5 Questions to Ask Yourself about Your Business Idea (Before Investing)

October 29, 2009 – 1:42 pm | by Matt Ackerson

roll the dice

Have you ever had a business idea? If you’re like most people, you’ll have at least a few ideas for possible businesses in your lifetime. But how would you know if your business idea is any good? The following five questions to ask yourself before investing your time and money should help guide you to the answer:

How does my business make money?

Money is the lifeblood of your business. Don’t get all idealistic on me and start talking about community and users and growth and puppies and kittens. I don’t care and more importantly your customers, the people who pay the bills, won’t care. Explain how your business is going to make money and keep it simple. What will be valuable about what your company makes or does that will motivate a customer to buy from you? Customers will likely buy from you if you are meeting a need or solving a problem.

For example, “We sell state of the art podcasting software that records sound crisper and clearer than anything else on the market, at only $10 per download,” or “We let visitors to our site send large media files over the internet for free, and charge a premium fee for sending files larger than 2 Gigabytes.”

How soon can the business start making money?

The easier it is for your business to start making money sooner rather than later, the more likely it will survive long enough to grow and thrive. Starting a consulting business can be great because you can start making money immediately and start up costs a very low, if any.

For instanceI’ve done a few website design jobs in the past to pull in some extra cash. Those opportunities came from acquaintances, friends, or networking. If you’re interested in making millions and building a business that’s larger than just you, this can be a poor model for entrepreneurial success, but it will pay the bills.

If you’re not going to start a consulting business, but say instead, a web-based business, how soon can you start making money from your idea? Well let’s see, you’ll need the website, a payment solution, traffic to the site, oh yeah and customers who are motivated to buy! It’s a similar story with a brick and mortar type of business, though the fixed costs and start-up costs will be significantly larger.

Building the core operating components of your business takes time, and during that time money is flowing out of your bank account without any flowing in. The sooner you get to be cashflow positive, the more likely you’ll succeed in the long run.

How risky is it?

The level of risk you will undertake in bringing your business idea to market is directly correlated, unfortunately, to how unique it is and second, how crowded the market space is. There is an inverted relationship between uniqueness and how crowded the market space is (e.g. the more unique your concept, the less competition you have to deal with, but also the less likely you can be confident that it will succeed).

To use my own start-up as an example, Bluesky Local is marketed as a unique service with respect to it’s focus on helping restaurants to fight the negative sales effects of weather, seasons, and time with automated coupon marketing. This is risky because there are no other examples of successful companies trying to solve the specific problem we are and in a similar manner that we are proposing to solve it.

Why will your customers care?

This deals with your value proposition. By how much is your service better, faster, and cheaper than what’s already on the market? Does your product of service help your customers to make money or save money? How much will they make or save with your service, what are the specific numbers?

In answering this question you need to understand that creating a successful product requires a focus and understanding of what the customer wants. Most of the time customers don’t know what they want until you give it to them and say, “Here, use this.”

As an entrepreneur it is your job is understand your customer’s needs and desires, and then feed him a product or service that fits into those needs like a perfect puzzle piece.

Why will it fail?

This is a critical question and one that is difficult to answer objective (because of your passion for the idea) and before you execute a business plan (sometimes crazy ideas will work, life can be unpredictable).

The best place to start in answering this question is to look at the key assumptions needed in order for your business model to work. Again I will take Bluesky Local as the example here. In order to work Bluesky Local needs:

  1. Restaurant owners or managers to log in to our website to use the service, such as sending out promotions manually, scheduling them for a later date, or automating them to happen on a regular basis. If the business owner doesn’t do at least this, than they will see no results because no coupon promotions will be sent.
  2. The restaurant needs a customer contact list to distribute it’s promotions to, and for best results it needs to be permission-based. If they don’t have or work to build a customer list, then they will see no benefits from the service.
  3. Customers receiving the coupons will be motivated to redeem the offers.

After you understand you core assumptions you want to work to minimize them as much as possible. The assumptions I listed above are already minimized (and there used to be more core assumptions than that). To further minimize them however we have (or might in the future) take the following steps:

  1. Provide suggested coupon offers that work to minimize typing and thinking; rig the service to automatically send the best possible coupon at the best time without any additional input from the business owner.
  2. Allow business owners to import an existing customer list that they might have; implement viral features that allow them to build a customer list extremely quickly through friendly, web-based referrals; leverage an distribution they might already have, such as through Facebook.
  3. Make it easier for customers to redeem by developing an IPhone or Android app to display the coupons so they don’t have to print the coupons; send the coupons in the form of text messages to customers cellphones.

By minimizing your model’s core assumptions you increase the likelihood of success.

The Bottom-Line

Most business ideas will fail. By asking yourself these tough questions upfront you will maximize your chances of success. In the end if you’re serious about being an entrepreneur, you’re going ot have to take a risk somewhere and you’re going to have to work hard to achieve your business goals. Fellow entrepreneurs like myself as happy to lend a hand along the way, so don’t be shy to ask for help or advice.

Are there any other questions entrepreneurs should be asking themselves before they invest?

Related Posts:

  1. 2 Responses to “5 Questions to Ask Yourself about Your Business Idea (Before Investing)”

  2. By John Exley on Oct 31, 2009 | Reply

    I think it might also be important to ask yourself the question ‘How scalable is my business model?’ I have read that often, the aspiring entrepreneur builds a business around her or himself, which is not scalable and will almost assuredly lead to her or him burning out and the business failing.

    Solid article, Matt!

  3. By Matt A.* on Nov 1, 2009 | Reply

    Truly, a smart comment, John. I wish I had thought of that one when I was writing this because it have been one of the biggest changes I have faced in the past in trying to get a business off the ground.

    Spot-on suggestion, thanks.

Post a Comment