A framework for creating and testing new business ideas
I work with founders every day as a Partner at Antler — problem-solving, ideating, dealing with the existential crisis; all of the exciting ups and downs of building a company from scratch.
One of the common hurdles I see when setting out to build a new company is figuring out where to even start. It’s sometimes overwhelming to frame things when anything and everything is possible, and you often have chicken or egg type problems when first starting to flesh out a new business idea. It’s easy to get lost or frustrated without a clear framework to guide your thinking. I wanted to share a framework I use, to think about new ideas in a consistent and comprehensible way.
There are two main “problem” patterns I see when it comes to ideating a new venture that I believe this framework can help overcome.
Too big of a problem statement — I often see founders (myself included) start with massive problem statements and explain how they are going to completely revolutionise an industry. I like to think of this as the Elon Musk effect. Founders are too focused on having their idea be absolutely, ridiculously large in scope and spend little time thinking of what specific problems it solves and how it would actually get off the ground. Too big of a problem statement is essentially no clear problem statement. If your impetus for starting a company is to “change the world” let me stop you right there, that’s your ego talking.
Solution first orientation — The second pattern I see a lot of is “solution-first thinking”. It starts with founders getting obsessed with a certain technology and cramming it into a poorly thought out or non-existent problem statement. This is how buzzwords spring up in the startup world. Think “blockchain for used tires”, “A.I. for birdhouse design” type ideas. Engineers and technologist tend to do this because they are well versed and excited about certain technologies and keen to find ways to implement them in the real world, but it’s often a case of fitting a square peg into a round hole.
The main thing missing from both of these approaches? A clear problem statement and a clear target market. What is the problem and who is experiencing it? Let’s dive into the framework I use to help avoid these common traps and to help guide your thinking when developing and testing a new business idea.
This is not a step by step guide on pitching your idea, but on crafting and testing ideas quickly for the first time.
Step 1: Identifying clear problems
I always start my thinking by first understanding a clear problem that exists and trying to explain it in as much detail as possible. If you have ever pitched an idea and not started with a clear and understandable problem I guarantee you have lost your audience from the beginning. There are lots of different ways to identify problems in the world, you can read my thoughts in depth on that here.
For ease, my two favourite ways of identifying new problems are a.) using a problem you personally face in life or b.) heavily researching an area you are interested in and identifying pain points. By heavily I mean talking to hundreds of people and reading as many books/papers/articles about the industry as possible. If you haven’t done enough research on a specific industry to write a decent book, what do you think your chances of building a successful company in that space are?
Your problem at this stage can be multi-faceted and complex, meaning you can list out a bunch of things wrong with a specific industry, we can refine it later. For now, focus on listing out as many aspects and angles of the problem as possible.
I like to use Warby Parker as an example when teaching this framework because I think they are an awesome company. So let’s pretend we are Warby Parker and think about some of the main problem(s) they helped solve.
- Glasses are really expensive. The industry is monopolized by a few big players and they have jacked up prices to ridiculous levels ($400-$1,000 in the U.S.)
- Getting glasses is a pain in the ass. First I have to go get a prescription, then I have to go to a mall, wait in line, get hassled by a salesperson to choose a pair of frames, then I have to come back in a week to finally pick up and fit my glasses.
- The selection is overwhelming. A glasses store has thousands of frames and it’s overwhelming to choose the right pair for me. I just want cool glasses.
Step 2: Identify the target market(s)
Once I have a pretty good grasp on the problem(s) I like to turn my focus on very specifically identifying the target market — or who this set of problems effects the most.
The reason why so many successful companies are started by founders solving their own problems is they understand the problem well because they are the target market, they don’t have to rely on third parties to validate things for them. It’s easy for me to explain Warby Parker’s problem statements because I am a target customer, the problems above are from my perspective.
Now, there are two things that are important when identifying your target market: a.) you need to be as specific as possible about each potential target market and b.) you can, and sometimes should have multiple, distinct target markets. We are crafting a hypothesis, so having multiple target markets will help in the later stages if your first, second or third hypothesis fails.
