At Urban Us, one of the first question we ask when we evaluate new startups is “How will your idea make cities better?” Interpretations of what it means to make cities better may vary, but in order to align resources to your cause, it is critical that your startup has a clear benefit to multiple city stakeholders. Whether the distribution channel for your solutions is government, businesses, or consumers, a successful urbantech startup will ideally serve cities, citizens, and the environment.

Our next question is, “Can you grow to 100 cities in five years?” It’s unlikely you’ll know exactly how this will happen, but the goal is to determine whether the problem your startup is solving exists for people or organizations across multiple cities. This will also help you answer a question you will get from prospective investors and teammates: How big is the market?

“Cellular phones will absolutely not replace local wire systems.”

– Marty Cooper, credited with inventing the cell phone at Motorola in 1981

Predicting scale is never easy

So why bother figuring this out early? Because, for many investors and employees, the potential size of an opportunity is an important measure of whether it will be worth spending time to learn more about the idea and, eventually, to invest. They know startups are hard in both large and small markets, so why not focus on the biggest opportunities?

Next, we ask, “How easily might this idea be replicated?” Some ideas become more difficult to copy as they grow, but in general, as your startup grows, more competition is likely to appear. Brand awareness, economies of scale, and high switching costs might slow down competitors, but it also helps to get a head start. If you’re working on an obvious problem, there are likely others working on solutions, too. And even if you’re working on a problem that is not asobvious, or in a “boring” market (as many urbantech startups tend to do), others will become interested in replicating any success you build over time.

Competition won’t just come from incumbents and other startups. Your potential customers might be tempted to keep doing what they’ve been doing, including nothing. Some may decide to build their own solutions.

You can’t depend on old adages like “hardware is hard” to protect your idea. Hardware is becoming less hard thanks to easier access to regions rich with manufacturing resources and better distribution of best practices. Most advantages in software and UX/UI are replicable, and though machine learning may give you an edge, algorithms are quickly becoming commoditized. Networks and industry insights are easier than ever to access and build.

What’s really hard to replicate are unique insights, proprietary datasets, distribution and brand. Whether your customers are consumers, businesses, or cities, we’re seeing winners break out by delivering on promises and exceeding expectations. Understanding your customer, being responsive, and shipping a great product remains rare but justly rewarded.

We also ask, “Why do you want to work on this idea?” Or, to put it another way, why do you want to make cities better? All startups are hard, but urbantech startups often include additional challenges. Your answer to this question will impact many things, including what support you can expect from advisors, what types of people will want to join your team, and even how you interact with regulators. Too often we see founders enamored with a piece of technology instead of focusing on the problem they hope to solve. We prefer the latter group.

A note on demos:

Some customers need to experience a product to be convinced of the product’s value. They need to test-drive it or see ratings or reviews from people they know. This is why great demos and prototypes can be so critical. They may not answer questions about how a product or experience will be delivered at scale, but before you worry about how to serve an entire market, it’s important to verify that someone wants what you’re making.

For business and government customers, the problem you’re working on is often one they’ve been living with and understand very well. If you are able to demonstrate how you can deliver a faster, better, or cheaper solution, they’ll be able to give you a sense of their interest. Ideally, they’ll demand to be first in line to buy it when it’s available!

All great startups make something people love, but we believe the best startups also do something else: They create public benefits. We’re always interested in understanding how urbantech startups might generate these benefits, and we think they are well-positioned to do so because so many problems in cities are a consequence of old technologies.

Old technologies helped cities scale to deliver the opportunities we see today, but many are no longer up to the task of delivering what we need. We need more benefits without all of the negative consequences, like electricity without global warming or rapid, comfortable mobility without risk of injury.

Can your startup help reduce greenhouse gas emissions? Cities are already responsible for 70 percent of emissions, and that number is expected to grow as city populations continue to grow around the globe. As this very detailed chart on energy use in the U.S. shows, a lot of energy-intensive activities relate to city life.

Density is what draws people to cities. It creates opportunity, but it also comes with downsides such as traffic, crime, and poor air quality. Startups are positioned to help provide public benefits in these areas.

