Truth 9. Screening and testing business ideas
After you choose a business idea, test the idea to gain a sense of its feasibility. Some business owners pick an idea and immediately move forward, but it is much better to pause and spend some time scrutinizing the idea.
The proper sequence in thinking through the merits of a business idea and launching a business is as follows:
Identifying a business idea
Screening and testing the idea to determine its initial feasibility
Writing a business plan
Launching the business
Complete this process to avoid falling into the “everything about my idea is wonderful” trap.[1] All business ideas have strong and weak points, and you should be aware of both before you proceed. In addition, studies have shown that prospective business owners tend to overestimate their chances for success.[2] As a result, you need to gain an objective assessment of its potential. There are four areas to consider in testing the initial feasibility of a business idea.
Product/service feasibility— Determine if the proposed product or service is desirable and serves a need in the marketplace. Prepare a concept statement, a one-page document that includes the following:
A description of the product or service and its benefits
The intended target market
A description of how the product or service will be sold
A brief description of the company’s initial management team
After you develop the statement, you should show it to 10 to 15 people who can provide informed feedback. Attach a short survey to the statement that asks the participants to (1) tell you the things they like about the product or service idea, (2) provide suggestions for making it better, (3) tell you whether they think the product or service idea is feasible, and (4) share additional comments or suggestions. Tally, read, and evaluate all responses.
Instead of developing a formal concept statement, some prospective business owners simply talk through their idea with people and gather informal feedback. Either approach is valid as long as the feedback you obtain gives you a good sense of the feasibility and desirability of your product or service idea and any areas in which it might need to be tweaked or strengthened.
Industry/niche market feasibility— The second area to explore is the industry your business will be part of and the niche market you plan to go after. The most attractive industries for new businesses have the following characteristics:
Are large and growing rather than small and shrinking
Are early rather than late in their life cycles
Are important to their customers (by selling products or services that people “must have” rather than “would like to have”)
Feature environmental trends moving in favor of the industry
Have high rather than low operating margins
You should also assess the attractiveness of the specific niche market you plan to target. An ideal market for a start-up is one that’s large enough for the proposed business but small enough to avoid attracting larger competitors.
Finding good information on your industry and niche market takes a little work. The best place to start is to tap into the resources available at a university or large public library. Industry trade journals and magazines also provide information. Talking to business owners who are part of the industry you plan to enter is another option.
Organizational feasibility— The third area to explore is whether the proposed business has sufficient managerial know-how and expertise to be launched and successfully managed. This task requires the people starting the business to be honest and candid in their self-assessments. The two most important factors are the passion that the individuals have for the business and the extent to which the people involved understand the industry in which the business will compete.
There are other people-related factors that have been linked with startup success:
Relevant industry experience or prior business start-up experience
Depth of professional and social networks
Experience and expertise in cash flow management
Access to mentors or people who can provide startup advice
Level of creativity
Undergraduate or graduate degree
While you don’t have to score high on each of these factors to be a successful business owner, looking over this list, combined with how passionate you are about the business and how well you understand the industry in which the business will compete, should give you a general sense of how prepared you are to start the proposed business.
Financial feasibility— The fourth area to consider is the financial feasibility of the proposed business. The two most central areas to consider are the total startup cash needed and the financial performance of similar businesses.
You need to have a sense of how much it will cost to launch the proposed business. Prepare a preliminary budget that lists the operating expenses and capital purchases required to get the business up and running. After you arrive at a total figure, provide an explanation of where the money will come from. If you expect the money to come from a bank loan, from an investor, or from friends and family, step back and consider how realistic those options are.
It’s also good to get a sense of a proposed business’s financial potential by comparing it to similar, established businesses. Again, you’ll have to do some work to find the information you need. If you identify a business that is similar to the one you want to start, and the business isn’t likely to be a direct competitor, it’s not inappropriate to contact the owner or manager and ask about the business’s sales and income. Even if the owner is only willing to talk in general terms (“our annual sales are in the $2 million range, and we’re netting between $150,000 and $200,000 per year”), that information is better than nothing. Internet searches are also helpful. If you’re interested in starting a fitness center, for example, typing “fitness center sales and earnings” into the Google search bar results in links to articles about fitness centers that discuss sales and earnings data.