What criteria do you use to judge the viability of a startup?

Here are the 3 questions I ask myself before considering seriously a startup:

1. How PAINFUL is the problem being solved ?
2. How BIG is the Target market ?
3. How REALISTIC is the revenue model ?

Atleast, those are the MAIN ones i'm interested in.

Quick background: I have founded 5 companies, one of them was acquired, one merged, one failed, one just reached commercialization and raised the fourth round of VC and I'm in the process of raising a seed round for my next venture. This will be the fourth company I've founded with venture funding.

Here is my experience, "Team" and "execution" are kind of a given when you evaluate ideas, but when you look at an idea, strip it away from the team and everything else so you can size it up without being distracted by passion and emotion from the founders. I think it's an overused fallacy that VC's invest only in great teams. VC's know that sometimes all they need is a team that is "good enough" to build a product so they can replace the team with a more experienced one when (and if) necessary. Statistically (according NVCA) 80% of VC-backed CEO's are replaced by a VC-appointed CEO at some point. It's not a stretch to say that many VC's fully expect to replace the founders at some point. My point is that I think the idea itself is much more important than many folks admit. I often read things like, "everyone has great ideas, it's the team that matters". That's just plain wrong. Great ideas are rare, as are great teams.

As for evaluating the actual business model, I use three things: 1) a "strategic control" scale to help me size up the potential of every idea I consider, 2) I look for ideas that overlap with, dovetail, or threaten competing businesses or business models, 3) I look for business models that will allow me (the founder) to create an irrational relationship between earning potential and valuation. I like revenue models that are really simple, but I don't care if a company can reach profitability in the first five years. It doesn't have to if you have a clear exit strategy and you can get sufficient momentum with customers.

The strategic control scale works like this: the very best business concepts will give the company the absolute highest amount of strategic control in a marketplace. Strategic control gives companies the ability to protect their revenue, customers and profit from the competition. On the other hand, bad ideas provide no strategic control at all. Here it is in a nutshell, with 10 being the highest amount of strategic control:

9/10 - Can we develop a platform and/or own the standard for something? This is the highest amount of control. A platform always beats an "app". The iPod is a brilliant product, but the App Store is a platform that gives the iPod strategic control. Facebook is a platform, Twitter is a platform, MySpace is (was) an app. Would you rather own the app or the app store?

8 - Control the value chain

7 - Own customer/distributor relationships

6 - Brand

5 - Two year development lead

4 - one year development lead (a development lead alone is very superficial)

3 - Selling a commodity at a cost advantage

2 - Selling a commodity at cost parity

1 - Selling a commodity at a cost disadvantage

Keep in mind that many companies use a combination of several of these points at once to exert strategic control, so it's not necessary for a concept to have a 10 to be successful.

By the way, there is a big difference between "sketching out a business model", as with the business model canvas, and determining the viability and potential of a concept. You're not looking for a checklist of things that need to be accomplished when you start a business, you're looking for a way to decide whether or not to invest time, money and energy in something.

I like your criteria, but I do think you're missing one critical aspect:

How well can the founders execute? Have they demonstrated an ability to execute in this field? and (very important) Can the founders identify what they need to do, beyond the obvious? and (most important) Can the founders quickly go from "I need to do X but I don't know how" to "I now know how to do X and I will dominate it."

Knowing what you're missing and being able to master something you have no idea how to do are the two most important attributes of a startup founder.

ie Make SURE the guys running the show are solid.

Here is my checklist:

Product Idea Checklist

* Minimum viable product
      o what is the simplest version of this idea?
      o can version 1 be developed in 1 month?
      o can you do less? can you accomplish things by subtracting rather than adding?
      o can the biz model be simplified?
* Customer & Market Research
      o Compete with non-consumption
      o what is the market size
      o if you are competing on price, or have a lower margin, do you have cost advantages in your business model that competitors do not
      o will version 1 be beneficial to customers?
      o are the biggest competitors in the market focusing on other areas
* Strength & Weakness
      o do you have an unfair advantage?
      o is this a product you will use yourself?
* Product Vision
      o what problem are you solving?
      o why is it important to solve this problem?
      o what is the pain this product resolves?
      o what makes your product different
      o can you describe what you are going to make as a generative metaphor
            + It's eBay for jobs.
            + it's like Wikipedia, but within an organization. 
* Dependencies
      o What external events are the products success dependent on?
      o How will you measure the external event?
      o What happens if the external event doesn't happen?
* Planning
      o Pre Mortem: Imagine the project has failed horribly : “What could have caused this?”
      o what thinking can be done upfront - thinking is faster than programming
      o Chicken & Egg problem - does the value of this product require it already have traction?

If I had to condense it I would go with:

• do you have an unfair advantage?
• what is the simplest version of this idea

I would probably start with a SWOT analysis of each idea. Seriously!

There are a million things to think about. I think a big one to add to the list right off the bat is, what does the sales cycle look like and what is your anticipated effort per sale. Is there a point of no return where sales start driving themselves?

The main problems of growing a startup are finding the motivation, the right advisors, the right coworkers and the right customers. If you can't solve these four problems before starting up, they will bite you later, when you are too busy with many other things.

In bullets points:

• Am I passionate enough about the topic to be able to dedicate all my time for the next 1-2 years to it?
• Do I know or can easily get access to 2-3 high profile people who can advise me on how to succeed in my target market? I talk about people like "been there, done that", not the self-proclaimed business consultants that pollutes startup forums :)
• Can I convince right now 1-2 great people to work with me on the project for equities only (no salary)?
• Even without those advisors, can I easily set up NOW meetings with 5-10 potential customers? In other word, no more "build it, buyers will come" for me!