Investors often ask if it’s possible to provide great investor returns while also creating public benefits. Some believe if the public is benefiting for “free” then the business is not using the right business model or charging correctly for its product. This is not what we’ve found.

Public benefits can help in recruiting the best talent and customers while helping to win over regulators to your cause. For example, the most talented engineers know they will be paid well no matter where they work, but there are fewer opportunities for them to work on something that also has a positive public impact. Later, we’ll discuss other stakeholders, such as advisors and regulators, and explain why public benefits matter to these people, too.

Most importantly, when you create public benefits, you make your team stronger. Most startups will face existential challenges, and we’ve found that a focus on public benefits can keep teams motivated in ways that money alone does not do.

Early on, your main goal is to figure out if you have a business. In simple terms, this means you eventually need to figure out how to have less cash going out than you have coming in. As consumers, we’re exposed to a wide variety of strategies for viable business. Think about all the ways you can access cars, such as buying, leasing, financing, renting, sharing, or hailing. In some cases we pay for products as we consume them, as with food, gas, or haircuts. We also pay monthly subscriptions to access services such as mobile networks, music libraries, or insurance.

The transaction-focused business is quite easy to model. There is the cost to provide the product or service and there is the cost to acquire customers (and often also to provide support to make sure they’re having a great experience). You can determine whether the business makes sense if your customers pay you more than what it costs you to make the product or deliver the service.

Subscriptions are a bit more complex, as there are more questions to answer. Will an annual subscription cover all of your costs? How many months would it take until you begin to receive more cash than you’ve paid out to provide the service and acquire the customer?

We also need a different type of analysis to estimate the value of customers overtime. Lifetime value (LTV) refers to how much you expect customers to spend with you in total. If they are subscribers, you can think about this as the number of months that they are customers multiplied by the price of the monthly subscription. If you sell a product, you might think about how many times they might upgrade to new products.

Your ability to make money depends on understanding not just how much you will make but also when cash will flow in and out of your business. Simple models can help you think through different sales, marketing, and pricing strategies and also reveal the costs of unhappy customers. David Skok of Matrix Partners offers many great benchmarks and metrics to understand the dynamics of cash flows for software-as-a-service (SaaS), and those benchmarks are broadly useful for businesses of all types to think about.

Hardware startups scare many investors. Hardware adds additional risk dimensions, including suppliers, manufacturers, and distributors. Hardware also tends to require more equity capital because early-stage startups are too risky to work with traditional lenders to help fund initial production.

A good amount of hardware risk comes from failing to understand how business models can change when hardware is connected to the internet. Connected hardware unlocks new customer relationships and proprietary data, as well as actuators, consumables, and services. Put another way, it presents opportunities to increase the lifetime value of customers.

Tesla redefined the relationship between car owners and manufacturers. Before Telsa, you had to drive into a dealership so they could learn about your car. For Tesla, connecting their cars over the internet means they can update software to improve performance and add features. It also means they can provide better levels of support because they can see problems before customers can. And it means they can learn from all of their customers by collecting proprietary data to train algorithms.

Proprietary data is at the heart of many successful AI applications. Some of this data comes from humans, but a growing portion of it comes from sensors embedded in things ranging from cars to irrigation systems. Hardware, specifically sensors, can play an essential role in unlocking the data to drive new algorithms.

Hardware can also enable mini retail outlets. Much like ink for printers or water filters for refrigerators, connected hardware doesn’t just allow direct interaction with customers; it also facilitates ongoing revenue from consumables — the things that are used up in delivering the service provided by hardware.

Finally, as noted, hardware can unlock new types of services. Rather than waiting for something to go wrong, professionals can be notified to inspect or replace parts and avoid service interruptions and potential for additional costs.

In 1884 P. T. Barnum led 21 elephants over the Brooklyn Bridge to prove that it was stable. Today, in the face of doubt about new technology, we might create a live stream of PT Barnum’s elephants. Risking life and limb on a cable supported bridge would be deserving of a Red Bull sponsorship! It’s a useful reminder of the constant need to show what is possible long after we might be comfortable with the idea.

