Recently, I started researching the 2025 Nobel Prize winners in economics. Their work examines how to estimate the value of entering new markets through innovation—a critical question for entrepreneurs.
Most advice on how to fund and start a start-up relies on pattern-matching: “Raise 18 months of runway.” “Get to $100K MRR before Series A.” These heuristics can help, but they don’t consider the wider picture of the market you might be thinking of entering.
The Aghion-Howitt quality ladder model explains innovation and creative destruction at a fundamental level. This framework, which earned Philippe Aghion and Peter Howitt the 2025 Nobel Prize in Economics, is the foundation for an interactive calculator that evaluates startup viability with economic rigor.
The Economic Foundation
The Aghion-Howitt framework (1992) treats innovation as discrete quality improvements that replace existing products. When you build a startup, you’re creating a quality improvement over existing solutions. The framework helps answer: Is this improvement valuable enough to justify the cost of building it?
The Core Equation
The model centers on a simple inequality:
Where:
- EV = Expected value (survival probability × business value)
- wη = Entry cost to build and launch
Viability reduces to a simple question: can expected returns justify upfront investment?
Let’s break down each component:
Business Value (V)
Your business value is determined by the perpetuity formula adjusted for growth:
Where:
- π = Annual profit at Series A scale (target customers × profit per customer)
- r* = Adjusted discount rate accounting for displacement risk and churn
- g = Growth rate from innovation (g = λ·log(γ))
The adjusted discount rate accounts for real risks:
This means higher displacement risk and customer churn directly reduce your business value.
Expected Value
Your expected value is survival probability multiplied by business value:
Where λ represents displacement risk—the probability that competitors or market changes make your solution obsolete. Higher displacement risk means lower expected value.
Entry Cost (wη)
The actual capital required to build and launch:
For UK startups, this includes:
- Employee salaries with employer NI: 1.2–1.4x base salary (1.15x if running lean)
- Infrastructure: legal, accounting, software, and cloud
- Runway: months required to build and launch
The Calculator
Try the interactive calculator below with your startup idea. Start with a preset to see how different archetypes perform, then adjust parameters to model your specific situation.
UK Startup Viability Calculator
Evaluate your startup idea using the Aghion-Howitt economic model. Adjust parameters to find a viable business configuration.
✓ VIABLE
Entry Costs (wη)
Base salary before employer costs
Employer NI (13.8%), pension (3-10%), equipment, recruitment (~15-60% total)
Legal, accounting, software licenses, initial tech
UK Employment Costs Guide
Employment Cost Multiplier:
• 1.05-1.15x: Bare minimum (NI + basic pension)
• 1.20-1.30x: Realistic (+ equipment, recruitment)
• 1.35-1.45x: Competitive (+ benefits, training)
• 1.50-1.60x: Fully loaded (premium package)
Current Settings:
•
3
employees: £
122
k (
6
months)
Unit Economics
Average revenue per customer per month
Direct costs to deliver service (hosting, fulfillment, materials, etc.)
Support, platform fees, transaction costs, etc.
Market Dynamics
Current penetration:
1.60
%
Est. time to reach:
0.1
years
Competitive Dynamics
Adjusted:
24
% (after defensibility)
How much better is your solution vs alternatives?
How difficult/costly to switch away
Value increases with more users
How formidable are incumbents
Risk of adverse regulation
Defensibility Factor:
25
%
Positioning Score:
43
/100
Financial Parameters
Cost of capital / required return for venture-backed startups
Aghion-Howitt Model
Growth & Discount:
Base λ =
25
% → Adj λ =
24
%
r* = r + 0.5λ + churn =
73.3
%
Valuation:
Viability = EV - wη =
+
£
1075
k
Strategic Position
Positioning Score:43/100
Defensibility:25%
Market Penetration:1.60%
Est. Years to Series A:0.1 years
Moat Components:
• Quality advantage:
3.0
x
• Competitive pressure:
50
%
Unit Economics
Monthly Profit:£80
Customer LTV:£1520
CAC Payback:25.0 months
LTV:CAC Ratio:0.8x
Gross Margin:50.0%
Series A ARR:£1920.00m
Build Phase Cash Flow
Monthly Burn Rate (Recurring):
Employee costs:£20.3k/mo
Monthly Burn:£20.3k/mo
Total Capital Required:
Recurring costs (6mo):£122k
Infrastructure (one-time):£75k
Total Entry Cost:£197k
Build Duration:6 months
Theoretical Runway:9.7 months
(Total capital / monthly burn)
Key Insights
Excellent:
2.5
% monthly churn (
74
% annual retention) is best-in-class for B2B SaaS.
Warning:
50.0
% gross margin is below SaaS standards (60%+). Will be valued more like services business.
Weak Position:
43
/100 positioning score. Vulnerable to competition and displacement.
Unit Economics: LTV:CAC ratio of
0.8
x is below 3x threshold. Improve retention or reduce CAC.
Viability Achieved
This configuration is viable with a £
1075
k positive gap.
To strengthen further:
- Improve retention to increase LTV
- Build network effects to reduce displacement risk
- Increase quality improvement (γ) for pricing power
- Scale customer base for greater value
Churn Compounding Effect
2% monthly:78.5% annual retention
3% monthly:69.4% annual retention
4% monthly:61.3% annual retention
5% monthly:54.0% annual retention
8% monthly:36.8% annual retention
What the Model Teaches Us
After experimenting with the calculator, several patterns emerge about startup viability:
Churn Destroys Value Exponentially
At 3% monthly churn, only 69% of customers remain after a year. Compare this to 2% churn (78% retention): the difference cuts LTV by more than half. Retention trumps acquisition for most businesses.
