So you’ve quit your unsatisfying job, and you’ve made the somewhat foolhardy yet exciting decision to start your own business. You have an idea in mind. Actually you’ve spent a lot of time thinking about this idea. You’ve told your friends and family about it, and they like it. You’ve taken notes, drawn diagrams; you may have even written a business plan, or gone as far as building a prototype. You’ve become comfortable with the concept of spending the next five years of your life building, enhancing, and selling this idea. Great… you’ve taken the very first steps towards building a company. But how do you work out whether your idea has legs before you bet your hard earned savings on it? Or worse, other people’s savings?
In order to build a company that grows big and lasts, you first need to identify a real, verifiable, widespread problem with unsatisfactory solutions, or with solutions that can be dramatically improved upon. Sadly, many a company is launched based on the perceived ingenuity of a solution, without clear validation that the corresponding problem is widespread enough and pressing enough to support the business you had hoped to build. Such companies seek exposure for their solution, and a headline-hungry press happily obliges, touting the solution as a harbinger of a new trend. There is little cost for a press outlet when this new “trend” turns out to be a fad. There is a very high cost for the founders and investors.
The term “trend” has been widely misused in recent times. Turn on your cable TV (something I haven’t done for years, thank God) and you’re likely to see befuddled news anchors asking “what’s trending on social?”. By definition, this is a flagrant misuse of the term. They should be asking, “what’s fadding on social?”.
There is certainly money to be made from fads. Just look to Dominique Ansel who has made a killing from his ground breaking innovation, the Cronut. Or Robert Atkins, hero of bacon lovers and inventor of the famous fad diet which has been widely discredited, who has now sadly passed away after multiple heart attacks. There are copious examples of “frankenfoods” and dieting fads that spiked in popularity early, and then petered out. If you’d like to try your hand at making money from one of these fads, you’re brave, but you’re most likely not going to lock down any smart investors.
Your best bet is to identify a real, quantifiable market trend that you can ride to success. You’ll need to read a lot of news, blog posts, and market analysis to hone in on a true trend. However, as is the penchant of the press, you may have trouble determining which touted trends are truly trends and not fads. There is no perfect way to predict this, but here are some indicators that you can use to educate your guess:
1. It goes mainstream
A real trend appeals not only to early adopters – it also appeals to the mainstream majority. Check out this diagram from the respected book for early stage companies called Crossing The Chasm by Geoffrey A. Moore.
This diagram explains how markets are segmented, from innovators and early adopters who love trying new stuff, to the majority who need more validation before they are willing to change their ways and their loyalties. A startup typically gains traction from the far left group on this diagram, moving to the right over time. Very few startups cross the chasm to mainstream popularity.
A fad may be swiftly adopted by people who identify as Innovators or Early Adopters. You know the type… they’re the first to have the new iPhone, and they probably own multiple smart watches. They’ve tried bug bars, and they have a storage room full of novel, largely unused tech gear. They live for finding and sharing new stuff. They adopt new stuff with a gusto that often catapults this new stuff into the headlines, and creates the spike of traction that we see in so many new startups. The only problem is, they have a faulty radar when it comes to determining which of the new stuff is here to stay – i.e. which of the new stuff appeals to more folks than just them.
Most companies struggle with crossing the chasm. The root cause of this is often that the problem they are solving is just not real and widespread enough to support the jump to the mainstream majority. In other words, they associated themselves with a fad rather than a real trend. So much for that early spike.
2. It lasts
A real trend lasts years. It typically arises slowly. Its growth is sustained – it “crosses the chasm”, and then continues to grow and gain adoption from the majority. People stick to it, and abandon it at a relatively low rate.
A fad doesn’t last, and has high churn (abandonment) from the get-go. An example is Palm Pilot, which shot to popularity in the 90s. There was a period when you couldn’t have a business meeting without seeing multiple people whip out their Palm Pilot styluses and send contact details to one another via super high-tech infrared signals. Fast forward a couple of years, and the same Palm Pilots were collecting dust in office draws everywhere.
Smart investors want to put money into businesses that will grow and last. They know that they can’t expect an exit in year one or two. They expect that a business has a plan to last long enough to be acquired or go public, which almost invariably takes many years. If it appears that your business is based on a fad, you might see some investment, but it’s probably not “smart money”.
Beware of early traction spikes and hockey sticks. They look amazing in a presentation deck, but investors are used to seeing initial spikes that can’t hold their line.
3. It’s needed
A real trend is fueled by real customer needs and lifestyle changes that are happening organically throughout the majority of a market. A fad is fueled by press and hype, is based on a temporary desire rather than a need, or requires new and artificial changes to behavior. In other words, a fad is fueled by novelty. Novelty is fun, but it wears off.
An example is the buzz around bug protein in the US. The argument for bug protein sounds solid: we should get our protein from an efficient, sustainable source that doesn’t ruin the environment, and respects the lives of intelligent, sentient creatures. Makes sense. And indeed, bug protein may be humanity’s saving grace when there is a food or water crisis.
However, bug protein is missing an essential trend characteristic: It’s not needed right now. Nobody is demanding more bugs in their diet. Nobody is craving the taste of bugs, and the ingredient requires heavy masking or treatment to be palatable to the western palate. Some bug protein companies are seeing a spike in traction, maybe due to the novelty of eating bugs, and the whirlwind of food press attention. Early adopters relish in this novelty, but only temporarily. Only time will tell if bug protein will make the transition to being a real trend.
4. Multiple companies are pursuing it
Competition is validation that a problem is worth pursuing. All too often, I see pitches from founders who claim to be first movers in a new market. A well worn adage says that a startup must “be first or be better”. This is true, but only if you are being first at solving a real, quantifiable problem, in a way that appeals to a majority of people, and is genuinely better than the status quo. When we hear companies claiming first mover advantage, alarm bells ring in our head, and we look at the market they are trying to service or create. If there is no competition, and no funded, derisked companies vying for that market, then we probably won’t invest.
5. Long standing data validates it
In the world of startup investment, dreams and opinions aren’t worth the paper they’re written on. Smart investors want to see validation that there is an existing, growing market for your product or solution. The best and only way to validate a market is by gathering long standing trend data from reputable sources. Then you must convincingly show how your offering is better, cheaper, or more efficient that the offerings currently serving that market. If you find brand new data showing a huge spike in traction for an idea, or huge overnight growth of a new market, you should probably wait a few months or years before it finds its way into your investor pitch.
(This article by Joe Foxton was originally published on SOSV's blog.)