Let’s go back to the Warby Parker model. Who are my potential target markets? Keep in mind that by identifying a specific problem in step 1 there is an implication that someone faces that problem, what we are trying to identify here is exactly who. Let’s use some hypothetical-deductive reasoning to narrow it down.
- First, someone has to wear glasses to have the problem of buying glasses, so my first deduction is people who need prescription glasses. Good news though — more than 50% of humanity needs glasses, that’s a good start.
- Second, my target market needs to care about price more than the brand name — if someone is willing to spend $5,000 on Fendi branded glasses they obviously don’t think glasses are too expensive.
- Third, the target market needs to hate having to go to the mall three times for glasses. They must value convenience a lot.
- Lastly, the target market needs to be style conscious. One of the ways I presume I can limit the overwhelming selection is by having a smaller, more curated selection of frames
So, who fits these criteria from a demographic standpoint? Young professionals who need glasses probably do, they value convenience and style a lot. Parents with kids who need glasses might also fit these criteria. Lastly, elderly people may be a good fit, they are price conscious and value convenience.
Great, we’ve got some hypothesis about who may really feel a lot of pain with this whole glasses problem.
Bonus: with a preliminary target market identified, you can start estimating your potential total addressable market (TAM) and start putting numbers behind how big you think this problem really is.
Step 3: Crafting a compelling hypothesis
Now the hard work comes, creating a hypothesis with our problems and potential target markets. I have to take the problems and one of the target market demographics and condense them into a clear and concise hypothesis. This stage is difficult because you are taking a tremendous amount of data and trying to boil it down to 1–2 sentences, but it is eminently important.
So often I see founders pitch their business and their problem statement is not concise, it’s a nightmare matrix of different problems faced by different target markets across an entire industry. What you are essentially asking, in that case, is for a third party to understand the entirety of your market and customer research in 30 seconds with a shitty powerpoint slide and you talking over — never going to happen. This is where most presentations lose the crowd.
What you need to pull out of all your problem and target market research is one clear hypothesis to start with. I like to combine a one-sentence summary of the problem with a one-sentence statement on what the target market wants instead. Let’s start with young professionals as our target market.
“Buying glasses in the U.S. sucks — it’s expensive, time-consuming and overwhelming. Young professionals want a more affordable, more convenient and more curated way to buy glasses.”
My hypothesis here is that young professionals agree buying glasses sucks and want a new solution with these objectives — which becomes the basis of validating my idea.
Step 4: Testing your hypothesis (market validation)
Now that we have a valid hypothesis, the fun begins. We now need to test our hypothesis against the real world. Too many founders validate their ideas in a vacuum of internet research and anecdotal evidence, a recipe for bias and misleading conclusions. To properly validate a hypothesis we need to talk to real potential customers.
To do this we need to test two different things, a.) how do we find our target market and b.) what is our value proposition once we are in front of them?
Finding your target market can sometimes be hard, but now is absolutely the right time to start finding them — because if you struggle to do it now, you are going to struggle to do it in the future as well when you have more to lose. In general, if you are pitching to raise money without having found and spoken with your target market in depth, you have your priorities out of order, go find your customers!
Once you have found your customers, you need to give them some sort of value proposition, e.g. what are you offering them? This can take a while to get right, and I always like to start by having an open-ended conversation. Talk to your customers like a fellow human being and find out what they really value. What do they most care about that you can really focus on? The best way to craft an amazing value proposition is to just listen to your customers — if the problem is painful enough they will tell you exactly what they would value in a solution.
Let’s go back to our Warby Parker case.
Let’s skip the growth hacking lesson for now and assume we’ve found our customers — they are young professionals, they are busy, they are price conscious and they are stylish. Boom.
Now we need to speak to them. Quick side note, most people will speak with you if you are transparent about the reason, don’t be afraid to just tell people you want to run an idea by them and value their thoughts. The reason I prefer to start my testing by speaking to potential customers is, in the case of my Warby Parker idea, maybe I find out they really don’t care that much about the price like I thought, most of them have well-paying jobs. What they really care about is convenience and style. They would love to have something just delivered to their office that is on style, it being more affordable is just an amazing bonus. That’s a potential life-saving insight for my nascent company.