I like:

• Is the opportunity big
• Can do founders pull this off
• Is it innovative or will it be absolete soon?
• Can you get run over by google/facebook/any-big-player
• Is this a passion or an interest, and is there domain expertise in the founding team?
• Is it a needed product/service?

A corollary to having a large user base who pay small amounts is a small user base who will pay large amounts. For example, a enterprise-service company, serving a small number of clients (Fortune 1000 companies, perhaps), but these clients can pay a lot of money for a service or product they think will benefit. Clearwater Analytics is a great example of this kind of model.

I was going to give a long conveluted answer about self-centerness, could versus should la-de-da-de-da. , but it all boils down to this:

How will this make the world a better place?

Here's my favorite set of questions - thanks to Steph Beer @Stepwise1.

Executive summary of the business project

What is your business idea? In what way is it creative and unique?

Who are your target customers? What test customers have you approached or could you approach? What is the value of those customers?

What market volume and growth rates do you forecast?

What competitive environment do you face?

What distribution channels will you use?

What partnerships would you like to enter into?

What are the sales, cost and profit situations?

What opportunities and risks do you face?

What is the picture on patents?

What are the social and environmental impacts of your business? In particular, what are the employment opportunities in regards to the development of the project?

What long-term goals have you set?

What additional stages of development are needed? List your next, concrete steps

Product and customer value proposition

What products / services are offered at what prices?

What is the status of the product / service development? What are the next steps? Do you have patents or licences?

Compare the strengths and weaknesses of comparable products / services.

Business model

How is your business organized? What is the network structure?

What do you make and what do you buy? (What are your core competencies and what do you outsource)?

Market/competitor analysis and own positioning

Which is the size of the market?

How is the industry developing (market growth)?

What are the key success factors?

Who are current and future competitors?

What is your positioning compared with key competitors?

Management team

What is the role of the different team members?

What experience or abilities does the team possess that will be useful for setting up your company?

How will you attract the right profiles and retain them?

What is the future management style of the operations?

What experiences or abilities are lacking? How will these gaps be closed?

Opportunities and risks

What other opportunities can be leveraged?

Project development phase

At what stage of the project development are you?

Have you registered your company? If so, when?

What are you current funding needs?

Please explain how you got to that amount.

How long do you estimate it will take for your business to become profitable? Provide details that explain your projections.

Level of personal funding: what is the percentage and amount that the project leader is investing in the company?

What are the other sources of funding? Specify each source, the percentage and the amounts.

Overall Assessment and motivations

In what ways do you consider your business to be creative? Summarize the creative aspects of your project in this question.

How will your business survive and grow in the next five years? Explain the main points that will ensure the sustainability of your company.

What is the main positive social and/or environmental impact of your business? Explain in concrete terms this impact and how you measure or plan to measure it.

Why should someone give you money?

What risks are involved with the market entry and how can they be controlled?

I always ask myself three questions:

• What customer pain can I solve profitability?
• Would I do this for free?
• What's my strategic advantage against competitors?

If I don't have good answers for these three questions, it's not worth it for me.

All those other criteria like how big is the market? or can the team pull this off? or will it get funded? are all fine but without getting past your internal doubts, you will never get to a place where it's even a viable idea for funding.

Just 5 days ago, I tweeted about an article that explained what angel investors are looking for. It was an article in itbusiness.ca titled: "Why Elevator Pitches Don't Work for Investors".

Towards the end of the article, they list some items that should be included in the presentation document for the investor.

I think you should evaluate your next venture with similar criteria. I would take their list and adapt it as follows so as to say that your evaluation criteria could be:

1. How significant is the pain that this solution will address (the dead lobster)

2. What is the overall size of the market, what is the size of the niche, and what will be your ultimate market share in both the market and the niche.

3. How will the world look prior to this product, and how will it look after.

4. What will be the market strategy?

5. What has been done so far?

6. Would you be able to get funding for this, and what would you do with this funding?

7. Can you do better than the competition? Who can kill your business? Is this a good takeover target?

8. What would be the 3 to 5 year financial projections?

9. What would you tell an interested investor about this venture?

A few of mine:

Is this an enterprise or consumer-focused application? For me, everything that I dislike about business is wrapped up in enterprise applications. Why? The long sales cycle (in my experience, it's a year minimum from first handshake to signature-on-contract) requires external investment, and for me, investors == anxiety, compromise and lack of control.

Is there a clear plan to generate revenue? If the founders don't have a clear plan to make money, they don't know what they are doing. If they are planning to gain market share and figure out the money later, they didn't learn a damned thing from the last bubble.

Do the founders have an exit strategy? If they do, then I'm skeptical. I want to work for people who are building a business that they love and wouldn't want to leave. If they are planning on doing it just to rake in a big payday, they are less likely to act in my best interests.

The main question is: does it generate revenue that in a way that is repetitive and scalable? Or does it have the chance to get to that point later?

1. The existence of competitors.
2. Your ability to execute.
3. An edge in features that'll make your offering better.

I have around 90 ideas for ventures myself, which I update regularly. When considering ideas I use the following questions:

Since you are not considering this as a VC, but yourself I would consider whether there is a realistic exit strategy. Can you exit even if you only partially succeeded and grew tired quickly?

I would also consider the idea in relation to the expected cash flow. I really do not want to end up in a situation where I am financing an idea myself and have bitten over something too big to finish version 1.

Is the general field of the ventue interesting and in growth? This means that if your venture fails after three years, you would not be in a dead end with lots of knowledge in an obsolete field.

Is it patentable or are there likely to be patents already on the idea?