Why is it important to structure the evaluation of your start-up idea?

I hope this article and future articles inspire and provoke thought on innovation, start-ups and entrepreneurship. I want to provide a practical, hands-on guide based on what I see in the start-up ecosystem, not add to the academic research.

Ideation funnel

I define the “ideation funnel” as a path for evaluating a start-up idea. The path starts with developing your own start-up idea or with an externally identified, existing start-up idea. It continues with testing the start-up idea, and ends with initial exploitation of the start-up idea up. It can be an on-going, repetitive process until a start-up has reached considerable maturity. I will explain the path in greater detail in a later article.

So why is the ideation funnel and the evaluation of start-up ideas important? In this article, I explain why it is important for new founders and for innovative corporations.

Founder’s perspective

I started coding at age 15 when my high school offered a class on the subject and one day as a teenager, I was standing at a chalkboard in my room, wondering what kind of job I would like to do when I grow up. Then I thought about my much older brother-in-law who frequently came to our house and talked about new business ventures. For example, he developed an energy drink based on the Star Trek theme. He called it “Warp4” and sold it in many stores throughout Germany. That was pretty exciting for me at that age. His passion and excitement made such an impression on me that I decided I wanted to found my own company one day, too. I made this decision because I want to work on new and exciting projects, with the geek inside me always wanting to learn new things. After graduating from WHU in 2011, this led me to try starting my first company with two co-founders. One of my co-founders was a very experienced entrepreneur who had already started and sold his first start-up. The other was a former McKinsey and Bain consultant. But we failed because we did not sufficiently evaluate our idea on an on-going basis and did not allow ourselves enough flexibility for change. Last year, I wanted to launch a start-up again, but did not have a viable idea. However, I knew that I needed to thoroughly ideate and evaluate any start-up idea. After having visited 15+ start-up conferences in Europe in recent years, I found that there are many potential founders out there who want to launch a start-up, but don’t have a viable start-up idea. There are also founders who have one or more ideas, but don’t know how to move forward. A structured path for ideation and the evaluation of start-up ideas is helpful in such situations, because this phase can otherwise be highly chaotic and needs structure. To help me structure this process of ideation and evaluation, I created a framework and called it the “ideation funnel”, which I will introduce in my next article. It is a step-by-step approach to identify and evaluate start-up ideas.

Corporate Perspective

The ideation and evaluation of start-up ideas can occur for existing industry players in 4 situations among others. First, corporations sometimes decide to establish a start-up based on a start-up idea identified by the corporation. This start-up founding process can be strategically initiated and owned by C-Level management, because it usually provides the best resource availability and decision-making speed for new start-ups. One example is Vattenfall with Solytic (more info). Second, corporations run corporate accelerators, and eligible start-ups have to be evaluated for the accelerator program. One example here is the Telefonica accelerator Wayra (more info). Third, the accelerator start-ups mentioned above need guidance through the accelerator participation process. Fourth, corporations sometimes invest directly in early-stage start-ups. Such an investment can be driven by a corporation’s strategy department. I explicitly exclude here the evaluation of any start-ups that have reached some maturity (e.g. >2 years old or post-seed phase), since they need to be evaluated differently based on their existing revenue.

Involvement in the creation of start-ups through C-Level initiatives, involvement through corporate investments or through setting up accelerator programs is important for three reasons among others:

First, start-ups can act as knowledge providers for the holding company, because start-ups often utilize innovative technology (e.g. blockchain) or new business approaches (e.g. platform business model like Airbnb, or gamification). One example is Deutsche B?rse AG, which invested in Digital Asset Holding LLC (more info), in part because they want to learn more about blockchain technology.

Second, start-ups can provide additional corporate revenue because corporate start-ups introduce new, potentially successful products. An example in this case is Deutsche Bank or AXA Group, which invested early in Zenhomes GmbH (vermietet.de) in the hope of gaining additional customer touch points via the Zenhomes property management portal.

Third, a corporate accelerator and the related start-ups can make a corporation’s employer branding appear more innovative, because frequent, external communication of the accelerator/start-up and the corporation together will impact brand perception. One example is the APX accelerator by Axel Springer & Porsche.

The process of ideation and evaluation of start-up ideas can be as chaotic for corporations as it is for individual founders. For this reason, I also recommend that corporations adopt a structured approach to this process as well. Corporations should likewise utilize the “ideation funnel” because with this approach the path can better managed and made transparent.