The next stage of this series is intended to expand on what I have found as key elements that need to be addressed to develop a winning business venture.
I suppose some may think this article series is somewhat out of order. Arguably one should formulate a Business Strategy before actually forming a Company. It is the chicken vs the egg scenario in my mind. I believe planning on the business structure to be formed early in the development stage is equally important. A business venture should never be started without a solid foundation and liability protections in place.
Brainstorming the Business Concept
The first step in tackling a business idea is to throughly research the market, competitors, etc. before getting too far into the rabbit-hole wasting time and money. We don’t want to start an expensive hobby. The point of creating a business is to establish and entity that can actually make a profit, grow and evolve. A good rule to start off with is simple…If a zillion people are already doing the same thing then chances are the market is saturated (read low profit margin); however, if no one is doing it there may not be a need for the product or service in the first place. Identifying an area in demand that is in a niche market is generally the best way for a small business to quickly evolve. Regardless of the concept, however, it is critical that the idea is throughly researched.
To start a plan of any type one needs to brainstorm the idea and get their thoughts on paper. I often use a word-cloud that has linked short phrases on a notepad with the core idea in the middle — building out the concept as new ideas come to mind. I’ve found that this method is one of the most efficient ways to test and develop a potential business idea.
The Word Cloud step generally forces one to think about areas where they need more information — competitors, pricing models, sales strategy, etc. I typically take one area at a time and gather as much information as I can. The point is actually to try to kill the business idea at every step. Look hard and be honest. Is there money to be made? Are there customers that will legitimately buy from you vs a competitor? How much money will it really take to get started? Have other businesses entered this market and failed? Why?
After researching a sub-topic, I then create a word cloud with that topic in the center and build out on it. Competitors, for example, can be expanded by adding sections: Who are they? Who are their customers? How long have they been in business? Do they have good/bad reviews online? Who are the principals? Are you connected through LinkedIn or other sources to employees and/or customers? What products do the sell? What is their pricing model? Are they making money? How many customers do they have? What are their product limitations? etc., etc. When all of the questions are reasonably answered (don’t spend months on this task) I move to the next section.
The word-cloud process can really help hone in on a working business model quickly. If there are areas that will nuke the idea they are generally unearthed during this step fairly quickly. It is much better to move onto another business idea than to try to start one that will very likely fail. Statistics work against startups. Something in the neighborhood of 90% of startups fail within 24 months. If you want to be in the 10% that survive category, don’t spend time developing a business that your preliminary research predicts will not succeed!
Market Entry Planning
The next step in the process is to be honest with yourself and build a market entry strategy. This should not be a Masters Theseus, but it needs to be complete. You need to clearly identify your market, you need to accurately estimate what it will take to create the product, and you need to realistically project sales. The best product in the world is useless if people don’t know it exists. Conversely if you don’t understand the customer-base it is very easy to create a product that no one wants.
Market research is the core to building a workable Business Plan. No one can sit in an office creating an idea on their own. They need to talk to customers and sincerely invest time into developing their go-to-market products and services. Getting a strong handle on what people will pay is equally as important. Again, the point of starting a business is to make money. You don’t want to sell a product for $100 that costs $99.75 to create. This is an area where you have to be painfully honest with yourself. It is very easy to only see the facts you want to see.
See How to Build a Company: Part 3 – Market Research for more details on Market Entry Planning
Business Plan
There is a ton of hype and confusing information on creating a business plan. I personally don’t believe it should be a novel. Regardless of what you create, any business that survives long-term morphs into something entirely different than the founders initial intent. I’m sure the early IBM founders never thought they would be making Personal Computers one day… I know those of us who started Orbitz never planned to be owned by Expedia — our #1 competitor — ever!
The key elements of a business plan need to stay simple. If you are looking for investors then a section about the principal owners is very important. A new business typically doesn’t have a working product or revenues. Investors are investing in and trusting the founders. If you aren’t qualified by yourself, look for others that can join your team. I personally, and I know of many others, will sit on an Advisory Board for minimal compensation up front until the company gets going. Others may be looking for the next big thing and join your day-to-day management team for ownership interest vs a big paycheck. The more experience you have on the management team the better the market and investors will valuate your business.
