from http://www.inc.com/resources/startup/articles/20051001/analysis.html, downloaded 23.6.2008
Column by Timothy Faley, Ph.D.
Is Your Business Idea Feasible?
In my last column, I focused on recognizing great opportunities and shaping them into business
concepts that thrive. This month we'll look at analyzing the feasibility of your proposed venture and
assessing its market potential -- an oft-neglected, pre-business planning step.
Making a critical evaluation of your business concept at an early stage will allow you to discover,
address, and correct any fatal flaws before investing time in preparing your business plan. As you
work through this phase, Phase II of business development, you will identify factors that are
essential to your venture's success while compiling the detailed, in-depth information you need to
write your business plan, thereby immensely shortening the next phase in the process.
Unlike Phase I, which emphasizes divergent thinking, Phase II requires convergent, focused
thinking and analysis. This is the point where you want to start drilling down to specifics. Although
you are not yet ready to prepare a detailed operating plan, it is important to concentrate on the
details of your business proposal. After conducting secondary market research, which involves
assessing the literature and other publicly available information, you will need to begin primary
market research by talking directly to stakeholders of all kinds -- from potential customers to future
team members -- about your business concept. Here are some pertinent questions you will want to
ask -- and answer:
* What does the industry where my firm will compete for customers look like?
* If you are able to create value for your customers, will you be able to capture any of it?
* Who holds the value-capture power in the industry you are entering -- buyers, suppliers or
others?
* How will your firm be differentiated and stay that way?
* Are there few or many prospective customers for your product or service?
* How many units per customer can you expect to sell?
* What is your immediately addressable market?
* Who will be your first customer?
* How will you move from that first customer to the 10th
, 100th
and millionth?
* What is the cost of acquiring a new customer?
* What kind of skills will you want to procure from your team members to complement your
own?
* When will you need to incorporate people with those skills into your business?
Author John Mullin's New Business Road Test is a good reference to help you rigorously think
through the industry, market, and team needs for your business. However, three additional
interrelated topics are also important: doing early-stage financial analyses on your venture, defining
the development path necessary to transition from your current business concept to the state of your
operating business, and gauging the investor attractiveness of your enterprise.
Early-stage financial analyses can be frustrating at this point, because you must make many
assumptions. The question is: Which of those assumptions should you validate with more detailed
investigation and which should you set aside for the time being? There is not enough time to pursue
everything, so you need to focus on the most critical issues. At this stage you are seeking insight,
not a single answer, from a financial analysis of your business. Using add-on software that provides
probabilistic capability to your spreadsheet will allow you to identify variables that have a large
financial impact on your business. You then can focus your attention on those items, systematically
mitigating risks as you build your business.
Recognizing the tasks that must be performed in order to develop your business to the point of
entertaining your first customer is important for understanding your total startup cash needs. If these
tasks are not followed by substantial business upside potential, they can create a fiscal burden that
will drag down your venture's chances of financial success. Many firms look promising as ongoing
concerns, but are unable to recover from the time and costs of getting to that point. To complicate
matters, ventures often have multiple development paths that must be navigated simultaneously.
Technology-based companies, for example, frequently must follow three paths: technology, product,
and market.
Phase II is the time to begin thinking about how to position your company for investors, whether
you hope to obtain your startup capital from Uncle Harry or venture capitalists. A business that
ultimately may be profitable on an annual basis but has little hope of recovering its upfront costs
does not look very attractive to investors. No investor likes their investments viewed as sunk costs.
You need to ask yourself how your investors will capture their returns -- through interest payments,
dividends or escalating equity value? Equity is worthless, if there is no way to cash out through a
liquidity event of some kind. Were you inadvertently considering using the investors' returns as
growth capital for your business? You need to look at the investment from their perspective as well
as your own.
Once you have successfully completed Phase II of the business-creation and development process,
you can be confident that your business concept is solid. This certainly does not mean you are
guaranteed to have a successful business, however, because there are many operational risks
involved.