It takes a combination of discipline and intuition to distinguish between just another entrepreneurial idea and a valuable opportunity worth investing in.
The problem for many entrepreneurs is that they become infatuated with a new business idea before they have properly evaluated whether it is worth their while to invest time, effort, and financial resources in pursuing it. Like an immature teenager falling in love for the first time, the excitement of the idea overshadows any objective judgement of reality.
How do you critically evaluate a business idea to assess if it is a worthwhile opportunity? After carefully observing how experienced early stage investors assess potential new venture opportunities, I have developed a framework to guide entrepreneurs in assessing and developing new business ideas.
An idea for a new business can be assessed on four dimensions:
- Technical feasibility – is the business idea doable?
- Market feasibility – is there a need?
- Financial feasibility – is the business idea profitable?
- Team skills and desire – do we want to do it?
Typically a new entrepreneur will concentrate on only one or two of these dimensions. People with a financial orientation may focus on the financial viability, while an engineer may be overly concerned with the technical detail. A person driven by emotion will look at team skills and desire. An individual with a marketing background will be interested in market feasibility.
The key to success is to evaluate an idea in a balanced way: recognise its strengths and weaknesses, discard ideas with too many flaws, look for innovative ways of overcoming any weaknesses in ideas that you wish to take forward, and ensure that you make the most of the strengths inherent in an idea.
Questions for assessing and developing a new entrepreneurial idea
Each of the dimensions in the framework for assessing and developing new business ideas can be evaluated through a series of questions. These questions are tough to answer, but if you are serious about being successful as an entrepreneur, you should:
- Be able to answer all these questions confidently and comprehensively with data to back up your responses
- Be comfortable that the answers to these questions are favourable so that even the most cynical investor could get excited about the idea
- If you were to pitch your idea to outside investors, they would seek detailed answers to these questions and want to be exhilarated by what they hear. Adopt the perspective of a skeptical financier to really stress test your idea.
1. Technical feasibility – is it doable?
- Is the technology for your product or service already available, or is it still in development?
- If it is still in development, what stage of development is it in and what can go wrong?
- If it is already available, is anyone else using it to develop the same product or service as you? If not, why has no one done so yet? If so, who are they and how does that affect your prospects?
- What kind of entry barriers does your technology provide? How long would those entry barriers last should your idea prove to be a high potential opportunity?
- What are your technological risks? List reasons why the end user might not want to use your technology, even though your product or service may be technologically superior.
- What other nascent technologies might become competition in the future – one year from now, five years from now, a few decades from now?
2. Market feasibility – is there a need?
- What exactly are you selling? What is your value proposition? Can you clearly express this value proposition in an elevator pitch?
- How do you define your niche? How large is the market? How fast is it growing?
- Who is your customer? Describe a typical profile.
- What is the customer’s need?
- How is the need currently being filled?
- What critical factors will lead you most quickly to your customer base?
- Who or what is the competition? What are the advantages and disadvantages of your product or service over the competition?
3. Financial feasibility – is it profitable?
- What are the sources of revenue for the business? What will the customer pay per transaction?
- How many transactions will you do in a day, week, month or year?
- What are the major costs for the new business? What is the nature of those costs – fixed, variable or semi-variable?
- Is there a good profit margin in the basic economics of the business? Test it out by using this simple equation: (volume x price) – cost = profit.
- What size capital investment is required to launch and sustain the business?
- What would convince an investor to contribute those funds?
How is the financial health of the business affected by the timing of cash flows – when revenue will be collected and when costs will need to be paid?
- How long will it take the business to break even?
- State the primary financial assumptions for your projections.
- How sensitive are your projections to changes in price, technology, competition, and your own growth?
- Develop best-case and worst-case financial scenarios.
4. Team skills and desire – do we want to do it?
- What special strengths do you bring to this enterprise?
- Why are you or your team likely to be more successful in this business than others?
- What are your relevant weaknesses and how will you overcome or compensate for them?
- Does this business really turn you on? Do you get carried away thinking and talking about it? Do you have the passion and commitment?
- Why do you want to do this – really?
- Are you willing to live with uncertainty.
- Will you be able to bounce back from potential failures?
- Can you adapt and refocus on a continuous basis?
- Is this the right time for you to do this? Your family?
- What are your exit strategies or options?