A lot of questions are made regarding how to know if an idea is interesting or not.
After all, the vast majority of the guys who want to create a business feel stopped because they don’t have the right motivation, and that’s usually attached to the lack of a powerful idea.
So, I’m happy to share with you what’s the basic and ridiculously simple methodology I intuitively use to evaluate any business model.
It is a set of criteria that allows you to easily understand what’s the potential of your idea.
But hold your horses, there’s something I want to tell you first;
When I mention “potential”, I’m not speaking about monetary potential yet. You see, in our society, there are enough startups aiming at the 15B markets and expecting 20m revenues in 3 years time, so they can be the next Uber or the next Airbnb.
I humbly think that’s not how you should picture your success to get started.
It can blind you to some great ideas that you can, indeed, implement successfully, just because you’re looking for a multi-billion dollar business.
Initially, we start with things that don’t scale. We solve one problem at a time. And when you’re able to do more of that thing because it is paying off, then you think on how to grow the business.
Now, I know this is not the usual approach that tech startups have. You have all those VC’s telling you that it requires the same effort to start a company in a small market and in a large market, and that’s the reason why you should always pick a large market.
But that’s not really up to date with the reality, I’m afraid. It is a VC perspective. That’s what they want to see when they’re evaluating a company.
Start small. Think how you can solve a really tiny niche’s problems in a way they will absolutely love you and, above anything – and as Seth Godin says -, they will miss you if from a sudden you disappear.
That’s how you build businesses nowadays, it is not about thinking, dreaming and remaining in the big picture.
Let’s go back to the point.
So, you have a list of 10 ideas. How do you evaluate them and decide what’s the one that you’ll be picking?
INTRODUCING “THE 4-STEPS METHODOLOGY TO EVALUATE BUSINESS IDEAS”
#1 Profit Margins
Every business needs profit margins, right? It doesn’t matter if you found a simple concept that sells a lot if, at the end of the month, you cannot reap some fruits of your labor.
Typical businesses with high-profit margins are built with reduced or inexistent infrastructure costs – the fixed costs that you have to pay every month – and also low variable costs – amount of money directly related to selling one unit of your product, at an early stage.
To give you an example, some of the best business models you can find are online-related content, such as Books, eBooks, and Online Courses.
Usually, these will require a lot of upfront personal effort, which mainly requires solely a couple of hours of your spare time, but won’t demand you to have any appropriate infrastructure in place or capital expenditures to publish the materials.
A second aspect you want to have in consideration when selecting a business idea is thinking about competition and rivalry. You have two very generic strategic approaches: either go for a small niche or go for the mass market. Do not do both and do not stay in the middle.
It is relevant to understand that both types of strategies have different competitive landscapes. Naturally, we are expecting to have fewer competitors on a niche strategy and lots of competitors in a mass market approach.
And, at the end of the day, where can you make money? Can you create a unique product and sell it with high-profit margins to a tiny niche? Can you create a mass market product that, even though there are lots of players in that sector, allows you still to make money and have a business?
For the sake of simplicity, what we have evaluated is very straightforward:
If you choose a given idea, how hard will it be to make money? Is the business’ sector completely overloaded with players? Are the prices ridiculously low so you can’t profit? Is there any chance to differentiate and create a unique offer?
How many of your personal hours will you need to invest into this business? Do you need six months to get things rolling or can you begin in one week and adjust along the way?
Will you need to contact hard-to-reach suppliers, such as Chinese manufacturers? And would you need to purchase and store initial stock? Do you need to buy equipment that might be expensive if you don’t have or aren’t willing to spend your savings?
What about a team; can you build this by yourself or do you depend on other people?
The Setup is usually strongly correlated with the Rivalry because one of the major components of the Rivalry is how quickly can someone enter an industry. You can also call it entry barriers.
Being scalable means that you can increase your output capacity as you find more and more customers. There are businesses hard to scale, such as the ones that depend solely on your working hours.
If you are a guru about a unique niche, and you’re performing consulting services, there’s a high chance you will have some difficulty in finding more consultants to join your company and scale your business. This type of activity relies a lot on the founder like a one-man show, which makes it hard to scale.
However, other business models such as everything which is related to the Internet can grow a lot more easily. I mean, there’s virtually no limit to how much you can sell online, which is awesome, right?
Ultimately, being scalable means you could outsource everything in your business and still earn more and more money. It also means you have very low or no capacity constraints, allowing you to grow your customers’ base without boundaries.
All you need is to evaluate your idea according to these criteria and you’ll come up with an overall grade.
Even if you don’t care that much about the grade, I think it might be helpful just to have a clear picture if a given project can really work for you or not.
An idea will work for you while it won’t work for another person. It depends on your unique capabilities and view of the world.
So, you must put that in the equation when evaluating where to start.
Hope it was helpful, but feel free to email me to if you have further questions. I’m more than happy to help!