Evaluating Markets Before Founding
Analyzing your potential market and testing concepts with potential customers are critical steps in deciding whether you have the ingredients for a potentially successful startup.
This week I spoke to two classes of engineering college seniors with entrepreneurial ambitions. One asked if I thought the most crucial thing for founding a startup was the “idea.” That question took my mind in several different directions. Because I am not an inventor, I often do not have a well-formed idea when I begin to work to start a company. The power of the unmet need is likely more important than the initial concept of how to solve it. The VC maxim that they would prefer an A-Team with a B-idea because execution is such a big part of the puzzle of startup success.
Yet, today I want to tell the story of the pre-founding of Accuri Cytometers, my most successful startup to date. I want to tell this story because it illustrates some of the market analysis that is critical when considering whether to found a company – and what the founding unmet need plus product concept should be. This process is one of the reasons that my rule of thumb is that it takes many months to get ready for a startup and that, initially, looks can be deceiving. Hopefully, this story can illustrate some of the pitfalls and thought processes that my technical co-founder and I went through before we landed on a good “idea.”
Concept #1: Detection and management of biocontamination of metalworking fluids
My future co-founder and I were interested in starting a business together, so we started hunting for a business concept that made sense. Since we lived near Ann Arbor, we approached the University of Michigan Technology Transfer Office (now known as Innovation Partnerships) to see what ideas there were. We connected with several inventors before we found a mechanical engineering professor who had been funded by all of the Big Three automakers and United Auto Workers Union (UAW) to develop a technology that detected biocontamination of metalworking fluids. My first impression was positive. It must be an essential problem to solve if it attracted funding from such high-profile sources.
So we set out to validate the market opportunity. We reached out to those who might be our future customers, specifically tier 2 and tier 3 auto suppliers who did metalworking. We did approximately ten interviews before we reached a surprising conclusion. What we found was that the potential customers fell into two groups. The first group had been sued over this issue – and, as a result, they had installed scrubbers that would keep their metalworking fluids clean. They did not need a $10K instrument that would detect biocontamination because they had already invested a bunch of money in a solution to prevent biocontamination. The second group had already solved this problem in a different, cost-effective way. They used “human detectors of biocontamination.” Specifically, they told us that they knew it was time to use another $500 barrel of metalworking fluid when the metalworkers’ arms became red and inflamed from the biocontamination. Now before you get frustrated with me, dear reader, please note that I do not approve of using human beings as detectors. Nonetheless, as we were doing these interviews, it was essential to listen carefully to those we would potentially be targeting as customers for a new $10K tool and to realize that it would make little sense to them to invest that much money when they did not feel they had an unmet need.
When we reviewed the potential for concept #1, we realized that there was no perceived unmet need for our product concept. And we realized that the funding the professor had received from these big players in the auto industry was primarily a way of politically handling a touchy subject rather than something our potential customers were willing to invest in actually deploying. Conclusion: We needed to move on and find a better business concept.
Concept #2: Water testing
Next, we looked at the water testing market. After we did some preliminary examination of the technical feasibility, we started learning about municipal water supply testing. The technology in question could conceivably be deployed to detect other interesting types of contamination in water supplies. As we quickly discovered, many small municipal water supply organizations consist of a few people. These organizations must meet U.S. Environmental Protection Agency (EPA) standards and regulations for water testing. While there is a need for significant testing of water supplies, standardized testing requirements and tests already exist. Therefore, we realized it was unlikely that these small, regulated organizations would invest in a $10K tool that would enable them to do testing that was not required by the EPA. We also contemplated whether our tool could test other contaminants that could not currently be tested for and become a required device. However, that process would be long, arduous, costly, and uncertain. Neither factor was a good recipe for a startup!
Concept #3: Life science research tool
Finally, we got lucky that one of the Innovation Partnership coaches’ had a Ph.D. in microbiology and was married to an immunologist. He knew from his own experience as a scientist that the available life science research flow cytometers were too expensive and complicated for individual research labs and that this caused many pain points, especially for immunologists. After we quickly assessed the feasibility of converting the technology into a low-cost, high-performance flow cytometer for an individual lab, we suggested that we interview his wife and get her perspective on the idea we had. When we met with her and described the concept, her response was both immediate and dramatic:
“I don’t believe you!” (Interpretation: no one else has solved this problem yet)
“When can I have one?” (Interpretation: I want to buy this solution)
We replicated that conversation with dozens of others in the field who, while less dramatic in their phrasing, were all eager to get their hands on the life science research tool we envisioned. We figured out a proxy for determining the number of labs that might buy our instrument to determine if we had an addressable market of at least $500M-$1B. The market size and the shape of a positive response were evident – and proved to be the foundation of a successful startup company and a business that is still making customers happy more than a decade later. Hopefully, these examples help illustrate the kinds of thinking and market testing you should do before committing to a startup. Do not assume that just because an idea has successfully attracted grant funding it can provide a strong startup foundation. Get out there and test your concept with potential customers, make sure you have a powerful unmet need, and make sure you consider the inherent structure of your target customers’ industry as you think about whether your mousetrap is going to attract and catch a sufficient number of mice.
