It is my experience that many founders of innovation startups follow a path more or less similar to the following:

• They feel dissatisfied with their current situation and want to take control of their life
• It occurs to them that one way of taking control is to start their own business
• Technology seems like a low-cost way of creating a new business as all you need is a computer
• They (or someone they know) have already encountered a frustration in their working or personal life which could probably be solved by technology
• They already have a solution in mind that they really want to build
• A cursory search on the internet fails to reveal an obvious existing solution
• They make a leap of faith: “If I have this problem then someone else must have it too. If I make it, they will come”
• Viola, an innovation startup is born

Sounds familiar? Don’t get me wrong, this is a perfectly valid way to found an innovation startup. Indeed, I’ve done it myself. What is surprising to many (myself included!) is how quickly it can go wrong and how much time and money can be wasted in the process.

Why is it that 9 out of 10 innovation startups fail?. It’s tempting to say that it’s ignorance - that if only these founders had spoken to an expert like me they would have succeeded. There is a grain of truth in that but it’s not enough to explain such a high failure rate.

Having worked with many innovation startups it seems to me that the real issue is the difficulty of reconciling the enthusiasm and drive it takes to be a successful founder with the focussed, incremental, iterative approach required to mitigate the uncertainty that defines your startup.

It’s hard to hold yourself back and tread carefully when you’re itching to be the next Jeff Bezos.

Show me the money

One approach that I see quite often from founders is something like the following:

The global market for Wangdoodles is $X billion. If my new Wangdoodle Wrangler can capture just $Y% of that market my revenue will be $Z million.

Many investor pitch decks contain a slide to this effect as it seems like a convincing argument. Let’s look at an example. U.S. App Store revenue and download estimates from January 1 to March 31, 2016, indicated that an estimated $1.43 billion net revenue was generated. That seems like a huge number, so even if we captured just 0.001% of that our revenue would still be millions of dollars. Surely we can capture 1/1000th of a global market?

Unfortunately the answer is likely to be a resounding NO. Detailed analysis of the U.S. App Store data showed that around $1.34 billion of the estimated $1.43 billion in net revenue generated went to 623 publishers. Still in with a chance? The total number of publishers contributing to revenue in that period was 62,300.

This means that 94% of all net revenue generated by the U.S. App Store in the first quarter of 2016 went to just 1% of the publishers. The other 61,677 publishers had to share the remaining 6 percent of the revenue, which was approximately approximately $85.8 million. If it was divided equally, they’d have made less than $1,400 each.

It doesn’t have to be this way

That’s all very interesting, but what’s my point? Thinking that the market is huge and therefore I only need to grab a tiny bit of it to succeed is exactly the kind of motivated reasoning that prevents founders from taking the steps they should to remove uncertainty. Most often when a justification like this is made during a pitch it takes only a few questions to reveal that the presenter has done little or no analysis of the breakdown of the market and simply knows the headline figure.

I’m not saying that you won’t be one of the 1 in 10 that succeeds or one of the 1% that make all the revenue. I am saying that to get there will take more than enthusiasm, determination and wishful thinking.

In my last post I introduced the idea that innovation startups are the embodiment of a question. My intention was to shift the way we think about creating an innovation startup from the optimistic (building for the sake of building) to the pragmatic (building for the sake of learning). We don’t want to dampen optimism (indeed, it’s essential for any founder to be optimistic) but to extend the founder’s enthusiasm to include pragmatism in order to be the 1 in 10 that succeeds.

If you look up the word innovation you’ll find many definitions but one characteristic they all share is the idea that innovation is about the new. Innovation is creative and original. Being new, creative and original implies change and it is difficult for anyone to accurately predict how people will react to change.

Notice that I said it was “difficult” to predict the reaction to change. Difficult, but not impossible. If the entity you are founding is the embodiment of a question doesn’t it make sense to get good at asking questions?

Let’s go back to the beginning

In an effort to work out why so many startups fail, failory.com analysed responses from 80+ failed startups to see if they could identify any patterns. By far the largest single reason was what were collectively described as Marketing Mistakes. 46 out of 83 startups mentioned a marketing mistake as the main reason for the failure of the project. Of these 46, a majority of 29 (34% overall) mentioned issues that boil down to a lack of product-market fit. If this isn’t starting from the wrong place, I don’t know what is.

