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Screening Your Biz Idea
Below
are the issues that you need to address when screening your idea and
determining if it is an opportunity.
You have a business idea, but is it a business opportunity? Understanding
the potential of your idea and seeing its opportunity in the marketplace
is critical. In looking at your business idea, is that window opening or
closing?
The process takes time and
research, but it will help you determine whether you want to continue with
your idea and commit seed money to develop a business plan. You should
evaluate your personal reasons and objectives in pursuing the business
opportunity.
Research
You should check published information about your
industry, market, and competition. Sources are available on the web as
well as your local library. Don’t forget to contact trade associations.
They will have up-to-date information. Attending trade shows and
conferences will provide you with insight to your competition
The
Market
Does
your product or service meet a market need?
Businesses that can identify a
product or service that meet customer needs and offer value-added
benefits have a higher probability of success. Federal Express is a good
example. When coming up with his idea, Frederick Smith saw a window of
opportunity to provide a service that delivered documents and packages to
their destinations overnight. Until FEDEX was started, a business had to
rely on regular shipping with 3-5 day delivery. Smith saw the need and
realized that customers were accessible with his service. At that time
there was no competition in the overnight delivery business. The
opportunity was costly to start-up, but was sustainable; and, it allowed
the start-up investment to be recovered. Lesser ideas are often unfocused
and do not readily identify customer needs or may compete with existing
brands.
Is
your market fragmented?
Are
there a number of companies with products in varying degrees of quality,
prices, etc.? This can spell opportunity for you. Often there will be a
market niche that is not being served that will allow you the opportunity
to fill the void. Mature industries that have been consolidated are very
competitive and new entrants will run into difficulty.
Is
your market large and growing?
If so, this is very appealing, and could help you
attract start-up capital. Also, it is conducive to your market share and
growth because your percentage of the total market translates to more
revenue. Markets under a certain size are less appealing because your
business growth can be capped. Growth rates are important. Chances of
success with your business idea are greatly improved where there is growth
of 20% or more.
Are
you in a high gross margin business?
High margins give you a cushion that permits you to
have more flexibility on the expense side of your business. You can
survive more mistakes when your gross margins are high. This will allow
your business a better chance to survive. High margins will help you reach
profitability sooner and improve your chances of success. It is preferable
to reach breakeven within two years.
What
are your costs?
Your
cost structure is important. If you have too high a cost per unit and are
not selling anything, then other firms have a competitive advantage. Seek
a cost structure where economies of scale exist whether you are small or
larger.
Economic
Issues
Profitability
is important.
Those high margins turn into reoccurring profits
down the line. Opportunities have appeal to investors when there are
profits of 10% or more years after year.
Can
you reach a positive cash flow?
Reaching breakeven and positive cash flow within two
years is very important if you are planning to raise capital.
Can
you provide a return on your investment
(ROI)?
This is important to investors and shareholders of stock companies and it
should be important to you. Screen your idea to see if you can come close
to the goal of 20% or more per year.
Does
your opportunity carry any strategic value?
Is
there valuable technology, land, assets, established customer base, etc.
that will make your idea attractive to others? As you grow the business,
those other companies may wish to acquire your business.
Are
your capital requirements low?
If you are going to be raising
capital in the venture community as a start-up, you will more likely be
funded if your initial needs are under $2 million. Small local businesses
starting out should be significantly less. The shorter you can cut the
time to your breakeven, the more attractive your venture.
Can
you realize your return on your investment?
If
you are planning to raise capital from outside investors to start your
business, you must be aware that they seek a return on their money and
will assume you have that objective in mind. What is that strategy and is
it feasible? Will there be an acquisition partner waiting? Or an IPO? When
screening your idea, take this under consideration.
Competitive
Advantages
Do
you have barriers to entry?
Here’s
where the "window" can be. Can you gain an advantage? Your
window of opportunity can be a new technology, an innovative product, an
outstanding business location, an exclusivity agreement with a supplier or distributor, or some
type of legal advantage. If you have good contacts or relationships in
your designated industry, they could make your opportunity more attractive
and to your advantage.
Do
you have any internal or external controls?
How
about those costs and prices? Screen for some degree of control over
distribution channels, prices, costs, etc. This advantage will make your
opportunity more attractive. Lack of control should make you think twice.
If there is market dominance in your potential industry opportunity (i.e.
a Walmart or Microsoft), it usually means there is a serious barrier and
carries a lot of risk.
Management
Team
Does
your business require a management team?
If so, can you attract some team
members with experience and reputation? The better their track record, the
more credible you are to the investment world.
This article based on material from the book,
New Venture Creation, 3rd Edition by Jeffery A. Timmon
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