given a first verbal priceless order  – think  “where do they keep the Crown-Jewels”, we are re-inventing yet again – we must – Quitting comes just before failure – ask an athlete – but the cupboard is pretty bare so it will be a slowish start ! ( if interested ) 

    It is our products, our knowledge (and even our high street bank account) and our credibility among our organic networks that will carry us over the trough – yes we will need the investment to ramp marginal acquisition cost UP to marginal revenue.  And – being “Old school” and European we are rather proud (foolish – no !) of not closing those early failures and not betraying the trust of those early clients. 

    And – yes I can start whole paragraphs with prepositions if I choose 🙂 – because a Startup must be ready to break eggs – 

    But, my word, – I wish I could have read your blog + theleanstartup, Brad Feld, MSuster and so many others and started “twittering” and blogging and wot-not  a few years back .


    My simple call to action for you david – if I may ?

    When we get to a size to be of interest – we could not yet use the $2m Matrix Ventures starts at effectively  – may I reach out to you ?  

    Beyond that any feedback is also most welcome – There are not too many hours available and I know our presentation is weak – but I would love to know from a VC perspective – where do we look worst? Thanks again – I will “stalk you” no further unless you continue to write well, inspire me further  or bite-my-hand-off to be our first non f&f – as I hope you would might more secretly desire :)Regards James

  • James, yours is a great story, and one that I sincerely hope ends well. Thanks for sharing. What you describe is exactly what it takes to be an entrepreneur: passion and commitment to ride through the tough times.
    I’d be happy to take a look at your presentation and give you some feedback on it. Unfortunately we don’t invest in European startups unless they are in the process of moving their HQ to the US, so we are probably not the right source of funding for you.
    Best, David

  • Fantastic David

    Thanks really – I will drop a very brief deck to your email at Matrix next week.
    It is very encouraging to be heard – we have been off the radar for too long.
    I see Series A as our timing for the US – so – see you soon !

  • Hello My name is Shannon. I own a start up called DigitalFaces helping businesses manage and maintain their social networking sites for only 35$/mo. However I have had a website idea that I laid out (every page) on an excel spreadsheet. It will be low cost to maintain the company after its initial build up. Its the craigslist for parties and events. My first question is what steps do I need to do before I can present it to a VC? What things do I need in writing, etc? Also when I have all those things how can I get in contact with a VC?
    The market is open for this kind of site,no competition as long as we get there first. The great thing is it actually will help every social networking site, we are not trying to compete! Please give me your thoughts. Shannon

  • Shannon, sadly the answer to your question is really a blog post in itself. Given the market that we are in today where there are many similar ideas, those that are getting funded are mostly where the sites have been built and are already getting traction with users. Take a look at how these deals are typically presented to investors on a site like Angel List, and you will get a feeling for what steps are required. If you don’t have a technical co-founder that can build the site, that would be the first step for you to take on. Once you have real traction with customers, it becomes very much easier to find investors that are keen to hear the story. I hope this helps.

  • OK so there are sites that are similar to the one I presented?
    and also get a coder your saying, get the site built, and then present it?

  • Shannon, the real key is getting user traction. That is what will get investors most excited.

  • Wmichw

    Hello David,

    Thank you for a great blog.
    Really enjoying your posts; however, when trying to read the blog on an Android phone, most of the time the floating bar on the left side cannot be minimized and is blocking off a part of the screen… in case this is not just an issue with my phone, please fix that so that we could enjoy your posts from mobile devices.

    Thank you in advance!

  • That is fixed now. I have disabled that sidebar. Thanks for the feedback!

  • Michael

    Thank you David – look forward to learning more from your blog.



  • How would this vary for a 501c3?

  • Shane

    My last company was called trailhitch, a product I invented. Trailhitch was conceived and licensed to a leader in the RV industry in just 10 easy months. In those ten months I was able to acquire 179M in purchase orders. I believe the most important lesson is monetization, Every one of my start-ups monetize. I am amazed that a startup like Wanelo can raise $2M in Seed with no Monetization model and no long-term goal. when I have a social ecommerce plan that will make your jaw drop! but I am unable to get in front of VC for lack of a core Team. You would think VC would be able to help a entrepreneur establish a team if the business model is great.

  • Hi Shane, I am sorry to hear of your frustration. It is worth noting that most VCs are focused on high tech, and therefore wouldn’t be interested in a company that was outside of their area of focus. In my case, I only do deals that are B2B software, so a pretty narrow focus. That may explain why you have had difficulties.

  • Shane

    Thank you for responding so swiftly David. I’m curious of how to get a VC appointment? I have only contacted VC firms through email that are incorporating with social ecommerce but I still am not able to get in front of them to pitch. Do I have to know someone and be recommended? Should I go through a Accelerator program? Or is there another way? Thank you!

  • The best way is to find a mutual connection via LinkedIn and get an introduction.

  • Prash

    Thank you David for sharing your insights and your experience. It is a nice and easy read. I am managing a software services company for the last 10 years and am presently looking for funding my tablet based restaurant management software in India. Your post has given me a heads up as to how to prepare myself before approaching VCs. Thank you once again.

  • My pleasure. Good luck!

    Sent from Samsung Mobile

    ——– Original message ——–

  • Hi David, indeed a very helpful post! Especially on question 2 I see al lot of people making the wrong assumptions (myself included a few times…). In order to help in this phase I came up with a concept testing tool (, both to test a concept and to narrow down your target group. Would love to hear if you think this could be a helpful tool!

    Thanks, Rutger

  • Hi Rutger, your link is broken.

  • Hi David, it should be

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