Ideation funnel – Identification and evaluation of start-up ideas

The following whitepaper is intended to present my opinion and serve as a guide on the process of identifying and evaluating breakthrough startup ideas. It is not meant to be a piece of academic research.

The ideation funnel assists upcoming entrepreneurs and corporations in identifying and evaluating start-up ideas with break-through potential. Additionally, it helps to prioritize the tasks at hand. It is a 6-step, hands-on approach for identifying potentially groundbreaking ideas in the digital ecosystem. It should not be seen as a filter, rather as a circuit through which ideas pass. The number one priority in utilizing the funnel is to connect with other stakeholders (i.e. clients, investors, co-founders) and discuss your idea as extensively as possible so as to deepen your understanding of its advantages and disadvantages. Moreover, it is important to move as fast as possible and achieve sales or other positive feedback (e.g. newsletter sign-ups, survey responses on product attractiveness) to give your venture momentum and to gain a better understanding of the customer needs.

The 6 steps of the ideation funnel are as follows for the entrepreneur:

1. Inspiration: Initial idea
2. First discussion: Discuss the idea in a team/evaluation circle
3. Macro-fit: Evaluate the idea with desk research based on market structure
4. Market sounding: Interview and discussion with clients and industry experts
5. Low-fidelity minimum viable product: Light prototype (e.g. Landing Page, Mock-Ups) to generate sales-near events or initial sales
6. High-fidelity minimum viable product/Finance: Working Prototype for initial revenue or to launch a financing round?

For each phase in the funnel, you need to create at least 2 or 3 must-have criteria, all of which have to be in place to move forward. You can easily identify these criteria by asking yourself: “What would have to happen for me to abandon this idea?” The goal of this question is to be very clear about your priorities, but not to create a negative state of mind.

Step 1: Inspiration

Inspiration for new ideas is the first step. Start by brainstorming with your team or collecting external ideas. This can happen in many ways. In most scenarios, there will be an abundance of ideas. Some European entrepreneurs tend to look to the USA, Canada or China for trending ideas, because these countries are the leaders in investing venture capital in startups. Such funding in turn creates a higher volume of new and successful startups. If you want to focus on the USA, Canada or China, you can find inspiration from sites such as crunchbase.com, trendhunter.com, betalist.com, angel.co or producthunt.com. They show you what is new in the ecosystem and which startups have just been launched. If you choose crunchbase.com, it is important to enter the right search requests. Crunchbase.com enables you to concentrate on the industry you like most. I personally believe that the focus should be on recent investments made by leading venture capital funds (VCs), such as Sequoia, KPCB or a16z, because they tend to attract the most promising business cases and entrepreneurs. If you want to choose a more granular approach, I recommend selecting a specific partner of a VC fund, because VC deals are partner-driven and owned. A specific partner may therefore have deeper insight into an industry, and this can be determined, for example, by looking at a partner’s successful exits. Another key source of ideas is the problems you encounter in your daily life as a corporation or an individual which could be solved by a startup idea. The benefit of this approach is that you have a perfect understanding of the problem on the customer side. But you need to check if enough other customers have the same problem and like your solution. The last option is to start with a buyer target group to which you have access and to try and solve one of their problems. The solution you come up with could be your startup idea. All of these sources of inspiration should result in a list of ideas. The list could include anywhere between 1 and 100 ideas, depending on the time and resources available for formulating an initial opinion of them.

Step 2: First discussion

This refers to the discussion of an idea in a team/evaluation circle. The goal of the first discussion is to explore ideas based on the intuition of each team member. Team members also get an understanding of each other’s opinions. A meeting or call is set up to briefly discuss all the ideas. All team members should have an adequate level of information on, and understanding of, the business model for each idea. For this reason, each team member should have at least visited the website of the company on the long list, if the idea is based on an existing company. This doesn’t mean there needs to be an understanding of the potential revenue of an idea, because sometimes an entrepreneur may or may not be familiar with the target market. In fact, most market-disrupting ideas are launched by industry outsiders (e.g. the founders of Airbnb disrupted the hotel market without having a tourism background). To sort out the ideas, I recommend giving “school” grades to each one so they can be compared more easily. In Germany, for example, grades range from 1+ to 6. This discussion phase helps to further mold the team and its decision-making process. The first discussion should result in 3 to 8 ideas, depending on the time and resources available for validating them.

