How to value Business Ideas

Author: Miguel Teixeira
2016-02-08
Tags: Ideas, Market, Competitive-advantage, Barriers-to-Enter, Skills


Every day you have ideas, most of those ideas never become a business. And the main question you should ask yourself when faced with your ideas is: is this a good idea for starting a business?

Basics of Idea Evaluation

Let's start with the basics. For an idea to be good enough for you to make the investment to start a company, it needs to:

  1. Have a good market,
  2. Have a good market fit,
  3. Have a competitive advantage,
  4. Have a good growth potential,
  5. You must be able to overcome barriers to enter efficiently. 

All of the above topics matter. So you should score your idea in every one of those topics (you can score them on a scale of 1 to 5) and then apply the following formula:

(Market x Market fit x Competitive advantage x Growth potential)/Cost of barriers to enter

Market Evaluation

Every time you think about a market you should think about: Value, Growth, and Margin:

  1. Value translates itself on how large the market is (in value),
  2. Growth is about how fast that market is growing (%),
  3. Margin is about how large are the margins of that service or product.

If you don't have values on the market size, growth or margins, try to evaluate qualitatively based on your experience. Then, multiply the three of them to summarize that information into one number. Remember, the total Market evaluation number should be between 1 and 5.

Market Fit

Market fit translates basically into the market willing to pay what you are asking for your product or service you intend to offer. If they do, it basically means that you got it right. You need to clearly identify this point because this is a really big assumption to make. Our advice is to go out and ask the market what would they be willing to pay for your offer. Then see if your idea is profitable for a specific price point. Then, see if your idea is profitable for a specific price point, and so, give a score and plug it into the formula.

Competitive Advantage

Jack Welch, a legend in Management and former CEO of GE, said "if you don't have a competitive Advantage do not compete" and that is absolutely true. A competitive advantage translates itself into: the ability you have of offering a product or service at a specific price point, sold in your distribution channels with your advertising efforts and have your clients choosing your solution rather than a competitor. It needs to be relevant to the market. There are 3 types of competitive advantages:

  1. Cost Advantage - where your cost structure allows you to offer a lower price point than other competitors (or the same price point but you can invest more than your competitors in customer acquisition like advertisement),
  2. Differentiation - where your product is better than your competitors, being the best choice for your customers,
  3. Focus - where your product is better in a specific niche. 

Know what your competitive advantage is and press on it. Produce a score for your competitor advantage and plug it in the formula.

Growth potential

Is there growth potential in your startup idea? So, can you move into new markets, upsell or make your market grow? How and by how much? Score your growth potential and plug it in the formula.

Barriers to Enter

Barriers to enter are the hurdles, efforts that you have to go through to start selling and deliver your product or service. The larger the barriers to enter, the more protected your margins will be. The ability to enter the market without having to pay full price on those entrance barriers is what you are looking for. To do that you need to have the right skill set, the tools and capital. So, identifying the task you need to execute is paramount to fully understand how much does it cost you to enter that market.

Startup or small business idea value

Score an good or bad Idea

You just have gone through the process and came up to a final score for your idea. There are no definitive conclusion and you should always review your assumptions. However, a good rule of thumb (if you rated each item on a scale of 1 to 5 and applied the formula) is above 100 score, it shows some potential and you should look deeper into the idea. Above 150, you should test your idea as soon as possible Above 250, you should really dig deep and find a way to build your startup.

Conclusions

Your idea can be in a small and stagnant market and still be very good because the quality or efficiency of your execution will drive customer towards your business, providing you with lower barriers to enter and good competitive advantage. On the other hand, you may not have the full skill set to execute your business, but your market fit and your market size is so good that you can outsource parts of your business. You should not disassociate the idea with the execution, because it is crucial to understand your ability to execute that idea. For example, starting a restaurant in midtown Manhattan to sell pizza might be the right thing for your, but it isn't for us (we're lousy cookers and know nothing about the business of managing a restaurant).

If you like your idea and want to start pitching it, take a look into this tool and article on pitches: Automatic Pitch Machine and Perfect Pitch.

Also, if you are looking to start a business using the web as distribution channel you may want to look into the following articles:

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