I am always asked what the key drivers of success for a startup are. And, honestly, there is no single right answer to this question. But, what I have boiled it down to is the fact that most startups require the right mix of: (1) a good business idea/revenue model in a sizeable market; (2) an experienced, hungry management team with the right skills for the job; and (3) the right market timing with a little bit of luck. And, not necessarily in that order. There are certainly more detailed factors like competition, product mix, pricing, sales/marketing strategies, speed to market, etc. But, let’s start with these three, and I will tackle the rest in future posts.
So, let’s determine if we have a good business idea/revenue model in a sizable market. Sort of three different concepts rolled up into one. A good business idea comes down to whether or not you are solving real needs for customers. A good revenue model comes down to how profitable and scalable your unit economics are. And, a sizeable market opportunity is pretty self-explanatory.
Let’s take a look at various business models in the online travel space, with which I am familiar, as the founder and former CEO of iExplore, the #1 adventure travel website.
For iExplore’s business opportunity, there was a real need in the market for a one-stop adventure travel portal site, given how deeply fragmented the industry was with no clear first-of-mind brand leader to research and book off-the-beaten-path international travel. So, we had no problem attracting over 1MM unique visitors to the site with a unique solution in the market. However, it was a small market opportunity, with only 10% of travelers interested in adventure travel, and of those, only 30% were interested in traveling overseas. So, instead of having the opportunity to serve the $240BN overall leisure travel market, like Expedia, iExplore was really only serving an $8BN international adventure travel market. Better than being a whitewater rafting company in a $100MM market, but iExplore would never scale to the heights of the major online travel agencies selling air, car and hotel reservations that appealed to the mass travel market. So, iExplore was a good business idea in a niche market.
We determined Expedia had a much bigger market opportunity, but did they have the right revenue model? The travel agency margins on air, car and hotel reservations are razor thin, and you need tremendous scale to have any chance and building a materially profitable business in this space. So, at the end of the day, the online travel agencies like Expedia had a weak revenue model in a mass market.
So, who ultimately figured out the winning business model in online travel? Planning sites like Trip Advisor, which was ultimately acquired by Expedia to improve their business. Trip Advisor appealed to all travelers looking for hotel reviews, so a mass market opportunity. But, unlike Expedia who was dependent on low margin air, car and hotel bookings, Trip Advisor successfully built an online advertising based revenue model that was wildly lucrative to its bottom line. So, Trip Advisor won the best business idea in the online travel space, with the biggest market opportunity and the most profitable revenue model.
The most lucrative successes have been products that appealed to everyone and had tremendous margins (e.g., Google, Apple, Microsoft, Yahoo, Groupon, eBay). That doesn’t mean niche market opportunities are bad businesses. It simply means, niche businesses may not attract as much attention from the venture capital community. The average venture capitalist receives 200 business plans a year, and only funds their favorite 5-10 companies (typically businesses targeting the biggest market opportunities with the best revenue models). So, if you think you have a good business idea in a niche market, that is OK too. Just realize you will most likely need to fund those opportunities with friends/family/angel investors and will be building a business of smaller scale.
I hope you all enjoyed our first lesson. Class dismissed.
This article was originally published on RedRocket VC, a consulting and financial advisory firm with expertise in serving the start-up, digital and venture community.