Startup Idea Checklist for South-East Asia Part 2
If you haven’t checked out Part 1 please do so!
For this part, we’ll focus on how to you evaluate the idea that you’ve generated.
"Even a pig can fly if it stands at the center of a whirlwind."
-Lei Jun, Founder of Xiaomi
After you’ve generated your idea, you’ll need to go deeper and Evaluate The Idea
The Market
Why Now?
Distribution
Team
Moat
Business Model
Finally, in your goal to get to Product Market Fit, you’ll need to look for:
High Retention Rates
High MoM and YoY growth rate
Willingness to pay
Organic Growth
Short Sales Cycles
The feeling that you’ve hit it :)
Idea Evaluation
Once you’ve found an idea you potentially want to work on, the next step, is to evaluate it:
The Market
“I like opportunities that are addressing markets so big that even the management team can’t get in its way.”
Don Valentine, Founder of Sequoia Capital
If you’re intending to raise Venture Capital, you’re going to have to swing for the fences. As the funds in SEA are smaller as compared to the US / China, you don’t necessarily need to be the next Grab or GoTo, but you’re still going to have to hit >100m USD to be attractive to a Venture Capitalist (depending on fund size).
The SEA Factor:
SEA funds tend to be smaller than the US, (8.2bn vs 130bn USD of VC money invested in 2020), which also reflects the fact that the market opportunity is smaller (for now), because income levels and tech adoption is much lower. Especially for SEA, I would be looking at areas that don’t seem very big now, but will experience tailwinds in 3-5 years given that we are in developing markets, we can look at models in India and China, to get a glimpse of what might be happening in SEA in that time span.
What you want to look out for is:
A large market, or better still, a small market that’s growing rapidly to a large one, at least 5bn USD. This is especially true for SEA given that it’s a growing region, not just in terms of income levels, but development. Today, because of a lack of infrastructure, a lot of companies and products cannot be built, but if you can forsee the macro trends that are developing over the next 5 years or so, you can position your company to take advantage of the macro trend when the wave arrives
Of this, if you can capture 100m USD in revenue annually 5 years down the line
Is there a larger market you can potentially enter after you’ve conquered your initial market, just like how Uber started with private black car service but moved into a mass ride hailing service that disrupted the taxi industry
Are customers constantly frustrated but still paying?
Has this market segment been underserved?
Why Now?
“The thing that I like to assume is every startup idea’s been tried … So, the question is not, has my idea been tried before? The question is, is it the right time for my idea to happen?” - Mike Maples Jr
Also known as the Sequoia question, this seeks to attempt to address market timing. For every Amazon, there was a Pets.com, and for every Vine, there’s TikTok. Just because something’s been tried and failed, doesn’t mean your version is doomed, but you need to understand why this time’s different.
SEA Factor:
SEA is experiencing many paradigm shifts. Smartphone penetration has not only increased, but we’re seeing a new generation that are mobile natives. In addition to that, a lot of the payment infrastructure, logistics, the influence of social media in purchasing decisions and the comfort with e-commerce have changed the landscape from the previous generation of tech startups.
What you want to look out for:
A paradigm shift in technology. This usually involves a technological breakthrough like the discovery that GPUs powering AI algorithms can produce the results researchers have been looking for, for decades or a shift towards the attitude towards a technology, be it the acceptance of purchasing items online or acceptance of cryptocurrencies as a legitimate asset
A change in regulation that would open the doors for competition to enter the market
The cost to production or entering the market has fallen dramatically. Moore’s Law is essentially responsible for the proliferation of smart phones.
A generational shift in attitudes. With each new generation, there’s usually a shift in attitude in terms of what they care about. A lot of how brands are promoting environmentalism is to cater to the Gen Z market that really cares about the issue. Also, now that a whole new generation that’s grown up with the internet are in the early stages of their career, the neo-banks that cater to this generation with an online only model is gaining a lot of traction
Distribution
While getting your product right at the outset is the single most important thing, which means finding Product Market Fit (PMF), almost immediately, the next aspect you need to get right is your distribution channel. Even with a slightly inferior product, you can beat the competition if your get your distribution channel right. An easy way to think about this would be getting the product right is paramount, but if nobody gets to know about it, or easily purchase it, any product superiority advantage you have does not matter. Basically, if I had to travel to another country to purchase my Macbook as opposed to ordering a PC online, I’d rather use the PC.
SEA Factor:
The most obvious shift here is that the online distribution channel is opening up a lot more, so what wasn’t possible 10 years ago, might be today
What you want to look out for:
Access to your target audience
A new untapped distribution channel
High LTC / CAC Ratio
Team
“If you think about how do you get to the big idea, we call it an Earned Secret. You did something in your past, you tried to solve some hard problem, and you learned something about the world that not a lot of people in the world know.”
