4 Signs You're In a Great Start-Up Neighborhood - and 5 Signs You're in a Bad One

I posted yesterday about the sale of Hot Potato to Facebook and why this represented a victory of sorts.

I also mentioned that I thought they were able to get a relatively high 'talent' multiple in part because of the NEIGHBORHOOD they were in as a start-up.

Neighborhood is a really critical concept to consider as a founder - here are some further thoughts on it...

‘Neighborhood’ is a handy metaphor roughly equating to ‘market.’ Not in a Porter’s 5 Forces kind of a way - but more casually - are you in a market that has enough heat to tangibly increase your odds of success?

Here are 4 signs you’re in a good neighborhood:

1. New Entrant Volume. There are lots and lots of new entrants popping up and everyone is getting some degree of traction, even the suckers. (social gaming?)

2. New Entrant Diversity. The crop of new entrants is multi-faceted – there are multiple levels of vending around the opportunity and the market just might spawn a whole new ‘industry.’ (mobile advertising)

3. Media Love. The market is emerging as a press-driven ‘movement.’ (social commerce/deal space)

4. Big Incumbent Anxiety. You see big companies making ‘strategic investments,’ developing copy-cat solutions, and kicking tires. (social mobile/location - read that link!)

And 5 signs you’re in a bad one (aside from these hooligans):

1. New Entrant Suffering. Not a big healthy crop -  competitors are going out of business, or there's lots of carnage from previous attempts to solve the problem.

2. Press Sucks. The press for you or your competitors is sporadic and dispassionate or skeptical.

3. No Funding. Not a lot of professional investment money is flowing into the space.

4. No Acquirers. You can't think of at least 3 obvious & viable acquirers.

5. It’s Hard and Never Gets Easier. Every effort seems manual & outcomes are ruthlessly linear to the effort put in.

The disadvantages of being in a bad ‘hood, aside from life just being harder, include that when you run out of gas – you just go out of business. No ‘talent’ sale for you matey!

The advantages of being in a good ‘hood are MANY –a whole 'nother post! - but they somewhat boil down to the fact that your margin of error is much wider and luck is generally on your side. (Vinnie, want to weigh in with the PR windfall of being in the social commerce space?)

One advantage specifically worth mentioning (and reflecting on as a founder), is the one that I think Hot Potato's Justin Shaffer ultimately fell back on – which is that in a good ‘hood, you develop a hedge on your personal time investment in the form of relevant expertise.

In other words - if your start-up doesn’t take off – not only do you have hopes of a talent sale - but you can also put your neighborhood knowledge to work within a brand-name company that will pay you well for it. Or maybe take a more informed start-up pass at the same market.

In either case, our time is our core asset as entrepreneurs – it’s what we bet with and what we want ROI on - so it’s good to hedge against time-risk by ensuring that your experiences are inherently accretive, regardless of the outcome of your current venture. It took me a couple of runs to understand this.