The truth is, being an entrepreneur is a stressful, risky profession. It’s a career filled with uncertainty, long hours with potential for little or no pay, and never being off the treadmill of finding the next sale. However, when you finally start seeing your business succeed, it is one of the most rewarding feelings you will ever experience.
Maybe you feel like coming up with a new business idea is very difficult, or you might have so many business ideas, you don’t know what to do with them. Either way, before you invest a dime into the first idea that pops into your head, take a step back and evaluate the practicality of your idea in the market.
Here are the six questions you must ask yourself to ensure that your business idea has the best chance of success.
1. Does my product or service solve a specific problem for a specific set of people?
If your answer to this question is “no,” then think about how you can change your answer to a “yes.”
Some ways of doing that are:
- Identify a problem first. Then, brainstorm around the product or service to solve the problem. Let the ideas flow and find a creative friend to bounce ideas off of.
- Don’t try to be everything to everyone. Instead, select a specific target audience.
- Once you have identified your specific target audience, uncover the specific problem they have in the niche.
- Alter an existing product or service in order to solve the problem better than what currently exists in the market.
The key is identifying enough potential customers who feel like your product or service will improve their life or solve their problem. Make sure you communicate the problem your product solves directly to the customers who have the problem.
Don’t try and sell to the entire world. Sell your niche market. A niche is more cost-effective from an organizational and marketing perspective and allows you to have a laser focus on a smaller market.
Think of the last time you had a problem. When searching for a solution, you probably purchased the solution that best solved your problem. Be the best solution to your customers’ specific problem.
A perfect example is the college test prep my daughter just went through. Kids with busy schedules and a heavy workload need choices and highly proficient teachers that can teach anyplace and anytime. One company did a very good job of filling those needs. They knew the market’s pain point and filled the need. That is who we chose.
For more information, I suggest you read Seth Godin’s book “Purple Cow: Transform Your Business by Being Remarkable.”
My printing, promotion, and marketing company offers a real-life example: We had customers who had to coordinate printing, promotional products, distribution, and fulfillment to thousands of their retail locations. They were making multiple phone calls and dealing with hundreds of emails. It was complicated dealing with so many vendors.
We jumped in and offered the service to receive all fulfillment needs and assembly and shipping instructions. We purchased the technology necessary for us to handle orders efficiently and quickly and were able to expand into the retail and fulfillment business. We became the go-to for all the print and promo needs, and developed a new fulfillment profit center. Then customers only had to deal with one point of contact. It produced dramatic growth for my company and eased the burden on our customers!
2. How competitive is the market and is there room for more businesses?
Once you have identified the problem your product solves, you must look at the prospective market. You want to make sure that the market is large enough for your business idea to succeed.
Some things to consider:
- Identify how many competing companies exist in the market. Is there room for a new business to capture a portion of the market share?
- If you can capture a portion of the market share, will you be able to grow and defend against competitors?
- Is this a growing market? A perfect example would be the aging population and their need for physical therapy. Ever increasing potential customers is not a bad thing.
- Look to see if there are companies in the market that have a unique advantage to produce the product or service for less. Consider whether it can be duplicated or if it is insurmountable.
Investigating all of these points should bring you one step closer to deciding whether entering the market is viable or not. If there are many competing companies who possess the majority of the market share, entering the market may not be the best idea unless you are bringing a disruptive force that will change the entire makeup of the market.
If you only capture a small portion of the market share and don’t expect to be able to grow the market in the future, you should look for a different industry to enter—but be careful about overlooking disruptive forces. Uber, FedEx, and iTunes are all examples of companies that turned old markets upside down.
For example, the farm and ranch real estate market in Montana is composed of a few large firms and hundreds of mom and pop shops, so it is very fragmented. Venture West Ranches is more of a boutique real estate brokerage that fills the gap in the market by providing estate planning seminars and building close relationships with organizations that are advocates for Montana ranchers.
When researching the market, we discovered that the average age of farmers and ranchers is 60 years old. Close to 70 percent of farms and ranches will change ownership in the next 10 or 15 years. This change in ownership allows VWR to enter and thrive in a fragmented industry all while the market continues to grow as ranchers age.
3. What are the startup costs associated with this business?
After answering the following questions, you may be feeling good about where your business venture idea is sitting. That’s great, but the next step is to directly analyze it. More specifically, you need to understand how much money you need in order to start your business.
To get a sense of this, look at areas such as:
- Equipment: What equipment do you need and how much will it cost? To minimize costs, look for used equipment.
- Overhead: If you’re going to rent a building, research market rates for rent and utilities in your area.
- Wages: Calculate how many employees you’ll need and how much you can afford to pay them.
- Raw materials: If you are manufacturing a product or creating a new service, you need to calculate how much purchasing supplies will cost.
- Inventory: Once you have created a product or service, you then must sustain an inventory so that you can meet customers’ needs at any service level.
By analyzing these barriers to entry, you will gain a better understanding of what is financially required for starting your business. Understanding this aspect is monumental to your final decision of whether you should act on the idea you have. If startup costs are at a manageable amount, then you can carry on to the next question, but if startup costs are unrealistic to finance or generate an acceptable return, consider altering your business plan or look for a partnership to help finance your startup.
Personally, this is what drove me out of the printing and promotional product industry. I saw the growth waning and the equipment prices dropping due to technologic advancements. I could see customers were trending toward ordering less printed product and shifting toward online. ing skill was also becoming less art and more pushing a button. It was time to get out before everyone started stealing business from each other.
