How do you know if you have a great business idea?

I spent a good deal of my time last week listening to business proposals – 28 of them in fact. It was the end of semester and my University students were presenting the business ideas they had been developing in teams for the last 12 weeks. It was a perfect opportunity for me to think about what makes a good business idea.

‘Good’ is an ambiguous term. It comes laden with assumptions – which could be different from person to person. So I thought I would elaborate on what, for me, a good business idea entails.
1.  It is profitable – or if it is a social business or not for profit, that it meets its clients’ needs and is financially sustainable. Of course, in a startup, part of the territory is that often we don’t have any certainty that the idea will be profitable. That is why it’s so important to evaluate the opportunity so we can make an educated judgement about that instead of spending time building something that won’t meet our financial goals.

2. It is proven. If the idea has worked somewhere else, has conducted trials, has already got customers or contracts signed, that is a big plus for me. It proves there is demand and that the business can make money.

3. There is a specific target market that is big enough to build a profitable business around. Almost everyone who has shared a business idea with me has also told me that their target market is everyone. This is a mistake however. For most businesses, everyone might potentially could benefit from your product or service, but the reality is that only a certain group or groups would buy it.

For instance, I spoke with someone the other day who is a personal chef. She goes into peoples’ homes and cooks fresh meals for them. When she started her business, she had a whole list of people that could be her target market including new mums, elderly and sick people. However she has found that her target market is high powered professional couples.  Now she can focus her efforts, knowing who her customers are. If you can find this out by customer research before you start, you can be more efficient.

4. There is a proven problem that the business solves. In other words, the business solves a point of pain for people. People buy for three reasons: because a product or service fulfils a basic need, because it solves a problem or because it makes them feel good. I like the first two reasons because, ironically, pain is a more powerful motivator for human action than pleasure. Also, in a recession, businesses fulfilling basic needs or solving a problem tend to fare better than those providing luxury services.

5. People will pay to have the problem solved.Google solves a problem in allowing us to get accurate search result but it’s not a problem we are willing to pay for. They make money because they solve another problem – how to get advertising in front of qualified customers. So a business has to find a problem to solve that customers will pay for.

6. A good personal fit. In other words, the entrepreneur with the idea has to have the skills, experience and resources to implement it well. So often, I see people pursuing ideas which are not a good personal fit. It MIGHT be a good idea, but it’s not a good idea FOR THEM. Pretty much 100% of the time people don’t succeed with ideas that are a bad fit. This is the reason that VCs focus on the team so much. They want to make sure that the entrepreneurs have the chops to execute well.

So, there’s my opinion. Do you agree? Is there anything you would add?

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Comments

  1. Chris says:

    Maybe you could include something about ethics? Is it run with good ethical principles in mind (and practice)?

    • I agree Chris. Ethics is really important. And in a really practical way; like, are we concerned more about what our customer needs or making money? Do we think about the impact that our business has on other people and the environment? And ultimately, what are we doing this all for? Is our business helping us to live the life we want to live?

      Probably a topic for a whole new blog post!! 🙂

      • Great post Susan and great comments everyone. I loved the comment around ethics and I’d look at it from a perspective of empathy, too.
        When building a business, you have an opportunity to step into your buying personas’ moccasins, feel how they feel and build a deep empathy towards them. I think, this is the basis of a businesses – to understand your users inside-out and address their problem in a relevant and empathic way as Susan explained in point #3.
        Great post and looking forward to future posts!!
        David

  2. Good post!
    Confirming you have a target market out there and that they want your products/services is indeed the main things.
    Test your market first!

  3. Floyd Andrews says:

    About the part where you mentioned proven: There are some people who are willing to risk on something that they just thought of. Their ideas may have worked for them during the testing, but there’s still that risk that they won’t work on other people. Despite taking that risk, they still end up being successful.

    -> Floyd Andrews, Resell SEO

    • Building a successful business is all about minimising risk in my view. I say that because in reality, you have a certain amount of time and money to make your idea successful. When time or money runs out, to all intents and purposes the business/idea dies.

      Therefore a startup is all about getting to breakeven before you run out of time or money so the startup can survive. The best way to do this is lower your risk as much as possible as early as possible. That maximises the time and money you have available.

      That’s a long way of saying that i agree, occasionally people do come up with an idea and do it without testing and it turns out for them, but I think you greatly increase the odds in your favour by doing some testing of your idea first and knowing as much as you can about your target market..

  4. Susan – great post

    I agree with your six and would add #7 Sustainable – which links to profitability, cash flow (to fund future growth) and the ability for the idea to evolve and expand over time.

  5. Great post!
    I agree with you in almost everything, but for example, number 2 is not necessary for me. It is true that you minimize risk if someone has tested something similar before, but I don’t feel comfortable following the same path that others did. You can succeed “copying” the same idea in a different country, but in my opinion next big things are there willing to be found.

    I will also add #7: Be your client number 1. If you have a pain no one resolves, and after researching, you realize that you are not alone, that there is enough pain to be profitable, you know exactly what you want and how to do it.

    Regards,
    Jorge

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