What are we doing by speaking to our potential customers? We are both validating the problem is real and letting our early customers help us build the ideal solution for them. If our problem is not real for our target market then there is no point in even worrying about a solution, we need to either change to a new target market (parents or elderly, as above) or, find out what young professionals’ actual problems with buying glasses are. If, however, we find it is a clear problem for them we can then enlist them to help us solve it. It is a classic “lean startup” methodology, but it is so often ignored by founders. Without this early customer feedback, Warby Parker may have just built a store with cheaper glasses inside of a shopping mall and totally missed the boat.
As seen above, crafting and testing a hypothesis in this framework is valuable for two reasons. First, it helps you confirm that the problem is real and there aren’t solutions already available you just didn’t see. Secondly, it engages your future customers to help you craft the perfect solution for them — helping you avoid the possibility of building the wrong solution to the right problem. (A good example of this is pre-Tesla era electric cars. Auto manufacturers misjudged people’s desire to have an eco-friendly care over their desire to have a nice looking and high-performing car).
If you want to see the power of engaging customers early on look at what Rob Rhinehart did with Soylent. The early adopters of that company where basically employees in helping it become successful.
Step 5: Drawing conclusions from hypothesis testing and gauging escape velocity
Okay, so we have crafted and tested a hypothesis, now what?
There is a spectrum on which your test results will fall, somewhere between “spaghetti sandwiches” and “overnight cult following, unicorn potential idea”.
If your results fall on either extreme of the spectrum it’s easy to know what to do next, for the former you pivot, go back to the problem and target market matrix and craft a new hypothesis to test (this is why we identified multiple target markets in the beginning. For the latter, you build the company.
The challenge I see most founders face is they are somewhere in the middle of the spectrum where the conclusions are far less clear. Floating in the opacity of weak, confusing and sometimes conflicting or bias customer feedback. This is the root of the classic keep fighting or pivot problem all founders face at some point.
At the end of the day, you as a founder have to make the decision on whether your initial validation is strong enough to move forward or is telling you to pivot. Here are some thoughts I have on the matter to help guide you.
- People who are interested in your idea as an idea are by definition early adopters, they are generally going to be quite accepting and forgiving of you making mistakes if they jump on this early. As you grow and reach the mass market that is not the case, at all. So if you don’t have substantial demand with your early adopters your chances of ubiquitous adoption are not high. Be careful to get too excited about anything less than early adopters loving your value proposition.
- Be careful when getting customer feedback from friends and family. It is always 100% bias no matter what and not that useful to show you how the actual market will respond to your offering.
- Everyone loves free crack. If you are offering something so ridiculously good it doesn’t make economic sense, of course, people are going to want it. e.g. “Would you be interested in getting free glasses shipped directly to your house?” of course someone would be interested, but that’s not a business. You need to get people excited to pay for something.
- Be careful about virtue signalling. During a hackathon, to get customer sign-ups in our office, a founder was asking people if they would be interested in buying candles made by disabled children. Nobody is ever going to say no to that, how could they? It doesn’t mean they are really a customer. Be careful about mixing in environmental, charity, etc. type offerings to your questions, as it will bias your customers’ real feedbacks.
- Be careful of asking leading questions. Let customers tell you what they want don’t lead them towards what you think they want.
Step 6: Building your solution (or starting from scratch)
Let me go ahead and say 9/10 times you go through this process you are going to decide to start over from the beginning, and that’s the entire point of this framework, to save you the time and money from building the wrong company; to give you a framework to quickly and effectively test new ideas and gauge whether or not it’s worth moving forward.
That 1/10 case means you have gone through this framework, you have crafted a very clear problem statement for a very specific target market, you can explain it to someone in less than two minutes and it’s clear. You know how big the target market is and know it’s a big opportunity to solve problems for them. You have spoken to them in depth and understand every nuance of the problem they face and what they care about in a new solution. You have a group of early adopters who believe in your vision of the future enough to help you build it, and will go out into the world and evangelize for you.
If you are sitting on this type of validation, build the company.
Tyler is a Partner at Antler helping great founders build great companies. Originally from the U.S. and now living in Singapore, building early stage, technology companies for the past six years.