Business planning, Finance, Legal

How to discover if there is a big enough market and strong enough problem for your start-up

Rose Powell /

Big ideas, big markets and billion dollar problem areas were the key topics at this week’s edition of the Next start-up development program.

 

Entrepreneur and Next mentor Nic Hodges told StartupSmart Australian start-ups seeking investment needed to work out if they could create a business that would be pulling in $100 million in revenue by their third year.

 

“If you’re after investment, either here or especially in the United States, you need to be talking about billion dollar markets,” Hodges says. “I think the big question for Australian start-ups is to aim for $100 million by year three because it’s an achievable but also global goal.”

 

While the big goals can sound intimidating, Hodges says the key thing founders need to know is if they’re creating a solution for a real problem in a big enough market.

 

“You need to discover a problem exists at a high enough frequency and level for your customers, which you can build a product to solve,” Hodges says. “At the very early stages, understanding how you’re going to make revenue is an optimisation problem, but knowing if you‘ll make revenue in a big enough market is the major one.”

 

Using multiple sources to pull data from to estimate the size of your market is critical, and it is the place where many start-ups falter.

 

“It’s easy to get carried away with numbers that aren’t validated or accurate. I see a lot of pitches where someone will say the global market is so many billion, and you do the quick mental maths and realise that they’re off by an order of magnitude,” Hodges says.

 

He adds that it’s very unlikely your product is targeted at a completely new market, so it’s a question of understanding which market you’ll be looking to segment.

 

“Most people who think they are creating a new market are actually re-segmenting a current one, and that’s where today’s most interesting start-ups are operating. Very rarely are you convincing people to pay you money that wasn’t already allocated elsewhere,” Hodges says.

 

Hodges lists Uber cars, App.io and Twitter as among the start-ups chipping away at massive markets successfully.

 

“They’re new products, but they’re not generating revenue that didn’t exist before, they’re taking a slice of revenue that was going elsewhere before,” Hodges says. “Twitter sees themselves as re-segmenting the TV ad business, and going after that revenue. They’re making a decent chunk from advertising, but it’s not new money.”

 

Given the fact start-ups will inevitably be competing with others for revenue, Hodges says mastering how to validate an idea and understand a problem is key.

 

“There is a big difference between asking someone if something sounds like a cool idea and finding out if they’d realise they needed your product naturally,” Hodges says. “If you ask the questions in the right way, then what you can really uncover is the problem.”

 

Several of the 27 start-ups involved in the program have already pivoted from their original idea.

 

“Already after the first week we’ve had the teams come back and realise what they were planning isn’t what was actually wanted by their ideal customers. But most also discovered a real need they could focus on,” Hodges says.

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Rose Powell

Rose is the current head of growth at Rampersand Ventures. She was formerly a reporter at StartupSmart.

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