How to Tell a Business Opportunity From an Idea

You will probably discard many ideas before you find one that has real potential, so where should you start? Fruitful ideas often occur at points where your skill set, your hobbies and interests, and your social networks intersect. In other words, the best ideas for a new business are likely to come from activities and people that you already know well.

A survey of entrepreneurs found that the most started companies in industries where they had significant work experience. The personal contacts and domain expertise developed on the job prove invaluable to many individuals that contemplate launching a business of their own. If you intend to start a business in a new industry, I would therefore encourage you to "apprentice" for a suitable period of time first. You can avoid many costly mistakes and decide if you enjoy the work before making a serious financial commitment.

If you lack deep industry knowledge, franchises may be another good option to consider, especially for individuals with little or no first-hand experience running a business. In addition to having a proven business model, a turnkey franchise provides the new owner with all of the infrastructure and systems needed to operate the business right out of the box, and many companies offer management training for new franchisees. Just make sure to investigate the franchisor thoroughly before signing any agreements or paying up-front fees/deposits.

You'd be amazed how many would-be entrepreneurs throw up their hands the minute they stumble across an established business offering the product or service they were developing. Don't give up hope! The "first mover advantage" so often quoted in the business press is seldom a guarantee of success. Profits breed competition, and frequently the pioneer in a new market simply validates the business model, allowing competing firms to launch copycat products that steal market share.

The point is that you should never let novelty become a precondition for starting a business. Noted business academic Amar Bhide reported that only 6% of companies he surveyed claimed to have started with a unique product or service. The vast majority of entrepreneurs credited their accomplishments to the "exceptional execution of an ordinary idea." Your chances of success therefore will be far greater if you can market a product that is similar to existing offerings, while providing greater value to customers or having a lower cost structure than your rivals.

 

OK. You've brainstormed half a dozen ideas for a new business and narrowed it down to a couple that seem promising. How do you know if either of these opportunities is worth pursuing?

A complete opportunity analysis is beyond the scope of this discussion, but you can start by asking yourself these questions:

1. Do I have the skills necessary to succeed with this opportunity?
2. Am I passionate about this?
3. Can I meet my financial goals?
4. Am I creating value for customers?
5. Can I harvest this opportunity at some point in the future?

 

As mentioned earlier, the ability to execute is far more important than the idea itself. To do this, you must begin by identifying the handful of factors that will be critical to the success of the business. You then need to see if your own skill set is compatible with these requirements and, if your talents are lacking, decide if you can get the necessary training in a reasonable period of time.

It's also vital to build a team that complements your skills and makes up for any deficits. Successful entrepreneurs are able to evaluate their own strengths and weaknesses objectively in relation to the opportunity. They have the discipline to pass on opportunities that do not play to their strengths and do not hesitate to partner with others or hire the right talent.

One of the great benefits of starting your own business is the ability to set the agenda, so why not do something that will make a real difference in the world and that is meaningful to you and inspiring to your customers and employees? Your chances of success will be infinitely greater if you can marshal all of your enthusiasm and creativity in the service of your new venture.

 

Despite the above, "do what you love" is not always the best advice. Don't forget to consider your financial needs, both short- and long-term, when evaluating an opportunity. In the short term, you will need adequate financial reserves to provide for your living expenses as well as the capital needs of your new business until it reaches cash flow breakeven. Obviously, you will be better off if the opportunity's capital requirements are modest, breakeven can be achieved quickly, and you have alternative sources of income (spouse, investments, etc.) to provide for your personal financial needs.

You must also ensure that the opportunity has the potential to fulfill your long-term financial objectives, whatever those may be. An opportunity that, for example, is a good fit for your skills and interests may still be a bad option to pursue if the expected returns are too meager to allow you to save for retirement or fund your child's education.

Customers lie at the heart of every good business opportunity. No matter how cool your idea might sound on paper, unless you can satisfy a genuine need in the marketplace for which customers are willing to pay, you risk being a "market of one."

It's critical that you get customer validation before launching your business. This may involve offering a sample of your product or constructing a demonstration prototype. Creative salesmanship is key here. If you can't get an actual sale at this stage, try at least to get an indication of interest (in writing, if possible).

If your prospective customers don't offer positive feedback at this stage, then you have a strong indication that the business model needs substantial revision or should be abandoned altogether. Thankfully, you will have spent only a small a fraction of the capital that would have been required to launch the business had you skipped this step. You should never follow the "build it and they will come" mentality unless the cost of failure is exceedingly low.

Customer validation is an important milestone, but you must also consider the capital requirements and ongoing costs needed to serve your customers relative to the price they are willing to pay. CVP analysis provides a simple and powerful framework to target the right set of customers to serve. Don't hesitate to experiment with different customer segments until you find the combination of costs and revenues that yields the lowest possible breakeven threshold and payback period.

 

Most entrepreneurs become too excited about starting a new business to give any thought to selling it one day. Unfortunately, certain businesses—especially those whose success relies heavily on the founder's own labor, personality, or connections—may prove impossible to sell on economically attractive terms. You will have to rely on your own hustle in those first few months, but one of your primary tasks after launching your new venture is to put systems in place to grow your business and allow it to function in your absence. A business model that lacks the capacity to scale beyond the founder's own efforts is likely to be a marginal opportunity.