Can vs. Should

Questions to ask before turning ideas into businesses

Happy Thursday, 👋

Working and investing in startups gives us a front-row seat to many unique ideas and emerging businesses. Through this, we often catch glimpses of the future, based on what companies are building today. While ideas have the potential to become the foundation of great companies, not every idea is destined to be a viable business.

Several years ago, psychologist Samuel West launched the Museum of Failure, a traveling exhibit showcasing notable product and idea failures. The exhibit serves as a powerful reminder that even the largest companies may not always get it right. Many of these failures highlight how an initial surge in customer demand does not always translate into long-term business success. Just because something can be built is not an indication it should be built.

Can vs. Should

Ideas can be risky. The temptation to build a business around an idea is strong, but it’s crucial to consider whether building the business is the best option. In the movie Jurassic Park, the plot revolves around creating a theme park where visitors can see live dinosaurs revived from ancient DNA. Dr. Malcolm, one of the characters, tries to raise a point of concern by stating that the “scientists were so preoccupied with whether they could, they didn’t stop to think if they should.” As we see in the movie, just because scientists could bring back dinosaurs did not imply it was an ideal business. While most startups are not this extreme, founders and teams should always ask themselves whether their business idea is something they should pursue, not just something they can pursue.

This distinction between "can" and "should" becomes even more challenging when a founder experiences initial success or positive feedback. When conducting market research, founders often ask friends and family if they would be interested in purchasing a potential product or service. The response is usually encouraging because these are the people who know the founder personally and understand the potential value. However, challenges often arise once the business moves beyond these initial customers and starts to scale. It’s this point where founders may discover whether their idea is something they should have pursued or merely something they could pursue.

Consider a high school student who starts a babysitting business. The neighbors who know and trust this student might be willing to hire them. However, scaling this business beyond the neighborhood becomes difficult because the broader market does not share that personal relationship. While the initial idea gained traction, scaling it poses significant challenges. Yes, the business can exist and generate income for the student, but expecting it to grow at the same rate as in the first year would be unrealistic.

Evaluating an idea from a "can vs. should" perspective is essential when deciding whether to launch a business. Just because something can be done, like creating a park full of live dinosaurs, does not mean it should be done. Similarly, teams need to consider the scalability of a business. Some ideas, like babysitting, make for great small businesses but are difficult to scale beyond a neighborhood.

Value Creation vs. Value Extraction

Another crucial aspect of our investment due diligence is assessing whether a company is creating value or merely extracting value. Products or services that only extract value from customers without enhancing their overall experience may start strong but often struggle to maintain momentum as future customers question the true worth of the product or service.

Netflix started as a company that created value by mailing DVDs to customers. Over time, however, customers began to question the value of the service. Netflix was not the first company to introduce streaming video, but it recognized that it could leverage this technology to provide even greater value through convenience. For emerging companies, customer values can shift over time, and leaders must continually evaluate whether their company is creating value or just extracting value.

We look for companies whose teams are building something that can fundamentally shift the growth trajectory of an industry, businesses that should exist and have the potential to increase value across their sector. As investors, we are careful to look beyond the first few customers of a business and project forward to understand how the company will generate revenue by shifting or redefining an industry. Business ideas that create long-term value for customers are the ones that should be pursued. Conversely, if an idea only extracts value from its customers, it may not be the ideal opportunity, or it may need a different approach to become successful.

Additional Thoughts

It can be risky to ask only close friends and family for feedback on a business idea because they often agree out of a desire to be supportive. Just because you have an idea for a business does not necessarily mean there is a market need for the business. Ask the hard questions: Is this product or service creating value by solving a problem, or is it merely extracting value from a small subset of early customers?

We are not trying to dissuade anyone from starting a business. Instead, we want founders and early-stage teams to critically evaluate the market opportunities. How will the business grow beyond the first few customers? Is the idea creating value or merely extracting value?

Not every idea should become a business. Just because something can be done does not mean it should be done. The lessons from the dinosaurs of Jurassic Park and products in the Museum of Failure remind us that sometimes the best decision may be to hit pause on an idea to better understand the marketplace. Launching a new company has the potential to change industries but only if founders and teams ask themselves a few difficult questions early in the process.

Wishing everyone a great weekend,

-The Caymont Ventures Team.