Rejecting the Null Hypothesis: Weeding Out Startup Ideas
Almost everyone thinks they have a great idea that will make them rich and (hopefully) make the world a better place. However, before taking that leap and sinking loads of time and money into your new venture, it is wise to take some time and try to “attack your idea” and see if it stands up.
In this article, I am going to walk through a recent startup idea I had and then explain why it failed this “attack” stage. I am also going to discuss other ways in which you can (and should) vet your ideas before jumping headfirst.
Here’s my story:
A few months back, I was thinking about 2 macro trends: reducing our environmental footprint and the rise of the sharing economy. An idea came to me.
I wondered if I could get people to plant trees on their property for “carbon credits” and sell them to corporations or other individuals looking for carbon offsets. This would help the property owners to earn some extra money off their land and for corporations to achieve their lofty climate pledges. The business model would be a platform to connect providers with buys, something akin to Airbnb. I thought it sounded promising. It was a solution attacking a massive market with massive amounts of potential suppliers. There was a huge unmet need. I believed in the timing given the increasing need to confront the climate crisis and the lack of highly scalable companies that could meet the challenge. In short, I believed this was a company that could both do well and do good.
This idea had me excited and passed my initial test of pitching the concept to friends. But one night I decided to do the math and figure out the economic viability of this business model. This is where things fell apart. The actual math is beyond the scope of this article, but the following is a summary of the key findings:
· In the USA where I planned to start this venture from, farmland can be rented for <$60/acre in only a handful of states. This was my baseline opportunity cost
· Next, several current carbon offset providers offered carbon offsets for amounts ranging from $10-$20 per ton
· A fully grown tree can offset only about 50 lbs. of carbon per year
· Trees take roughly 30–50 years to mature enough to get logged at a good price
· Buying saplings cost about $1/tree if you buy in bulk.
The result: No profits to be made in the current environment. The price of carbon offsets is simply too low and the opportunity cost of simply renting your land out to a farmer is too high for the model to work.
So, I went back to the drawing board and began searching for my next idea.
This critical evaluation of your idea should be a key step in your development process. No matter how good the idea sounds in your head, if there is a weakness, it is best to discover it early.
In some scenarios, it could be hard to calculate unit economics at the idea stage. So, let's discuss some more ways you could try to vet your idea without spending any money.
Ways to attack your startup idea:
· Unit economics: Do the math. Build a model and see if you will make money under good conditions. Now try average conditions and bad conditions and see what happens. Even if it's just back of the napkin math, that is enormously helpful.
· Talk to people: Try to be as neutral as possible and encourage them to be objective. Remind them that their honesty can save you tons of time in the end. Remember that everyone has their own perspective and that their lack of emotional attachment to your idea is an asset. Ask questions like “what pitfalls do you see?” or “What do you see that I might not?”
· Think critically: In statistics, many tests use the concept of rejecting the null hypothesis. Try that here. Think up any reason you can for why your idea could fail. Write them down and do some investigating on each reason. If you can confidently reject each null hypothesis, you might be onto something.
If your startup idea passes all these tests, congratulations, you are ready to begin work on the product!