A great idea may not always be a profitable business. You have to solve a problem being experienced by a lot of people AND do so profitably!
There are two primary ways to identify an opportunity:
- The market tells you there is a problem: there is something that personally drives you crazy that you’d like to see fixed, or you see something that is driving a lot of other people crazy.
- You find an interesting technology that might be applicable to a number of problems.
Most often, entrepreneurs that have a passion for fixing a problem tend to have better success at starting a business (that passion fuels the many hours needed to start and grow a company!). But creative people with a passion for technology can often look at a technological innovation and envision applications that go beyond what the original inventor had in mind. Either way can lead to success.
So after you’ve identified a problem or found an interesting technology, how do you go about verifying that it can be the basis for a successful start-up company?
- Go talk to potential customers. What drives them crazy about the current solution? How would they like it to work better? How much extra would they pay for their preferred solution? What value do they see in it (the value proposition)? How likely would they be to buy it? How often would they buy it? Where would they like to buy it? Here is a Vol Court presentation that can be a helpful resource.
- Research potential competitors. How are they solving the problem? What are the weaknesses that you can exploit? How can you improve upon what they are doing? What distribution channels do they use? Who do they target and who are they missing? You can find information on large public and private companies at Forbes (click on “Lists”).
- Identify your target market segments. A big mistake that entrepreneurs make is that they think they can sell to everyone. A scatter shot approach to many markets is very costly and time consuming. Pick one or two segments that have the highest potential for sales and that you can serve better than your competitors. For example, everyone drinks milk, but the dairy industry doesn’t market to everyone … it primarily focuses on women between the ages of 30 and 50 who want to build strong bones.
- Quantify your target market segments. There is a ton of free information for both consumer and industrial market segments from the Census Bureau. News articles and industry trade journals often have online information at little or no charge, or printed journals can be accessed at your local library. Searches on the Internet may provide information, and sometimes free information can be found at Forrester. Pricey market research reports may be necessary for specialty areas marketresearch.com).
- Develop sales projections. You’ll have to make an assumption about how much of the market you will sell to, and then you can calculate the number of units and revenue you’ll receive based on the results of your research.
- Project your profit/loss. You’ll have to estimate what it will cost to produce and your product. Look at income statements from similar companies in your industry to see standard gross margins, profit, and overhead. This information can be found on websites of public companies (typically in their annual report, 10K, or in their investors or governance section). Sometimes you can find free information on Hoovers (but sometimes a subscription is necessary) to find information for private companies. If you are out of line with the industry, it will raise a red flag with potential investors.
This should give you a “back of the napkin” analysis to determine if the business worth pursuing. This estimate will be refined as you further develop your idea, products, and markets.