How to choose the right business idea?
Last week, I gave a talk on “Starting a Business upon Graduation” to a group of Harvard Business School students. In addition to sharing my experiences in starting Pixily right after graduating from Wharton, I shared my approach on how one should zero in on a viable business idea.
I approach the idea development process similar to how one approaches sales leads within a sales funnel (see below). I start of with a number of rough business ideas and put each idea through the due diligence funnel. Some make it through the funnel and some don’t. Ideas that make it through the funnel are more viable and have a higher chance of being successful.
I usually split the due diligence process into two stages. In the first stage, I focus on the idea and in the second stage, I focus on whether I can execute on the idea. In this post I will focus on the first stage and the next post I will talk about the second stage.
Stage 1: Is the idea viable?
Is your product or service a must-have? This is a very important question to answer. It is not just enough to look at secondary research, but it is very important to conduct primary research. I recommend talking to potential users of your product. You should start with friends, family members and trusted business associates. If people you know see a need for your product, you should then talk to potential customers whom you don’t know very well. If people you know well do not see a need for your product, then it may be very hard for you to find strangers that will want to use your product.
Is there a willingness to pay (WTP)? Even though there a number of free services that are wildly successful, I take extra care NOT to start a business whose product(s) are free. This is even more important in a downturn. In a downturn, history has shown that advertising based businesses are the hardest hit and cannot sustain for too long without paying customers. This question should be asked in conjunction with the previous one and should be addressed very early on.
What is the market size? Once you figured out that there is a market for your product, it is important to understand how big that market is – total population size. The answer will define what product features to develop, how to market and what the distribution channels are. It will also help you raise money.
What is the revenue potential? This is a simple math and easy to do once you know the answer to the previous two questions. The higher the revenue potential, the better the idea.
What is the industry structure? In addition to understanding who your competition is, it is important to understand how the industry is structured, who the suppliers and customers are and what the barriers to entry are. In essence, you need to conduct Porter’s five force analysis. Among other things, this will answer the question as to what kind of competitive threats you will experience and what are the substitutes for your product.
What are the trends? For a product to be successful, it is essential that broader trends favor its market adoption. You need to identify the trends such as technology, demographic, and behavioral. This will help you define your marketing message and also in convincing investors as to the timeliness of your product.
By answering these questions, you are able to filter down a bunch of ideas into a smaller set of viable business ideas. Even if you have a single business idea, you should still subject it to this rigourous process. You will be able to replicate your success from venture to venture and not be a one-hit wonder.