4. What are my funding options for starting my business?
There isn’t one simple answer to this question. You must evaluate which funding avenue fits the best with your business and then pursue it.
Some possible routes to generate needed startup capital include, but are not limited to:
- Business loans: Don’t be too hasty and take the first loan offered to you. Understand every part of the loan including interest rate, monthly payments, collateral, personal guarantees, and the length of the loan.
- Crowdfunding: GoFundMe and Kickstarter are options for startups looking for small or large amounts of investment by capturing the attention of small and large-scale investors. Keep in mind that crowdfunding isn’t as simple as just creating an “ask” page. It requires you to bring your own solid network to the table or to have ideas about strategies to attract investment from people who aren’t in your network.
- Family and friends: This may be a risky area but if you are short on investment capital, ask your family and friends for some assistance. Make sure both parties understand the terms of the investment and have the investment in writing.
- Self financing: This is always my first choice, primarily because you keep total control and the only investor you have to answer to is yourself. This can still be done in small business—every one of my businesses was self-funded. Sometimes I worked several jobs and other times I used savings that I had stashed away for the next idea. Not all of my ventures have been successful, but when you are successful there is never anything more fulfilling.
- Venture capital: Venture capitalists are looking for companies to invest in, but beware, they will ask for a portion of your company in exchange for startup capital investment. Never sell more than 50 percent unless you are preparing to exit the company. VCs are also only going to invest in high growth, high potential return businesses. You are not going to get funded by a VC for a small business unless they see the ability to expand it dramatically.
Success is not guaranteed, which is why it is extremely important for you to sell your business idea to potential investors. If you sell investors on your idea, they are more likely to invest startup capital in your company. Investors are going to want something in return, so make it worth their while—but don’t sell the shirt off your back doing so and always stay in control.
For more on funding, check out the Bplans Funding Guide, as well as 35 Ways to Fund a Small Business.
5. How long before I can become profitable?
It doesn’t matter if it’s five weeks or five years—ask yourself how long until the business can start being profitable. This one question can make or break a startup and send investors running for the hills. Finding the answer to this question is also sometimes incredibly difficult. But if you approach it head-on, you’ll be in better position to answer this question with confidence. From previous questions, you should have an understanding of what your startup expenses are.
Next, you must identify and calculate your operating expenses. By identifying startup and operating expenses, you can calculate a breakeven point by estimating your sales and comparing the two.
Using your break even point and estimated sales, figure out how long it will take you to break even and become profitable. Be conservative!
The final step is to evaluate whether you can hold out long enough before you can become profitable. Then give yourself some wiggle room.
Going through these steps will help you understand the timeline you are dealing with. If the break even point is five years down the road, are you ready to pour money into the business until then? If your answer is no, you may want to pursue other ideas or consider the gig as part time, but if your answer is yes, then proceed on with your plans. The decision balances on whether or not you are willing to bet the farm, or just a few cows. Your comfort and confidence are important.
For more on how to figure all this out, these sales forecasting resources and Bplans business calculators will help you get started. Additionally, to determine whether or not you should quit your job right away to start your new business, or ease into the transition slowly, check out Should I Quit My Job to Start My Own Business? 9 Questions You Need to Ask.
6. How can I be innovative in this preexisting market?
There are too many answers to this question for every business, but in order to be innovative, you have to be creative and empathetic to see the pain points of the market. You have to be willing to do something that maybe no one’s done and risk failure, or possibly adopt other success stories to your business. For example:
- Can you adapt things that Amazon has done to your own business in order to make it successful?
- Could you partner with another business and create a win-win situation for the two of you?
- Can you bring more than one of your business ideas together to create a product or service never before seen?
The possibilities are endless—you just have to be observant and creative. By being innovative and trying new things, you can create a product that is both financially feasible and irresistible to customers.
At Venture West Ranches, we partnered with a respected estate planning attorney and financial planner to put on estate planning seminars for farmers and ranchers. We help educate aging farmers and ranchers on the steps they should take to prepare their farms and ranches for the future. No other farm and ranch brokerage is doing this, which allows VWR to fill the gap and help fellow farmers and ranchers. Filling this need has led to increased trust and starts building a relationship with the farm and ranch community and our market.
Being an entrepreneur is scary. I know—I’ve started several companies myself. It takes hard work and dedication, but you can do anything you set your mind to. Considering these questions can help you determine whether your idea solves a problem, can thrive in a market, and will produce profits that reward the investment.
Most entrepreneurs skip one or all of these steps before investing capital. Starting a business is challenging enough, but you greatly decrease your success rate by not doing your homework. This is why writing a solid business plan is very helpful. It makes you slow down and put your ideas and numbers on paper. While it is very easy to get rich on paper, you should have baseline, worst case and best case financials. The plan should also help you make decisions from a financial, marketing, and organizational standpoint.
The above are all important questions and are questions you need to ask from the start. But before you get overwhelmed, take this into consideration: the Bureau of Labor Statistics’ “Establishment Survival Report” says that the overall survival rate of businesses since establishment is 18.8 percent. However, the survival rate of businesses that survived the previous year is 96 percent. This being said, year to year you have a 96 percent chance of success.
In order to join the ranks of the 18.8 percent of businesses who survive their first year, you need to be innovative and solve your customers’ problems before they even know they exist. It will pay off monumentally for you and your startup business. Good luck!