How a product is born. Part 0: The idea

Before building anything, you need to decide whether it is worth building at all. That requires honesty with yourself. Especially when you like the idea so much that you would rather postpone the awkward questions.

At the start, it is easy to leave three things unresolved: whether there is a market, where the money will come from and how the business will work. Answering those questions before launch at least lets you understand the risk you are taking.

Let us go through them.

Three reasons products fail

In an early CB Insights study, 42% of respondents cited a lack of market need as a reason for closing. Among the 101 failure accounts, 29% mentioned running out of money and 23% mentioned team problems. These figures come from an analysis of companies that had shut down. They cannot be applied to all startups, and the reasons could overlap.

Start with the market. A product can have a good interface, a strong team and a clear idea. Yet people may be unwilling to pay for it. Or the problem it solves may exist on too small a scale.

Founders often imagine a bottomless market for their idea. In practice, they still have to find that market.

Assessing it is difficult. It is one of the hardest parts of starting a business. If you do not yet understand how to do it, learn before you launch.

The next reason is running out of money.

A business consumes cash before it generates income. In IT, the model may take years to become profitable. Lower initial operating costs give you more time. It helps if one or two people can get through the first stage. An eight-person team needs to be paid whether customers have arrived or are still missing.

Another point: if you do not understand the difference between operating profit and recovering your initial investment, put the launch on hold and work it out. A month or two of preparation will not, by itself, take your market away. And if that is all it takes, how large was the market in the first place?

The third reason is the team.

That category can cover many management mistakes. In my experience, some can be corrected while there is demand and cash remains. Without demand, even a successful change of personnel will leave you looking for buyers.

The idea and the hypothesis

One of the most common mistakes in entrepreneurship is treating an idea as a hypothesis. They are different things.

An idea is: “It would be great if everyone wore our hats.” It is vague, emotional and commits you to very little.

A hypothesis identifies a specific segment, problem, solution and source of revenue. “This audience currently solves this problem in this way for this amount. We can do it better, faster or more cheaply.”

If you can explain who will pay, how much, what for and why, you are thinking in useful terms. Until those answers exist, the hypothesis needs work.

Ideas are plentiful. Different people often arrive at similar ones. An investor wants to know who can execute: whether the team understands the market, the problem and a way to make money.

I explain this using a deliberately simplified ladder of value:

• idea - $1;
• implementation - $10;
• sales - $100;
• scaling - $1,000,000.

The amounts are an illustration, with no promised return. The point is that implementation, sales and scale bring increasingly difficult tasks and higher demands on the team.

Serious money comes with serious difficulties.

Customer discovery: the rules people keep overlooking

Customer development has become so fashionable that the term is losing its meaning. Everyone says they do customer discovery. Then they ask: “Would you use a product like this?”

Someone may agree out of politeness. You invited them, they want to be supportive and saying yes is easier. That is a weak basis for a launch decision.

Start with three questions:

1. What problem do you face?
2. How do you solve it today?
3. What do you dislike about that approach?

For now, you are discussing the customer's life. Your product presentation can wait.

If the problem they describe matches the one you intend to solve, good. Break it down and work out exactly where you can help.

The user journey matters too. Even a faster, better solution can be difficult to introduce if it demands a drastic change in habits. People are conservative. Preserving a familiar way of doing things while improving the outcome makes a product easier to try.

Jobs to be done: look at the product from the customer's side

After customer discovery, it helps to examine the product through Jobs to Be Done. Consider the job it performs in the customer's life.

Someone buys a drill because they need a hole in a wall. They order delivery because they want food at home in 30 minutes.

Understanding that job makes the product's value and its real competitors clearer. Some competitors will be indirect: the customer already manages somehow, even if your particular category of service does not exist yet.

A month or two spent on this analysis can save years of heading in the wrong direction. Enjoying your own idea helps you begin. After that, you need to understand why another person would want it.

Assess the market without fooling yourself

TAM, SAM and SOM describe three levels: the total market, the segment available to you and the share you could realistically capture.

The first two are usually easier because market and segment data can often be found. The third is where trouble begins.

A familiar mistake sounds like this: “The market is worth 16 trillion. If we capture 1%, we will be rich.” That arithmetic still leaves the question of why customers would choose you unanswered.

Take your segment. Identify its five largest players. Look at their shares and what remains for everyone else. Then investigate why the leaders became leaders and why other businesses operate on a smaller scale.

Suppose your calculation shows the leaders holding 70-80%, with several dozen companies sharing the rest. Study that remainder. Where is there room? Which customers are dissatisfied? How could you outperform smaller competitors? That is how a realistic estimate of the accessible segment begins. These shares are hypothetical; your niche requires its own data.

An absence of competitors needs an explanation too. You may have spotted a new need. People may also be unwilling to pay for the proposed solution. Test that possibility before you build a budget around the more exciting explanation.

Follow the dream or follow the money?

The honest answer may be uncomfortable.

If business is primarily a way for you to earn money, assess the market through the opportunities it offers. A sector's visibility and your enthusiasm for it say little about a newcomer's prospects.

As a hypothetical example, if 10% of businesses succeed in one segment and 0.1% in another, that difference deserves attention. It illustrates the decision process; actual industry shares would require separate research.

Rebar manufacturers can earn a good living even if their childhood dreams involved something else. Meanwhile, plenty of people want to make computer games. A popular subject does not automatically give a newcomer workable economics.

Choose a market using the numbers. There will still be emotion involved: you have to live with the business.

If the activity itself matters to you, income can follow from doing it well. That is an understandable motivation too. Recognising it early helps you set your expectations.

And a suggestion for younger founders: if you understand modern promotion, communication and audience engagement, look at established industries. Good marketing can help a welding business just as it helps a digital service. What matters is how well you work with the people who are prepared to buy.

Unit economics and LTV

Unit economics matters, but treating it as an end in itself is unhelpful. Customer acquisition costs change with the tool, offer, structure and channel. At the start, estimate them at least well enough to see whether the model can work at all.

LTV is the monetary value of a customer over the entire business relationship. Its duration affects that value alongside revenue and service costs. For comparison with acquisition costs, a margin-based calculation is useful. This interpretation follows the definition of customer lifetime value.

Much depends on how well you do your work. In construction, development and other complex services, how you handle problems matters too. Problems will happen. Always. Customers notice whether you walk away from them or follow through. That influences repeat purchases and the length of the relationship.

A simple check is to divide the expected margin-based customer value over the relationship by the acquisition cost. If acquisition costs exceed that value, or consume it even in an optimistic scenario, the model needs revisiting.

Test three scenarios: positive, middle and negative. If the economics works in the middle scenario, you have something to work with.

What matters

Product development starts with honest answers to three questions:

1. Is the market large enough to support the business?
2. Who will pay, and why, with a clear explanation and calculation?
3. Will the budget last until break-even?

If you have sound answers to all three, it is worth moving forward. If you do not, another month of analysis is preferable to a year spent building on untested assumptions.

The next part covers the MVP: how to test the core hypothesis at the lowest practical cost.