Dharmesh Shah presents a three-factor framework for evaluating startup ideas: potential (possible revenue or impact), probability (realistic odds of success), and proximity (how well it matches your skills and passion). Weight these factors based on your risk tolerance and career stage.
Chapters
Do you have a framework for picking ideas? And the answer is yes, I do. Despite the fact that ideas are qualitative and there are so many factors that go into them and it can't really be a perfect science, it doesn't stop me from trying to analyze them. And so I do have a simple framework, and here's how it goes. The first thing I look at is the potential of the idea. How big could it be? So if all the stars align, things kind of go your way, and you kind of get to the thing that you want to get to, how big could that thing be? And you can measure it in any number of ways. If you're working on a for-profit, it can be, you know, revenue or market cap or something like that. Or if it's a nonprofit, the overall impact that you're going to have. But some sense of the overall potential. And what's the magnitude of the idea overall? So that's thing number 1. Thing number 2 is you need to look at the probability of that particular outcome to say, yes, this thing could be a billion-dollar company, but the probability of that is actually relatively small. It could be a 1% chance of achieving that potential. So that's thing number 2. Now, before we go further, I think it's important to note a mistake a lot of entrepreneurs make is they look at the probability of an idea before they look at anything else. And if the probability is too low, they kind of dismiss the idea out of hand. It's like, oh, if I only have a 1% chance at achieving this thing, I'm not going to do it. And I think that's a, that's a mistake that certainly, you know, based on your kind of risk tolerance and what you're looking to do, that probability of success is super important. But It's not the only thing. So, for instance, if you had a 10% chance at building a billion-dollar business, the expected value of that opportunity would be $100 million. It's 10% of a billion. Another company is like, okay, well, I've got a 50/50 chance at building a $100 million business, which is still significant. The expected value of that is 50% of $100 million, which is $50 million. And if you had a 90% chance at building a $10 million company, let's say, the expected value there is $9 million. Now, obviously, the expected value in and of itself is not the kind of final decider. And we're taking kind of rough guesses here. But the thing to kind of recognize is that just because an idea is kind of hard to achieve, just because the probability is low, doesn't necessarily mean that it's an idea you shouldn't pursue. You should balance that kind of probability and the overall potential of the idea. And then there's the third factor. So it's not just about the probability, not just about the potential. The third one is what I think of as proximity. And it can be, is the idea kind of close to your heart? Is it something you're passionate about, something you enjoy? Or you could also think of proximity as, is it close to your area of expertise, as something you know about. So it either has to be something you know about, you're really kind of close to, or something you want to know about, you're passionate about it, you want to dig in. It has to be something that, um, that you're going to get some joy and, uh, and fulfillment out of. So those are the 3 things, right? So you look at the potential of the idea, the probability of its success and achieving its potential, and to what degree is it, uh, proximate, um, to to what you know and what you care about. And you put those 3 factors together and you can weight them different ways in terms of if you want to come up with an actual kind of calculation. But the, but the math is not the important part here. The important part is actually recognizing that all 3 of those things are, are relatively important and you want a mix of those things based on your circumstances. So maybe if you're a first-time entrepreneur, you don't look for the kind of $10 billion outcome with just a 1% chance. But maybe if you're early in your career, you still have some risk tolerance and maybe you don't do the, oh, I've got a 90% chance of succeeding at, you know, building a $10 million business. Maybe, maybe this is the time to go ahead and take some risks. So anyway, that's how I think about ideas. That's my simple framework. Hopefully that was helpful.