–Ben Horowitz
While this is what venture capitalists talk about all the time when it comes to backing startups, there’s very few specific advice on how to know that you’re building the right team for the right market, otherwise what is known as Founder Market Fit
While there are many examples of successful founders who break the mould, there are some questions you should be asking yourself before you look to solve a problem
The SEA Factor:
While still lagging behind Silicon Valley and China, the talent pool is increasing from looking at how tech has already proven to be a better return on time when it comes to financial return, fulfilment and career branding for top tier talent, whereas in the past, the top talent stayed in banking, consulting and law. As the opportunities in the region increase, we also notice that the ‘sea turtles’ are returning and talent from big tech and the previous generation of unicorns looking to start or join an early stage startup
What you want to look out for:
Do the team members compliment each other not just in terms of skillset, but also personality? i.e you don’t want 2 business development people who are both extremely analytical and big picture thinkers working together
Do any of the team members have prior experience in the industry that you’re looking to disrupt. This is what Peter Thiel refers to when he talks about an ‘earned secret’. Is there something that you know that others don’t? If you worked on payments for Grab in Indonesia, you’ll definitely have a greater insight as compared to someone that has never done it.
Have the founders worked together before? This isn’t the same as being friends for years. What you are looking for is compatibility in work styles, and also how the other person reacts when things go wrong, which they inevitably will in a startup
If the team has a natural fit to the industry. If you’re looking to build rockets, you better have someone that can sell a dream out of nothing, and if you’re building a social network, at least one member of the team should be very clued in on the habits of teens etc
Moat
"What we're trying to find is a business that, for one reason or another -- it can be because it's the low-cost producer in some area, it can be because it has a natural franchise because of surface capabilities, it could be because of its position in the consumers' mind, it can be because of a technological advantage, or any kind of reason at all, that it has this moat around it. But we are trying to figure out what is keeping -- why is that castle still standing? And what's going to keep it standing or cause it not to be standing five, 10, 20 years from now. What are the key factors? And how permanent are they? How much do they depend on the genius of the lord in the castle?"
- Warren Buffet
Simply put, what is defensible in your business? It does not necessarily have to be something as tangible as a patent, but at the same time, you will need to be able to understand for yourself, and articulate to your investors why is it that after you have spent all that time, effort and capital in building up value in a business, it won’t instantly get eroded away by the competition once they recognise there’s value in what you’re building.
SEA Factor:
One thing unique to SEA and developing markets is a level of insider knowledge and local understanding. That’s what Jack Ma called the crocodile in the river, to Ebay’s shark in the ocean. In SEA, ironically, we have seen Shopee outflank Alibaba owned Lazada because of this.
What you need to look out for:
Network effects- Meaning, is the community that you’re building getting stronger with a new member being added. Case in point, I could build a Carousell clone tomorrow in a matter of weeks, but in this 2 sided market place, if I don’t have sellers selling a variety of products that buyers want, and ready buyers that will buy these products the sellers will sell, I do not have a thriving marketplace. At least in Singapore, Carousell has a good portion of the market buying and selling, and any new seller wanting to sell his/her used item(s), will go to Carousell, because that’s where the largest pool of buyers are. This makes it hard for a competitor to replicate because that would entail getting the users to switch, and it’s not just stealing users away one by one, but you will need to do so at scale, which makes for a uphill battle.
Economies of scale - As you get bigger, are you building up any advantages? Usually this comes with cost reduction as you are building up bargaining power with your supplier for physical goods, and this is most obvious with e-commerce companies.
High switching costs - This is more prevalent in B2B companies. When a system is entrenched in a company / industry, people are often reluctant to change the product / system because that involves a learning curve or having to ensure that the other software is compatible. Even if there might be potential cost savings, the effort and inertia is often deemed as not worth it, since the intangible costs might be many times higher. Humans are often wired to minimise loss than to maximise gains, and if it’s an industry where the potential cost is very high, like healthcare, or where they are making so much money and jeopardising that revenue is a reality, the status quo wins. Which explains why healthcare companies use the most outdated systems like fax machines and Bloomberg terminals haven’t been unseated for more than 40 years in the financial industry.
Brand - This is the most intangible factor of the lot, what does building a strong brand mean? If you ask me, I would describe it as building trust with your consumer, which evolves to loyalty. The tagline ‘Nobody got fired for buying IBM’ was so strong in the 70s that IBM dominated the enterprise market, it symbolised reliability and to purchasers, job security. Today, Apple commands a premium because it’s a brand that people trust and no amount of specs or designs it’s Android counterparts throw out is going to matter much. That’s a strong moat. However, this is something that you can aim to as a long-term vision as it’s a bit hard to pitch a brand that does not exist to investors.
Proprietary technology - Ironically, this is something very rare in the tech industry, at least at the startup phase. Even till today, Grab does not have a technology edge over Gojek, neither does Lazada have one over Shopee and same goes for the food delivery companies. If you’re going to make this your moat, the founding team should be from a strong technical background
Business Model
“The right business model creates leverage”
-Naval
Essentially, how do you make money? How do you intend to charge your customers, how much do you intend to charge? What is the process to get there?
