Is Your Startup Idea Too Risky? A Story about 0 to Millions
3 ways to know if you’re taking on too much risk
0 to Millions
Jaclyn was riding a Megabus shuttle from Boston to New York when a nagging idea kept her awake in an otherwise boring afternoon. Somewhere in between every stop-and-go in midst of a traffic jam that seemed to stretch forever, she couldn’t help but wonder if 2018, in all its entrepreneurial glory, had only smelly buses to offer. “Where is the Uber for long distance traveling? I bet someone would share a ride with me for $40 instead of this crap,” she repeated to herself.
Jaclyn had come from a finance background. Over the course of the last 6 months, as she sat through countless meetings on the same old same old, a dull sense of entrapment slowly ate at her. It was as if she could see her whole life flash before her but in a dreadful way. For someone who, since little, has aspired to do something hands-on that could reach millions of people, she couldn’t connect the dots between what she was doing and where her passions lied. She had wondered about tech startups, at the Zuckerberg styled gold-rush that would allow her a chance to chase her ambitions. But the comfort of a $250K/year private equity offer in the drawer kept those thoughts at bay, only to be resurfaced strangely on occasions like today. Maybe, just maybe, if there’s a will, there’s a way.
At the Boston South Station Terminal, there were 4 shuttle companies loading 50 people a shuttle, every hour and around the clock. Between just Boston and New York, Jacklyn figured that there are roughly 50 x 24 x 4 x 7 x 52 or 1.7M travelers a year. At $40 average ticket price, these folks spend $68MM a year, not counting other modes of transportation like trains and planes that could also be part of the equation. $68MM between Boston and New York alone, she thought. Lucrative, maybe. Expanding to 50 other routes and taking a 5% market would translate to $170MM a year. Demand and addressable market size: check and large enough.
At such a market size, why aren’t people car-pooling? Well, strictly speaking, that’s not true; they are in fact riding, 24/7 actually — just in private cars with friends and family. What would it take for someone to offer their car and do 800 miles round trip with 8 strangers? $500? Let’s find out. For the next 3 months, on her Uber trips home, Jacklyn would occasionally ask if the driver would be down for her idea. To her surprise, in addition to pleasant conversation, she quickly learned that some are happy to do it for $450 a day, few even willing to go for $200 one way just for the experience of doing a road-trip with new folks and visiting NYC. Supply-side market validation (discussed later): check.
Working 80 hours during the week and then some on her startup idea wasn’t easy. Not much went on until she had shared the idea casually with a consultant friend Helen and decided to join forces - Jaclyn 60%, Helen 40% equity (covering startup equity later). On weekends, they devised a plan to find interested riders, in the easiest and most cost effective manner — standing outside for 3 hours in front of the South Boston Bus Terminal with two posters that stated “$40 car-pooling to NYC in Toyota Highlander.” 15 people came forward. Of course, they didn’t actually do the driving right then and there. But another similar result at Penn State NYC gave them enough confidence to try it. Demand-side market validation: check.
Over the next year, Jaclyn and Helen started off with 2 of their own cars, carrying 4 passengers for 6 trips on a weekend. They then found 10 Uber drivers who were happy to do it as long as the two provided logistics support. Revenue grew to $8k a week when Excel spreadsheets became too cumbersome for keep track. They started scaling using a variety of softwares online and when customers became repeat users, they hired a freelanced app engineer from Upwork to build a simple app. Revenue grew to $25k a week. Before Christmas, a wealthy friend from Jaclyn’s network caught a wind of what they were doing and offered a $1.5MM convertible note at a 15% discount (more on this later). Jaclyn and Helen decided to quit her job and take on the work full time, hiring a logistic manager and 3 full time developers at $100k salary each. By year 2, revenues grew 5% week over week to $110k a week and so the legend goes. In 6 years, the company was bought for $312MM in.
Validation, market sizing, and reliable partners
I created the above 100% fictitious story to serve as an illustration for the next few parts. Albeit fake, factors that made Jacklyn successful are not far fetched, if not typical of other run-away tech “unicorns.” Either you’ve made it this far because Jaclyn’s story eerily resembles an idea you’ve been ruminating on or it was worthy enough for 5 minutes of your time, I promise to stop here and pick up again next week on the 3 essentials in Jacklyn’s story that I tell young entrepreneurs — validation, market size, and team. Missing any one of these, you are taking on pure risk rather than calculated risk.
