New Ideas Need Two Documents
It’s intoxicating to have an idea for a new business that could meet an unmet need and revolutionise a market or industry. Unfortunately this feeling often sees first-time founders focus on writing a business plan and trying to protecting the idea, both of which, at the stage of early ideation, are a waste of time. Business plans ask questions that at best are answered with guesses and as far as protecting intellectual property is concerned, the novel parts of technology usually become evident are a series of prototypes have been built.
In any case, all businesses require a plan but new ideas require validation.
I subscribe to the philosophy that there’s no such thing as a new idea. This reminds me to hunt for precedents and insight from those who have tried to blaze a similar trail. And they’re there. If you claim that no-one has ever had or tried to capitalise on your idea, you haven’t Google’d enough.
Validating an idea begins with testing one or a number of hypothesis. A hypothesis is a proposed explanation for a phenomenon. In AirShr’s case our primary hypothesis was ‘People care enough about radio to press a button to remember it’. And as you think through how to methodically test to validate or invalidate each hypothesis, it’s very likely you’ll also be thinking about how to commercialise the idea. There are two opposing views on this topic. The first is that there’s little point in thinking about a future until the primary hypothesis is validated. The second view is that thinking through the factors that will make an idea generate revenue in the shortest possible time is useful and may even help in the validation process. I live in the latter camp and the best way to quickly organise and articulate these factors is by using a business model canvas. This is the first document and it should evolve very regularly.
If you’re working with others to validate a new idea, they are likely to become your co-founders. It’s important to be aware of the practical risks of working together (often on nights and weekends) at this early stage. Your idea might become the next Google but what’s more likely to play out is initial excitement in the idea will wane or a co-founder’s circumstances will change or a dispute will arise. Online legal document platforms and lawyers can readily provide comprehensive long-form shareholder agreements which are important as an idea evolves to a venture. However these agreements often remain silent or require costly customisation to address each practical risk. So the second document for new ideas is a short-form shareholder agreement that is easy to understand and can be entered into by the founders. Here is a link to the short-form agreement we used at AirShr which became the basis for how we interacted in the early days. And as it turned out, one of the AirShr founders did request to discontinue their operational involvement and we used the terms of this agreement to successfully manage the transition.
Also, special thanks to Stephane Chatonsky, my venture capital professor at business school, for advising the AirShr team on how to make this important document fit for purpose. His expertise was incredibly valuable.
In closing, both documents are designed to help add the right amount of structure at the early stage of validating a new idea. They are not the only versions of these documents out there but these are tried and tested.