SEA Factor:
Like in China, this is where a lot of innovation can happen. The best tech is still in SV, but where teams can win is adapting their business models for the local market
What you need to look out for:
High Margins - While companies like Amazon might serve as a counter example, most companies that succeed operate on high gross margins. This is why software companies are so attractive, the marginal cost to sell an additional product is essentially zero. And when you have high margins, you have more room for error, something you will make a lot of in your startup journey
Low CAC, high LTV - This is pretty straightforward, if you have a low cost of customer acquisition, your marketing dollars go further, and a high Lifetime Value of each customer just means you extract more dollars out of the customer, meaning you need less customers to make the same amount of money. The advantage of operating out of SEA is that your CAC will be relatively low, but at the same time, your LTV will be relatively low as well.
Short Sales Cycle - For B2B companies, this refers to the time it takes to close a customer. The general rule is that larger companies tend to have longer sales cycles as there are more stakeholders, but at the same time, the dollar value is higher. Unless you have a really compelling product that they need, generally, the sales cycle can easily take a year. Another route, is to target SMEs where you can reach the decision maker faster, and it’s a matter of building out your sales pipeline
High Cash Flow - This is the lifeline of the business and self explanatory
Positive Unit Economics - Don’t spend two dollars to make one. While tech companies used to do this, hoping to get big fast and hoping that the two dollars will become 50 cents or that the one dollar will transform into five, it’s healthier to grow sustainably, meaning that you aren’t relying on your next round of funding to survive.
Product Market Fit (PMF)
“A value hypothesis is an attempt to articulate the key assumption that underlies why a customer is likely to use your product. Identifying a compelling value hypothesis is what I call finding product/market fit. A value hypothesis identifies the features you need to build, the audience that’s likely to care, and the business model required to entice a customer to buy your product. Companies often go through many iterations before they find product/market fit, if they ever do.” “When a great team meets a lousy market, market wins. When a lousy team meets a great market, market wins. When a great team meets a great market, something special happens.” “If you address a market that really wants your product — if the dogs are eating the dog food — then you can screw up almost everything in the company and you will succeed. Conversely, if you’re really good at execution but the dogs don’t want to eat the dog food, you have no chance of winning.”
-Andy Rachleff
What you should look out for:
Retention - While this varies from industry to industry, and product to product, you want to benchmark this metric and understand what are the targets to hit to know whether you’re getting to PMF or not
High growth rate - Again, depending on the product and industry, you want to be at a point where you’re growing organically quickly. Paul Graham gives a benchmark at 5-7% week on week
Willingness to pay - If you’re not building some sort of UGC platform, you probably want to test if your users are willing to be customers, and profitable ones at that. Even Facebook was making money from ads early on and only raised money to grow faster
Organic Growth - If your users are coming to you through word of mouth, that’s a good sign that you’ve made other users happy enough for them to recommend your product
Short Sales Cycles - More for B2B but if your customers are knocking at your door, that probably is a good sign that they need your product
The feeling that you’ve hit it :)
“You can always feel when product/market fit isn’t happening. The customers aren’t quite getting value out of the product, word of mouth isn’t spreading, usage isn’t growing that fast, press reviews are kind of ‘blah’, the sales cycle takes too long, and lots of deals never close. And you can always feel product/market fit when it’s happening. The customers are buying the product just as fast as you can make it — or usage is growing just as fast as you can add more servers. Money from customers is piling up in your company checking account. You’re hiring sales and customer support staff as fast as you can. Reporters are calling because they’ve heard about your hot new thing and they want to talk to you about it. You start getting entrepreneur of the year awards from Harvard Business School. Investment bankers are staking out your house. You could eat free for a year at Buck’s.”
-Marc Andreessen
In Summary:
After you’ve generated your idea, you’ll need to go deeper and evaluate the idea
The Market - Target large markets or markets that will become large.
SEA Factor - SEA is a fast growing region, and lagging behind markets in terms of development but also with a similar path, good to look at these markets as a crystal ball to the futureWhy Now? - A shift in technology, consumer behaviour or regulation
SEA Factor - A lot of infrastructure has been laid out, what wasn’t possible 10 years ago can be tried again todayDistribution - Access to your target audience at a low cost
SEA Factor - A lot more online / mobile opportunitiesTeam - Ideally people you know well and have domain expertise
SEA Factor - Talent pool is getting deeperMoat - Build a brand, have proprietary tech or strong network effects
SEA Factor - LocaliseBusiness Model - Don’t spend two dollars to make a dollar
SEA Factor - Key area of differentiation
Finally, Test for PMF:
High Retention rates
Organic growth at 5-7% week on week
If at the end of the day, you don’t find an idea, keep on trying, be honest about the evaluation and keep on iterating to find PMF, but change your value proposition and not just incrementally add features :)
Thanks to Jeng Yang, Hannah, Derek, David & Jeremy for early inputs!
Also, happy to chat with early stage Founders on the above
I have an interest in all things tech but with a particular interest in Social, The Creator Economy, the Metaverse, Fintech, AI and DTC. If you’re working in the space or starting something new, I’d love to chat, my email is zishuang.cheng@gmail.com
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