Step 3: Macro-fit

This phase is more analytical and involves chiefly desk research, because it needs to be verified if specific must-have criteria (e.g. minimum market size, affinity of the idea for venture capital funding) for a breakthrough startup idea are in place. The goal of this phase is to come up with an opinion, based on market structure, as to whether you have a chance to win the market, build a large firm and are satisfied with the business model. This is the first point at which you start quantifying and qualifying your startup dream. You can now start setting yourself goals, which you can do by checking the following factors:

Market size

• Description: Market size (total addressable market (TAM), serviceable available market (SAM), target, share of market (SOM) (see explanation at HubSpot: https://blog.hubspot.com/marketing/tam-sam-som
• My opinion: Assume you can acquire 1-3% of revenue of the serviceable available market within 5 years, depending on your market definition
• Sources for further research: Google, industry associations, expert interviews, consulting firm websites, statistics office of your country, current market participants

Number of clients

• My opinion: The more clients you have available in the market the better, because you are less dependent on one client
• Sources for further research: Google, industry associations, expert interviews, consulting firm websites, statistics office of your country, current market participants

Estimates of revenue per sale

• My opinion: This depends on your preference, but influences your company’s speed and flexibility. Lower revenue per sale means shorter sales cycles and different sales channels compared with higher revenue per sale. Christoph Janz from Germany wrote a very informative article on this point: https://christophjanz.blogspot.com/2014/10/five-ways-to-build-100-million-business.html
• Sources for further research: Competitor websites, forums

Relevant trends for market timing

My opinion on strong indicators

• New laws which create economic opportunity (e.g. a change in the estate agent law in 2015 in Germany created a wave of new startups)
• International trends that are transferred to a new country (e.g. Uber coming from the US to Germany)
• Technologies which are approaching the peak of inflated technologies in the Gardner Hype Cycle (e.g. Deep Learning in August 2018)

Information sources for further research: General news, startup blogs (e.g. CrunchBase)

Competition

• My opinion: The goal is to understand the age, funding rounds, size and value proposition of other competitors in the market. Ideally, your startup is the first in a given market with the right timing, as you then have a chance to win the market unless you are, too early in the market
• Sources for further research: Competitor websites, industry participants and experts

Venture capital investments into this industry over the past years

• My opinion: A growing venture capital investment trend is a good sign, because it shows that venture capital investors are potentially interested in the topic
• Sources for further research:Crunchbase, Google

Potential new entrants and new substitute products for the industry

• My opinion: A few new entrants in the market can be advantageous because it confirms the viability of the business opportunity. However, many potential entrants in the market with a very similar product/service can have a negative impact on your margin unless the entire industry implicitly agrees on high margins
• Sources for further research: Industry expert interviews

Number and power of industry suppliers

• My opinion: The more suppliers there are and the less power they have over your business, the better (e.g. if you develop a digital product, you are dependent on software engineers in general, but not on one particular engineer)
• Sources for further research:Expert interviews and supplier conversations

You should also complete the lean canvas template (https://medium.com/@steve_mullen/an-introduction-to-lean-canvas-5c17c469d3e0), with a first draft for each idea, because it shows what to prioritize in the next phase (market sounding). In any case, you don’t want to spend more than a couple of days validating each idea in this phase, since the most important part is the next step of talking to potential customers and market participants. 

Step 4: Market sounding

The goal of this phase is to get a feeling for the market by talking to clients and getting some initial qualitative feedback. Expected results include a typical buyer persona, the client’s “pains and expected gains.” This is also a refinement of your lean canvas. In this phase, you can also further define what your competitive advantage is. If you can, you’ll also want to talk to the client about your solution and ask if he thinks something like the solution you want to provide can help. But if you do so, be aware that some clients may not tell you the truth in an attempt to be friendly or they do not yet understand the product/service you are proposing. Dave Bailey delivers deeper insight into this issue and initial solutions at https://medium.dave-bailey.com/what-you-shouldn’t-ask-your-customers-a208c5dbab75. If the client agrees, you should record the conversation, because listening to the actual conversations leaves a different impression on your team members than just hearing your description. In other words, team members are more likely to buy into your idea when they listen to your recordings.

