How to find startup ideas that make money

I am glad that my previous blog post Sorry, your “cool” webapp is probably not going to make money received good response and generated a lot of debate. What I discussed in that blog post was that most of the so called startups or webapps which are based on “game-changing” or “cool” ideas never end up making any money. So, if your aim is to make money, pursuing such ideas can be risky. While idea-driven startups rarely make money, I professed market-driven approach for someone looking to find startup ideas that actually make money.

Market-driven approach to finding startup ideas that make money

The market-driven approach is quite simple. It essentially means:

Find a startup idea that: a) is already making money for someone else in a growing industry; b) interests you; c) aligns with your skill sets. Once you find such an idea, simply carve out a niche within the industry by a) addressing pains of an under-served segment within that industry; b) or, making it much easier to use than existing solutions; c) or, disrupting the market by making your product accessible to masses at a much affordable price. And once you dominate a particular niche, expand from your niche with your eyes set on the largest player in the market.

There is a lot going on here, so let’s break it up.

Finding a startup idea

For most entrepreneurs, this is perhaps the most difficult phase of initiation. I have known people who would wait for years for that golden startup idea to strike. Truth is: even if you wait for years, startup ideas that are born out of vacuum almost never work. As Steve Blank says, no business survives first contact with the customer. So, why not skip the whole idea-game altogether and simply go ahead with ideas that other people have tried-and-tested? This is what market-driven approach is all about. Pick a growing market and simply make a better product.

Here are some essential ingredients of a market-driven startup idea:

• Growing industry: this is important because a rising tide lifts all boats. Also, a growing industry means that most probably a strong leader is yet to be established and the field is open for many new players, one of whom could be you. How to find industries that are growing? One good resource is Inc’s 5000 fastest growing companies list. In that list you can find companies that are growing at >1000% every year for last 3 years and have revenues in millions of dollars. If they can do it, why can’t you?
• Industry that interests you: aim is to not just make money but have fun on the way, right? Hence, it is important to pick a startup idea in an industry that appeals you. Even though eCommerce industry for ladies bags and purses might be growing, if you don’t see yourself passionate about it, don’t pick it!
• Industry where you have a chance: it is bit obvious, but there are a lot of things in life that appeal us but we’ve got no chance (for geeks: most obvious example is dating a hot lady!). For example, it goes without saying that even if machine vision industry is growing and people are making money licensing such technology, if it requires a PhD and you don’t have it, probably it is not worthwhile to pursue an idea in that industry.

The key idea here is to find an industry (like SEO, document management, enterprise productivity, eCommerce for travel, etc.) where you know people are making money. Inc 5000, Mixergy interviews and Flippa.com are just some of the sources where companies reveal how much money they are making. Make a list of industries that make money for other people, appeal to you and are relevant to your skill set. Finally select any one of them (though in most cases you will end up with only 1 or 2 i which satisfy all three criteria). Don’t be ashamed of this activity as we are not “copying” business ideas, we are simply using information to select which industry should your startup should belong to.

But there are competitors in an established market!

That’s precisely the key to this approach. Lack of competitors in the market is serious indicator that nobody has found it profitable. So, you would want to pick a startup idea which has competitors. In addition to signalling that a market is profitable, competition also helps in positioning your startup. When you are new, nobody understands your offering and frankly nobody has time and patience to understand it. They are simply too busy to digest an entirely new idea or product offering. However, when you position it against established competition, you instantly have their attention and they instantly understand the differentiation. Now customers don’t have to understand new concepts, they simply understand what’s so different about you.

This strategy of positioning against established competition is very powerful. That’s why when cars were invented, they were first called horseless carriages. And that’s why I have positioned my startup Visual Website Optimizer as a much easier alternative to Google Website Optimizer with all features of Omniture Test and Target. (You may not understand the positioning but my target market of people who do A/B testing day in and day out would instantly get it.)

Even with all the benefits, many entrepreneurs still fear established competition. In previous step, once you pick an industry that you would want to start with, find a niche which you can dominate initially. It is important to become a leader in at least one aspect of your industry. That aspect can be:

• Serving an under-served segment. Imagine you picked SEO as an industry, next step is to do research (hint: talking to people works best, but probably I will address this in next blog post) on what are the current pain points that are not addressed by existing solutions (including market leading). It may be the case that only a small segment is unhappy, but in a growing market even that small segment can be pretty large (in terms of revenue potential) for a startup. So, for example, you find that marketing agencies want a whitelabeled solution for their clients, there you have a startup idea: Whitelabeled SEO tools for agencies. Similarly, if it is document management, you may find that most solutions are so generic that a specific subset of market like accountants are craving for much better management of Excel spreadsheets. So, there you have another startup idea: document management for accountants and financial planners. (Warning: the two startup ideas above may or may not work. They are figment of my imagination with no market research!)
• Another differentiator of your idea could be usability and ease of use. Most likely, customers in any industry are fed up with existing, bloated solutions with hard to use interfaces. Simply pick an industry and make it drop-dead easy to use. People usually drastically under-estimate how big advantage ease-of-use can be for a startup. However, simply look at some examples. File sharing existed before Dropbox. Social networking existed before Facebook. A/B testing existed before (my) Visual Website Optimizer. What all of these products did was to dramatically simplify the key activity in an industry. You can do the same. Taking example of SEO, make a product that makes it no brainer to generate new content and build backlinks for it. Make it so simple that even a 5th grader can do it and you have a winner.
• Disrupt an industry with a lower (entry) price point. If your industry is growing and existing solutions are exorbitantly priced, there may be an opportunity to build a product as great as leading one in the market and simply provide it a dramatically lower price. Salesforce revolutionized CRM by offering their product for $10/user/month while leading CRM solutions at that point were costing tens of thousands of dollars.

Key point here is that it is important to carve out a niche that you can dominate with your startup in order to get noticed in a growing industry and get initial set of customers.

So, is this the end of my startup story?

No! In fact, this is just the beginning. Niche domination is not the aim. Industry domination is the aim. Visual Website Optimizer doesn’t only want to be the easiest A/B testing out there. In fact, aim is to be leading A/B testing tool out there. It’s going to be hard but not impossible. Idea is to expand feature-set horizontally and gain prominence outside of your niche slowly and steadily. Eventually, you should replace industry leader and in fact become a source of market-driven ideas for other startups. (I know, how meta)

Industry leading companies are run by people similar to you and they probably followed the path your startup is going to follow. So, there is no question that you cannot be an industry leader someday. It is a nice feeling to be a niche dominator, but don’t feel satisfied with it. Always set eyes on the industry leadership position! That’s where the big bucks are.