How to approach a business idea

Startups

Posted by Enrico on Jun 17, 2016 1235

From a definition point of view, a business idea is a concept that leads to a commodity or service that can be sold to generate profit. The right business idea introduced at the right time in the right market can be a very profitable activity. Two possibilities are typically encountered when one wants to create a business from scratch.

On the one hand, one can invent a new concept where the creator will be the first on the market with such a product or service. In this case, we are talking about a “disruptive” idea. This clearly constitutes the advantage of "being the first" but, at the same time, the concept can be copied, very rapidly leading to high competition. This is the case with most high-technology startups. Remember, competition is good. Very few startups are killed by competition.

"No one is allowed to say why an idea is bad unless they offer how it can be fixed." - Mike Karnjanaprakorn

On the other hand, one can decide to copy a concept that already exists and is proven to be profitable. In this case, the whole problem would be to come to the market with an improved product or service and try to acquire more clients than your competitor. I will not, however, focus on this topic.

Instead, the following paragraphs will try to explain how to approach and develop a solid disruptive business idea. Remember, business is, above all, about "taking risks"... but these risks should be quantified and calculated.

1. Disruptive business ideas & killer questions

To create and develop a sustainable business, one has to propose a service or commodity that answers the following question: How can we improve people’s lives? With this mindset, start thinking of what would make people’s lives better. This is not an easy process, since we are used to accepting things passively the way they are. Nonetheless, we see many new successful concepts every year and there are many important ideas still to be developed and that are, perhaps, waiting for you. So, how to find these ideas? My suggestion here is to read and talk to people around you until you spot a real problem that can plausibly be solved. Also, do not work on an idea just for the sake of it. The most successful founders are those who are passionate about what they do. They work and act as if they are on a mission. So, find something about which you are very passionate.

"The possession of facts is knowledge, the use of them is wisdom." - Thomas Jefferson

Once you have a plausible solution to something that people need, start asking “killer” questions as soon as possible. Killer questions are those that aggressively attack the basis of an idea, and, when answered definitively, can be sufficient to declare an idea “bad” and justify “killing” it and moving on to the next idea on the list. One needs to come up with killer questions that are specific to a product in the hope of killing bad ideas as quickly as possible.

One should also conduct a series of frugal experiments, for example, by building an inexpensive MVP (minimum viable product) quickly and getting feedback. This cycle should be repeated until an effective solution is found. Don’t wait until the MVP is perfect. Go out and ask for feedback as soon as you have something to show. An MVP can be an Internet site with the basic functionalities in the case of a digital startup or it can be the first physical prototype in the case of a commercial product.

Some examples of killer questions are:

  • Does your idea clearly solve a problem that people have?
    Does your target consumer want to use your solution? The best way to answer this question is by going out and talking to your potential customers and getting their feedback about your product. Market research can be effective as well, but could be very expensive. Whatever you do, try to obtain potential client feedback as soon as possible.
  • Is it actually possible for you to build the solution?
    Don’t waste time with solutions that can’t be built. A time machine would certainly be useful, but impossible to build with the technology we have at the moment.
  • Is the opportunity big enough to justify the necessary investment?
    This underlines the following questions: How much money do you need to raise in venture capital? What would be the potential profit? Are they commensurate?
  • Is the cost of acquiring customers acceptable?
    The solution can be very interesting but, if the cost of acquiring new clients is higher than the variable margin, one should stop wasting time with this idea and move to the next one.
  • Is the revenue model plausible?
    This raises the question: How is the solution going to generate profit? By advertising? By selling the product directly? What is the path to profitability?

If the proposed solution survives all the killer questions, one can reasonably think that the core business idea is worth being developed. The next steps would be to write a business plan, as described in the following paragraphs.

2. The basis of a business plan

A business plan is a formal statement of a set of business goals, the reasons why they are believed to be attainable, and the plan for reaching those goals. It should also contain background information about the organization or team attempting to reach those goals. A 3-to-5-year business plan is typically required, since investors will look for their annual return in that time frame. Business plans typically consist of the following steps. They can, of course, be adapted depending on the industry.

a. Background to the business idea

As the heading says, this is the part where the background of the business idea has to be described. It is useful to understand the strength of the fundamentals of the idea.

b. Vision

This part has to describe where the creator of the startup wants to be in the long term. It is really important to convince investors.

c. Mission statement

Typically, this has to be one or two sentences about the following: What am I selling? Who am I selling it to? Why am I selling it?

d. Goals and objectives

Goals represent things that the company wants to achieve.

