Early Stage Vetting of Business Ideas

I have been having crazy business ideas for a long time, ever since I can remember really. I had the lemonade stand (that lasted until the second customer was a bully and just drank the lemonade and took my money!). The earlier I was in life, the more immediately sure I was that my idea was the NEXT BIG THING! Some of them might have had some merit, like imagining satellite radio when I was 17 or inventing simple RF technology sensor control that could communicate with a database when I had problems with employees leaving the freezer doors open at Rory’s Gourmet Ice Cream. But, none of them were really ever going to work for me at the time and place I was at.

Nowadays, I think my ideas are a bit more feasible given that I start with a more acute perspective about consumer needs, an understanding of markets, and expertise in manufacturing technology, but, the funny thing is, this generally only leads to me finding the reason why an idea won’t work faster than I’ve ever been able to do before! This though, is a real skill and one that any serious entrepreneur needs to develop. Though every business idea is different, there are some simple steps can be taken to quickly find out if an idea is worth pursuing more seriously.

Find the holes

Analyzing Financial Data

A lot that has changed about my perspective towards a new business idea as I’ve become more experienced is that earlier I would often focus on what was good about my idea. I would try to think of all the positive reasons why it would work. Now I take exactly the opposite approach. I try to find all the reasons why it won’t work.

As a starting point, any idea I will be serious about has to meet these criteria:

  1. It has to have a unique value in the market (something no other product has, or at least no other product that has been successfully marketed)
  2. The cash flow has to work out. I don’t like borrowing (large amounts of) money and I don’t like spending valuable time asking for money that I could be spending making money, so my business models are a bit unique in that respect.
  3. It has to be producible (also within the framework of the cash flow)
  4. It needs to be somewhat protectable (at least long enough that there is a significant enough upside)
  5. It has to be legal (at this point I’m not willing to risk what I have for a little extra money)
  6. It has to fit within the framework of a lifestyle I want to live. (This is an important one that I think most people don’t think about nearly enough. When you start a business, you are starting a lifestyle. It’s like a marriage. You have to be committed. It’s going to determine how you spend a majority of the daily time you have in life, and it’s going to last a long time. It’s critical that you enjoy it or you won’t be able to devote yourself to it enough to make it truly successful.)
  7. The upside needs to be significant.
  8. The downside needs to be acceptable.
  9. I need to know, roughly, who the target market is and how I can reach them.

Obviously, this covers quite a bit, but, with some experience, most of these questions can be answered without even a google search. And, you only need one “no”, so look for that one first. Let’s go through them one by one.

Unique Value

Unique Selling Proposition / Unique Selling Point / USP

While there are certainly a lot of products that aren’t unique that are successful in the market, most of these derive their success from either the market leverage of the company or distributor putting them into the market, or amazing marketing savvy and execution by a smaller player. I know that I have neither, so for any of my products to be successful, they better be uniquely valuable so that they can out-do the competitors head-to-head on the shelf.

It’s important to make the distinction that it doesn’t mean they need to be the best in all areas of the market, it just has to be the best option for my target market. The world is flat now, so even if your target market is a small percentage of the total market, you can potentially reach them on a global scale and that percentage can turn into some pretty big numbers.

Cash Flow

100 Dollar Bills

Cash flow is King. Cash flow is King. I can’t really say it enough time. Money is valuable. It can do a lot of things. Not having money is debilitating, it can ruin even the best of businesses. When thinking about the business model, you need to think of how your cash flow will work at each stage of the business. Startup, ramping up, first production, local sales, national sales…. At EVERY step of the way, the cash flow equation has to work. It HAS to work. This is not a “nice to have”, it’s a “must have”.

It should fit within the framework of a lifestyle I want to live.

Clearly, you can borrow money, and you can sell equity for cash, but very few people are going to lend you money or invest in your company if you have a real cash flow problem at any point. Amazon is probably the biggest outlier in that respect, but they had a lot more human resource and other collateral than any regular entrepreneur. Knowing how each stage of cash flow will work at the outset can be challenging, but you should have a pretty clear idea of: startup/fixed costs, operational costs, costs of goods, rough marketing costs…and how all that will relate to your rough plan for sales. If one part of this equation is clearly out of balance over some period of time, you might be better off thinking of new ideas.


GDC Europe 2010 Talks, Conversations, Presentations

One nice thing about what I do is that I can pretty much eyeball something and know if it can be produced and how it should be produced. This is not a common trait, so call me! If you can share with me your quick ideas, I can give you a rough idea of what the steps to production would be and how feasible it is. In any case, this is, obviously, a pretty critical step to knowing if you should invest a lot of time in a new business idea. Industrial/Design engineers are also good people to turn to (though a lot of industrial/design engineers in the US don’t have a very complete understanding of the machines and processes most commonly used at the factories).

Hope you’ve found this article useful so far. I’ll follow up with another segment covering the final six topics. (to be continued…)

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