Gross Margin Matters Immensely
Sub-60% gross margins prevent SaaS-level valuations. You’ll be valued like a services or logistics business (lower multiples), affecting fundraising, exit potential, and strategic flexibility.
Defensibility Compounds Over Time
A business with 60% switching costs and 40% network effects achieves 46% defensibility, significantly reducing displacement risk. Early moats matter more than fast growth.
Entry Costs Arrive Before Revenue
Entry cost (wη) arrives upfront, before revenue. A £50k reduction in entry cost has the same impact as a £50k increase in expected value, but is usually faster to achieve. Lower entry costs reduce the viability threshold.
How to Use the Calculator
Now that you’ve seen the core insights, here’s how to model your specific startup:
1. Start with a Preset
Try the presets to understand different startup archetypes:
- Realistic Optimized: Balanced assumptions for a typical UK SaaS startup
- Lean Startup: Minimal viable team, focus on efficiency
- Best Case: Strong unit economics with competitive advantages
- Defensive Moat: High switching costs and network effects
2. Adjust Entry Costs
Model your build phase honestly:
- Team size: How many people are needed to build the MVP?
- Salaries: UK market rates for your roles (£40–80k typical for tech)
- Employment multiplier: Include employer NI (13.8%), pension (3–10%), and equipment
- Months to build: Be realistic. Most products take 6–12 months
- Infrastructure: Legal (£5–15k), accounting (£3–8k annually), software licenses, and cloud
3. Define Unit Economics
This is where most startups succeed or fail:
- Monthly revenue per customer: Customer payment amount
- COGS: Direct costs to deliver (hosting, fulfillment, materials)
- Operating costs: Support, platform fees, transaction costs
- Gross margin: Target 60%+ for SaaS valuations
4. Estimate Market Dynamics
- Monthly churn: 2-3% is excellent for B2B SaaS, >5% is problematic
- TAM: Total addressable market in number of customers
- Series A target: Typically 600-1200 customers depending on ACV
5. Assess Competitive Position
This is where the Aghion-Howitt model shines:
- Quality improvement (γ): How much better is your solution? 2-3x is incremental, 5-10x is transformative
- Displacement risk (λ): What’s the probability competitors or market changes make you obsolete?
- Switching costs: How hard is it for customers to leave? (Data lock-in, integrations, training)
- Network effects: Does value increase with more users?
- Competitor strength: How formidable are incumbents?
6. Interpret the Results
The calculator shows:
- Viability gap: The £ difference between EV and wη
- Positioning score: Overall competitive strength (0-100)
- Key metrics: LTV, CAC payback, gross margin, burn rate
- Insights: Specific warnings and recommendations based on your inputs
Limitations and Considerations
This model has key limitations:
- Assumes stable parameters: Real markets exhibit uncertainty and variance
- Ignores pivots: Market learning may require strategic changes
- Linear customer growth: Actual growth is usually sporadic
- No seasonality: Many businesses have seasonal cycles
- Generic CAC: Uses £2k as a default rather than your actual acquisition cost
- Heuristic defensibility weights: The calculator weights switching costs and network effects equally (50% each) in reducing displacement risk. Economic literature confirms these drive competitive moats, but lacks a theory for their precise relative importance. Similarly, competitor strength (0–50% increase) and regulatory risk (0–30% increase) are calibrated heuristics, not derived from first principles
Treat this as a structured analytical framework, not a predictive tool. Its value lies in forcing rigorous thinking:
- What makes your solution valuable?
- What threatens your position?
- What is the minimum viable investment?
- When should you abandon the idea?
The Nobel Prize Connection
The 2025 Nobel Prize in Economics recognized three economists for explaining innovation-driven growth:
- Joel Mokyr (Northwestern University / Tel Aviv University) - “for having identified the prerequisites for sustained growth through technological progress”
- Philippe Aghion (Collège de France, INSEAD, LSE) and Peter Howitt (Brown University) - “for the theory of sustained growth through creative destruction”
Aghion and Howitt’s quality ladder model—which this calculator implements—explains how innovation creates value by replacing existing products with better ones. Building a startup is not just business creation. It is participation in the creative destruction that drives economic progress.
This calculator translates Nobel Prize-winning economic theory into actionable business decisions. When circumstances change, mechanism-based reasoning adapts; pattern-matching fails.
Further Reading
If you want to dive deeper into the economic foundations:
- Aghion & Howitt (1992): “A Model of Growth Through Creative Destruction” - The original paper establishing the quality ladder framework
- Acemoglu (2008): “Introduction to Modern Economic Growth” - Comprehensive textbook on endogenous growth theory and innovation economics
- Tirole (1988): “The Theory of Industrial Organization” - Essential reading on market structure, competition, and strategic positioning
- Christensen (1997): “The Innovator’s Dilemma” - Bridges theory and practice by explaining how displacement actually happens in markets
For practical startup guidance grounded in these principles:
- Kerr & Nanda (2015): “Financing Innovation” - Explains how VC economics and funding structures shape viable startup strategies
- Ries (2011): “The Lean Startup” - Practical methodology for rapid iteration that aligns with learning about displacement risk
- Blank (2013): “The Four Steps to the Epiphany” - Customer development framework for validating quality improvements
Conclusion
Most startup advice relies on pattern-matching: “X worked for Y company, so try that.” This calculator offers something different: mechanism-based reasoning about why businesses succeed or fail.
The Aghion-Howitt model cannot tell you whether to build your specific idea. But it forces you to confront hard questions:
- Is your quality improvement (γ) large enough?
- Can you build defensibility before competitors respond?
- Does your entry cost (wη) leave enough margin for error?
- Will your unit economics survive real-world churn and competition?
Answer these honestly, and you’ll understand whether you have a viable business before spending 9 months and £200k discovering the answer the hard way.
Build something valuable. Build something defensible. Use economic theory to improve your odds.