There is a stage of product discovery that the vast majority of founders never visit at all: right at the beginning, when you don’t actually know what you’re doing at all. I don’t mean that you’re simply ignorant, I mean that you don’t yet have the idea for your innovation startup. This is the situation I want to consider.

The market comes first

You know that you want to create your own innovation startup but you don’t have an idea yet. What do you do?

The single most important factor in a product’s success is whether or not a group of people are willing to pay for it. Your task is to find that group of people. The vast majority of innovation startups succeed in the long term by finding a market that is willing to pay them money for something.

That something may not be your ultimate product that makes you a millionaire, it may be a tiny fraction of that product but it can be done now, quickly. What matters is that you can find a group of people who need whatever this something is more than they need the money you’re charging for it. Once you’ve found them give them your initial product at a price where you make a healthy profit and you’re off.

Find your niche

Suppose you decide that the world needs a new note-taking app. You know how to design the database, you have a great idea for a beautiful interface, it shouldn’t take more than a couple of months to get the first version out and you’re in business, right?

A quick internet search will tell you that there are plenty of note-taking apps out there. When I did this the first page of results consisted entirely of variations on a theme of ‘The X best note-taking apps of 2020’ with X ranging between 8 and 11. There’s a lot of competition in this space, including some well-established big players. Whilst competition is not necessarily a bad thing (there are at least 11 variations considered worth of the title ‘best note-taking app’ after all) it is highly unlikely that as a small startup you are going to be able to compete with the budgets and teams who already have thousands of paying customers.

So building a general-purpose note-taking app probably isn’t the road to easy, instant success. You need to find your niche. Suppose, like me, you are an amateur musician. If you play an instrument that requires both hands it’s a pain to have to take your hands off your instrument in order to start a note-taking app when your notes consist of… musical notes! How about a note-taking app that is voice activated, with integrated video so you can record your sound and technique at the same time?

The potential size of your market is much smaller, but you’d probably be able to charge more for your product. You probably already know where to find your market since you are a musician yourself and you belong to social media groups and other organisations where you connect with your fellow musicians. You can make a niche market really happy and focus on a product that becomes so well designed that members of your niche market have no choice but to use it.

If you can find a small group of people and make them very happy you will make money. Also, your marketing will probably be more effective since the larger a potential market is the more effort you have to make locating people willing to buy your product.

You probably already have an idea based on your personal interest, work responsibilities or personal association. Starting with something you know is likely to be much easier than trying to enter a completely unknown market. Don’t assume, however, that just because you have a problem that everyone else in your chosen niche will have the same problem or will experience it in the same way.

Start with general curiosity about a topic. You’re looking for patterns, asking yourself ‘what is wrong with this?’. Don’t just concentrate on what you’ve already decided to do. Think about other issues in your niche area. Try to come up with 20 different business ideas and investigate their viability.

Check the potential size of the market. Does it have a magazine devoted to it? Magazine publishers are in the business of market segmentation. If you’re targeting a niche with its own magazine like Bass Players or Fly Fisermen (Fisherpeople?) then chances are you are onto something. See if you can find social media groups devoted to your niche. How many people subscribe? Track down Government or industry statistics on the number of people employed in your niche.

Conduct interviews (but make sure you read The Mom Test first!), watch people doing ‘the thing’ you’re interested in and conduct a literature review. The resulting insights will lead to ideas and help to define the problem you’re solving. Even if you’re working on an existing product or service the insights may lead to new features or lines of service. Engage with social media groups and see if you can recruit enthusiastic potential early adopters who will be happy to give you the information you need and who can become advocates for your business.

Ask questions and use the answers to decide which question in particular your startup is answering.

There’s more to do, but this is a good place to start.

Wrapping up

All of the above information can be summarised as:

Start with what you know

Start small

Ask questions

Create options

Find a paying audience

Above all, start at the beginning

Next month I’ll look at the next steps.