The Problem
The most important section of a plan is to clearly describe what problem you are solving. Are you reducing costs, are you filling a niche market, are you solving a problem no one realizes exists (e.g. Apple iPod/iTunes)? It is very important that this section is well thought through. If you aren’t solving a problem, filling a void, saving money, improving efficiency, or doing something that has meat on the bone no one will buy your product. Understanding the problem statement is also key to marketing and sales pitches. It should be tested, tested and retested on friends, family social network, etc. to refine this section into something that anyone can understand. This is not a book. The entire concept should be easily understood in a few bullets.
The Solution
After the problem is defined then the solution section is where you describe how you will solve it. What products will you offer? What makes your products different than your competitors? Who are your competitors? Why would someone buy your product over theirs? The more compelling the solution is the more likely you will secure investors and customers. Similar to the Problem section, the solution needs to be tested. Market research potential customers, call competitors customers, hire a market research firm, send out Surveys, etc. and nail down the solution!
Expanding on the solution concept, this isn’t a section where all of the worlds problems are solved. Out of all of the areas you will likely discover through research, pick one or two solutions that will have the widest understanding and market appeal then zero in on those offerings only. Too many offerings will dilute your brand and confuse the audience!
A/B Testing
Up until this point I have written a lot about developing a concept. What I want to make clear in this post is that none of this can be done in a box. Testing the market early and often is the key to being successful. I believe a lot of Entrepreneurs wait too long to get offerings to the market. They try to create the “perfect” product and miss the boat entirely. I like getting a product out as soon as it is stable to test the waters. It is better to find out early an idea is not working than investing months or years into a product no one wants.
At Orbitz, we were one of the first travel companies to launch a mobile app. It was exclusive to the Apple iOS platform and would only allow search (had to call an 800 number to book). It was simple, but it clearly showed there was a demand for mobile search, which then provided us with data on what customers were looking for that helped us evolve the app and justify the expense to develop on the Android platform. For example, we observed that travelers would actually get to a city and then search for a hotel vs. buying one early. That was a surprise to all of us. We “assumed” that people would use the app predominantly to find hotels before they traveled. What travelers understood better than we did was that hotel rates drop the closer you get to a checkin time. If a hotel property has a lot of available inventory they will release more rooms to the online travel sites and often dramatically drop their room-rates to fill the property. Watching pricing change via our app was an unexpected benefit to our customers that clearly helped grow our revenues.
Business are Dynamic
Businesses that survive in this economy are dynamic and ever evolving. The business planning process is cyclical. Work through the steps, A/B test, refine the process and evolve every section of the plan accordingly. The key is not to get stuck in a rut doing the same thing that although may be successful one day could be nonexistent the next. Apple is a good company to research that follows this cycle. They find a niche market, they build a killer product, they gain crazy market share, then they start working on the next big thing in secrecy while their competitors play catchup. When Apple sees sales drops and competitors taking their marketshare they launch the next game-changing product. Companies that are in a proactive position will always be more profitable long-term.
Expanding on the proactive vs reactive business is why I believe startup businesses are viable and can succeed in any economy. It is a lot easier to change the direction of a small company vs a large one. Employees are also very close to the market as well as the leadership in a small business. In a large corporation it can take decades for them to evolve. The older they are, the bigger they are, the more profitable they are, etc. stifles creativity in most big businesses. Large company employees know what is going on in the world, but they don’t generally have a voice at the executive level that has the authority to make changes. It is an accordion effect in a large business. By the time the executives see a market shift other competitors are materially impacting their revenues. What generally happens is the large company does what they do and opens their checkbook acquiring a competitor vs building a product in-house.
I personally believe that the build a very solid product, get noticed by companies with deep pockets and be acquired is a very good long-term business exit strategy. Having the right product that a large corporation would want can instantly make founders millionaires practically overnight. Having a clear end-game strategy is something that should be incorporated into a business plan. Not many businesses are built to last 100 years anymore. Venture Capital Investors specifically look for clear exit strategies. The better an exit strategy is defined the more likely you will get a VC’s attention.