Objectives describe how the company plans to get there.

e. Business environment

The following points that describe the environment in which the company will be competing have to be analyzed:

  • Barriers to entry;
  • Market segmentation, market size and market potential;
  • Competitors (number, size, etc.);
  • Substitution goods;
  • Political influence;
  • Non-technical barriers.

f. Local government and local policy

The study of the influence of local government and local policy is fundamental, especially when one wants to enter a new market with a new technology.

g. SWOT analysis

The strengths, weaknesses, opportunities and threats of the project should be studied.

h. Marketing plan

The goal of a marketing plan is to understand as accurately as possible how the idea can provide a solution to potential clients. It is also important in order to determine the ways to reach them. Typical factors that have to be taken into account are the type of distribution, the kind of advertising, and the communication channels. A lot of importance has to be given to the cultural behavior of potential clients.

i. Financial plan (P&L, balance and cash flow sheets)

The creator of the business idea has to determine the size and growth of the target market as precisely as possible in order to forecast the right amount of "working capital" required to run the business. It is particularly important to establish the following data for at least the first three years:

  • Evolution of the turnover. This should be the result of market study.
  • Evolution of the variable costs, e.g. raw materials.
  • Evolution of the fixed costs, e.g. the cost of a production machine.
  • Evolution of the earnings. This is turnover - variable costs - fixed costs.
  • Evolution of the working capital.
    Working capital is directly related to delays in debtors’ and creditors’ payments and to the stock.
  • Evolution of the cash flow.
    This is very important, since it shows the real amount of money that the company will need in its growth phase. Remember, the goal of a business is to generate cash.

Once the working capital is known, the financial structure of the company has to be decided. This includes the choice of how the startup project will be financed.

Typical questions to be answered are: Are we going to find private investors to be part of the capital (equity) or are we going to contract debts with a financial institution? In which proportion? Which debt ratio do we want? This part will be explained in another blog post

j. Measuring and evaluating

Under the previous points, a number of assumptions are made and projections can often miss the mark. Measuring and evaluating using KPIs (key performance indicators) help to get a better overview of the business and its evolution. KPIs have to be continuously adapted to the evolving context all the way through the life cycle. I already explained the importance of KPIs in another blog post.

k. Strategic action plan

A strategic action plan defines the major deadlines and milestones that need to be met during the business development.

 

3. A few practical suggestions for building solid business ideas

  • First of all, remember that it's OK if you fail. Go and make mistakes! Successful people make mistakes and fail every day. They just learn from those mistakes and focus on the next ideas.
  • Every now and then, do nothing, go and get some fresh air. Creativity rarely happens in meeting rooms. I have had my best ideas when I was playing golf or simply hanging out with my friends and family. Being a workaholic will not help much. Go out and do something different from time to time.
  • Focus on passion instead of revenue and profit. You want to make a lot of money with your business idea? That's OK and will probably help you work hard and give you that extra motivation that you need to succeed. However, successful business ideas are not created about money. None of the people I know who succeeded focused on money. Conversely, they were focused on passion, value and customer satisfaction.
  • Remember, the best business idea is not the one with the best business plan, but the one with the more reliable data.
  • In practice, it is often better to improve an existing business idea (or business model) that is proven to be right than invent a new one. In fact, if the core business already exists, one should only take care of acquiring a market share.
  • Share your business idea with your friends as much as possible. The only way to get feedback on your idea and improve it is to share it. Many people ask for an NDA (non-disclosure agreement) before they start talking about their idea. Well, asking this is a sure way of being late in launching your idea. The only way to protect your idea is to execute it faster than everyone else. When you protect your idea too much, someone else will succeed with it. In fact, it's probably already happening somewhere else.
  • Don't listen to the "no-sayers". Most people resist change and will always focus on why you will fail. It's natural and human. That's why those people won't ever create a business.
  • Most likely, your idea won't be what you thought it would be anyway. So, don’t look for perfection when you think of an idea. Just start working on it and it'll improve day by day.
  • If you have a new technological product and you are confident about its potential, try to introduce a patent before commercialization. Keep in mind, though, that patenting costs money and it is sometimes easy to copy a product anyway and adapt it just by changing a few of its elements.

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    Enrico Tam

    MBA, PhD, tech entrepreneur, maker

    Hi, I’m Enrico and I started hacking at 9 years old back when it was Visual Basic. After trying to become a professional tennis player I somehow got entangled in a PhD in engineering, an MBA programme and a big consulting fir... (continued)

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