So, what are these factors?

Buyer persona: Description of a fictional character.

• My opinion: It can help you to get a better understanding and feeling as to how a client might react to your product/service and to focus your efforts. Example: Imagine you are building a cell phone for retirees. It would help to imagine a fictional retiree (e.g. Robert, 70 years old, likes fishing, hiking and cooking)
• Sources for further research:https://optinmonster.com/how-to-create-a-concrete-buyer-persona-with-templates-examples/ AND https://www.strategyzer.com/canvas/value-proposition-canvas

Pains: The “pains” a customer has, which are related to the scope of your solution. These problems can be things, for example, that annoy, cost time or money.

• My opinion: You may already know both points from the lean canvas, but now is the time to validate your assumptions with the market. Make sure you know the biggest pains and expected gains for your customers, since these are the buying arguments you want to use when selling your product/service.
• Source for further research:https://www.strategyzer.com/canvas/value-proposition-canvas

Gains: The gains a customer has which are related to the scope of your solution. These gains can be additional revenue, savings in terms of time, money and effort.

Competitive advantage: This describes how the startup differentiates itself from competitors, e.g. with a better product, cheaper product or a better way of doing business (e.g. lower cost, better marketing method)

• My opinion: This is fundamental because it will be helpful to you in winning the market and finding your position.

If you are developing software or a website, one method here might be to create a click dummy with tools such as Figma. You can show the click dummy to potential users and ask them if it would solve their problems.

At the end of this phase, you should be able to re-check and update the goals for your dream. You should also consider how you can achieve these goals, and what kind of a reality you create when you do achieve them.

Step 5: Low-fidelity minimum viable product (Lo-Fi MVP)

This is the first prototype of your firm’s product that you build with the client in mind. The goal is to collect further information, if an idea has the potential to result in a high-growth venture or not. You also want to create “Momentum” which here refers to any quantifiable interest that is shown in your product. Interest could be in the form of clicks on advertisements (on Facebook, Google or other websites), e-mail addresses left behind on a website landing page, inquiries through referrals or positive feedback from cold calls.

An example: The lo-fi minimum viable product could be a landing page (a test web page) created with tools like LeadPages or Instapage. These tools help you to easily build a website using conversion-optimized website templates with pre-generated pictures, text and layouts. In any case you do only want to invest little time into graphic design for this.

Further tests you can also include:

• Get customers to buy your product or sign a “Letter of Intent” to buy it.
• Copy the product from a competitor and try to sell it

As a result of this phase, you should be in a position to start your first financing round. However, this depends greatly on the investor, the team and the timing of the idea. It has a better chance of success if you have an impressive team (e.g. former founders, industry experts, alumni of prestigious universities or employers), angel investors willing to take risks based on the team and on untested ideas without revenue and/or a currently trending idea (e.g. Internet ideas before the crash of the new economy or cryptocurrency related ideas during Bitcoin boom).

Step 6: High-fidelity minimum viable product

The goal of this phase is to validate initial business assumptions based on your first product and not to build a scalable product. For example, if you build a web application like mint.com, you should have a prototype that can generate initial sales, focuses on a few of the customer’s worst “pains” and is developed in a common programming language with plenty of available developers. In this phase, you do not want to focus on building an application that can be used by tens of thousands of users at the same time, as you will need to rebuild your application anyway. The best scenario here is to start with a single-feature product. This single feature should solve the customer’s worst “pain” and be achievable with comparatively little effort.

Summary

I encourage you to start using the ideation process now, because it is best learned by applying it. Start brainstorming and ask yourself how you can quantify and qualify your dream. Set yourself goals. Think about how you can achieve them, and what kind of a reality you create when you do achieve them. Construct feedback loops to determine if you are on track with your goals. When you embark on your startup journey, keep asking yourself how you can make your dream bigger, with more people and capital.

If you have any questions or comments about the ideation funnel, or want to learn how to apply it to your situation, please contact me by e-mail at [email protected]