There is a lot of existing guidance on understanding and finding consumers and business customers, which we won’t repeat here. One thing we will note is that your messaging about public benefits is something that must be tested. We often meet founders who assume that people care a lot about public benefits such as emissions reduction. While many consumers do care, that doesn’t mean those benefits will be their motivating factor in buying from you.

We’ve found that customers are motivated by comfort, savings, fun, and many other factors. Public benefits may be a very pleasant afterthought for them, and that’s not a problem. Whatever the motivation for their purchase, the aligned goal is to get more of your solution out into the world. This is why we encourage founders to be okay with sneaking public benefits into their products or services.

Having clear public benefits frequently means that there will be multiple different organizations or individuals who benefit from what you’re building. This usually means you will be able to choose between different potential first customers.

For example, Rachio began by focusing on how to save water by creating a smart irrigation controller. When they began, municipal water systems could understand the potential benefits of their product, but it was hard to deploy enough devices to demonstrate those benefits. Ultimately the team at Rachio was able to convince consumers of the benefits from control, savings, and even a whole new category of pranks (such as spraying squirrels or kids in the yard). After a few years, Rachio deployed enough devices that they no longer have to prove their product’s efficacy to water utilities.

Another example is 1concern, which models risk associated with earthquakes and water. Insurance companies are interested in these models, as are first responders, real estate owners, and citizens. 1concern opted to work with local governments and first responders, in spite of alonger sales cycle. Not only can first responders use the models to save lives, they can also help to make the models better in real time. Though, 1 concern chose to begin there, they’ll have other opportunities to work with businesses and consumers in the future.

Like hardware startups, there are few things that scare investors as much as business-to-government (B2G) sales. Some investors have had poor experiences, watching their companies struggle to navigate procurement, long sales cycles, and poor transparency in the sales process. Other investors simply don’t have any experience with B2G as a business model and would prefer to stick to business-to-consumer (B2C) and/or business-to-business (B2B) models.

A typical local government request for proposal (RFP) can take 365–730 days! How will your sales strategy cope with this? If you are a software company, it’s possible to price in a way that allows you to bypass the RFP process by tapping into discretionary spending budgets, where sales cycles can be about 90 days. It’s an effective initial growth strategy, but then what?

It surprises founders when we tell them that we have a few teams who have succeeded, as seed stage companies, in winning RFPs with local governments. In most cases, the process has taken well over a year, but being able to close what are usually $1m+ deals can be enough to get another, larger funding round done.

The RFP process differs from enterprise sales in other ways. In some competitive segments of government services there might be analyst publications that provide clear maps of the relative competitive positions in that space. In the B2G space, there is detailed data available about who is selling to local governments, including the name of companies as well as contract values. This is helpful from a competitive perspective, but also offers the potential to discover possible partners. Partnerships are another way to reduce the risk of RFPs and learn more about the process.

Even when you aren’t selling to city government, it’s necessary to be mindful of regulations. Much like other aspects of “schlep blindness” (that is, the tediousness of certain tasks that prevents people from recognizing startup opportunities), the thought of having to get multiple legal opinions isn’t very appealing to most founders. It’s much more interesting to build something and work with customers. But avoiding this for too long, or assuming you can “ask for forgiveness” later, is not a good long-term strategy.

At a minimum, it’s necessary to understand regulations so that you can design your business to avoid regulatory risk. Things get more interesting when you are part of completely new ecosystems. We’ve worked with teams that have helped define how drones operate on construction sites and others who’ve helped lobby for changes in what types of personal electric vehicles are allowed on streets in California.

Time and money are resources that most early-stage startups just don’t have in abundance. Working with regulators can be like adding another complex sales or business development process, so it’s important to figure out when you should invest the time. We urge teams to get products into the world and ensure they have very happy customers. Why? Happy customers are a reason for regulators to begin dialog because they show that some part of the public is getting value from what you do. This makes it less likely that regulators will simply ask you to stop doing what you’re doing.

This is also where public benefits can be helpful. Being able to go beyond customers and show broader benefits to other stakeholders will provide further incentive for regulators to work with you and to adjust regulations that will ensure that you can operate within the law.