This Rule Determines Whether Your Startup Will Sink Or Swim

Tuesday, June 26, 2018

  By Eddie Yoon, founder at Eddie Would Grow

In short:

  • You can avoid classic startup failure by proving demand for your product before launching in a specific niche.
  • To do this, use the 20/20/20 Rule, which asks three questions about your startup’s target demographic, timeline and geographic market.
  • Nestlé used the 20/20/20 Rule perfectly to confirm that a new product, Mexican-inspired Nerds candy, would succeed in the U.S. market.

Startups are often reincarnated a few times before they hit their stride. Take consulting firm Avondale for example: After two big-name clients failed to come through as expected, Avondale’s founders were forced to swallow their pride and restructure their business just as it was starting to grow. They made tough financial decisions and dreamed up a new workflow from scratch. It was both a painful and life-saving process, as they wrote in a 2013 Inc. article.

Hitting the reset button like this is always costly, whether in terms of time, opportunity, capital or cash flow.

Avoid a costly do-over by confirming the demand for your product or service -- and clarifying what that demand looks like -- before you start.

The ability to prove demand for your product is the gift that keeps on giving. It’s a powerful tool when you are asking investors for more money, time or patience. It can give new life and energy to your team. And frankly, it can help convince skeptical customers to take a chance on you. After nearly two decades of studying demand and business growth, my observation is:

Most folks ask the wrong question the wrong way.

When founders try to prove demand for their new business, they usually try to guess the exact number of people who will need or use their new product. This is nearly impossible. To make things easier, they should play the “over/under” game, guessing above or below a certain number so they have a 50-50 chance of being right. Also, they should stop asking "will this business outcome truly happen?" and start asking, "what would need to be true for this to happen?”


Use the 20/20/20 Rule.

I have a simple rule of thumb I call the 20/20/20 Rule to see if your idea for innovation or startup has staying power. The rule asks:

  • What must be true for 20 percent of the population to have the unmet need that my business addresses?
  • Does my business have a 20-year trajectory?
  • Is this business trend growing faster in the top 20 cities or local markets for my category?

For an example of the 20/20/20 Rule, look to Nerds candy.

Nestlé USA's confection team used the 20/20/20 Rule to create a new product concept in just three weeks (vs. the typical three or four months) and launch in nine months (vs. the two-years-or-more norm in consumer packaged goods). They did this with a legacy brand, Nerds, which had deep consumer love but lukewarm revenue growth.

Marketing Director Daniela Simpson and her team saw that Hispanics had a clearer affection for fruit-flavored candies like Nerds than chocolate. Her team also recognized that the fruity category did not have any true Latino brands or flavor profiles.

But was this enough to make a big bet? They used the 20/20/20 Rule to find out.

  • What must be true for 20 percent of the population to have the unmet need that my business addresses? It was clear to Simpson’s team that while Hispanics are only 18 percent of the population today, they are on their way to accounting for more than 20 percent.
  • Does my business have a 20-year trajectory? Simpson’s team also saw that the love affair with Latino brands and flavor profiles was a 20-year up-trend in other categories. In the beer market, brands like Dos Equis and Modelo have been surging. In other aisles, tortillas have overtaken white bread and salsa has overtaken ketchup.
  • Is this business trend growing faster in the top 20 cities or local markets for my category? Finally, the team saw that more than half of the U.S.’s biggest cities were already majority-minority, meaning that Latinos were the majority of the population. In fact, these majority-minority markets already account for 45 percent of the U.S. GDP.

Simpson’s concept passed the 20/20/20 Rule test. So her team launched Nerds Lucha Grande, a box of the iconic candy in four new, Latino-inspired flavors: guava, pineapple, lime and mango chile. At the 2017 Sweets and Snacks Convention (the largest confections and snacks industry event in the U.S.), the candy beat out more than 300 other new products to win “most innovative new product.”

Last year, Nestlé USA debuted a suite of new candies with Mexican-inspired flavors. (Credit: Nestlé USA)

You might say that the importance of Latinos isn't new news. And that is the point. If a concept seems truly new and groundbreaking, then it probably doesn't pass the 20/20/20 Rule. Trends that are NOT new have probably not yet fully run their course, which means there is still lots of opportunity, and you should strike.

The 20/20/20 Rule is easy to apply across industries. Take beer, for example.

Craft beer already has 20 percent dollar share and is a 20-year-long trend. Its presence is growing much more quickly in some cities than others. If we’re abiding by the 20/20/20 Rule, then the time is ripe to invest.

Or Netflix.

When Netflix was at its absolute lowest point in 2011 -- after the price hike and Qwikster debacle -- I wrote with confidence that Netflix's best years were ahead because the conversion to streaming is a 20-year trend. Airbnb, Blue Apron, Apple’s iTunes, and Lyft are all part of an unbundling movement that has been going on for decades.

Here’s another way to look at it. If you have young children, as I do, then ask yourself: What are the activities they will and will not be doing when they are adults?

My children will never know how to make a full pot of coffee thanks to Keurig and Nespresso, but they will always be able to binge TV thanks to Netflix. They may very well never own a car or even drive one. And they may grow up believing that Nerds was always a Latino brand.

The 20/20/20 Rule is a great way to find trends you can bet on with confidence.

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