How to Pick the Right Idea / Market

By Ed Hsieh

We're taught the Lean Startup method at school to help aspiring entrepreneurs use the most efficient processes when beginning their startups and looking for the mystical "product-market fit." This process, essentially the scientific method applied to startups, with an emphasis on efficiency, is good for making sure people don't waste effort on pointless tasks.

However, as we discussed in the Aardvark case, what if the original concept for the business is doomed from the start? What if the company uses the Lean method flawlessly, building efficient tests and responding to customer feedback perfectly, but ends up with a product that addresses a tiny market, or a problem that can’t be solved?

It would be helpful if a framework existed to help aspiring entrepreneurs determine if the idea and market they are tackling are appropriate for the goals they have in terms of ROI and scale. For example, if I’m a founder with one other co-founder, and am looking to swing for the fences and create a VC-backed company that can one day IPO, perhaps I would use one formula for determining if the market I’m going after is appropriate. On the other hand, if I’m a single founder looking to create a lifestyle business, perhaps I would use another formula or framework to determine if my idea or target market is appropriate.

Unfortunately, I’m not sure any such framework is possible or would really be useful. While entrepreneurs should certainly be aware of their addressable market size, so many other variables come into play in determining a business’s viability that the market size alone is not a useful indicator of business potential. I can think of many examples where companies targeted roughly the same market, but the values of the companies are vastly different. For example, Google vs. Bing and AltaVista; Facebook vs. Myspace and Friendster; AirBnb vs. couchsurfing; Spotify vs. Rdio; Instagram vs. Picplz, etc etc.

So when is it helpful to look at addressable market size? Perhaps it can be useful as a litmus test for how big an idea can become, but not how small. For example, if I build an iPad app for retirees, it should be fairly easy for me to see the limit on how big my business can become, unless I expand outside of the iPad form factor or the retiree segment. On the other hand, if I build a video-sharing app, the potential market is huge (I can be the Instagram for video!), but my video-sharing startup might also be worth $0 if I can’t execute or someone beats me to the punch.

In the end, I think the Lean Startup method helps answer market size questions, as entrepreneurs discover important metrics that can be included in a market size calculation, including how useful their product is, how many users will convert to paid customers, etc through lean tests.

What do you think? Are there any useful frameworks for helping determine the right idea or market to go after? Is this even a useful question to answer? Or is it simply one of many questions that gets answered through the Lean method?

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