Aspiring entrepreneurs should test their business idea thoroughly before writing a business plan, says John Mullins, or they are likely to join the majority of start-ups and fail to make it past the five-year mark.
As the economy begins to recover, many would-be entrepreneurs are attempting to turn crisis into opportunity. Taking advantage of disrupted markets and lower resource costs they are trying to transform big ideas into thriving new businesses.
The statistics suggest it will be an uphill battle - over 80% of new ventures fail before their fifth anniversary, with many hitting the scrapheap much earlier. One major reason for start-ups failing to shift from first to fifth gear is that the business idea simply falls to pieces when faced with the reality of the business superhighway.
That's why aspiring entrepreneurs, instead of wasting time, effort, goodwill, their own and other people's money on a venture doomed to failure, must give their business brainwave a thorough 'idea MOT' before setting off.
If you are an aspiring entrepreneur, pay particular attention to seven key areas that make all the difference in determining whether your idea is attractive, or headed for the junk yard:
There is no business without customers (OK, the occasional dot-com survives without them, at least for a while). Will customers in the target market segment be offered clear and compelling benefits, at prices they are prepared to pay, and that are different from existing offerings? Detailed knowledge of intended customers is essential. Who are these people or businesses? Where are they? How do they behave? Conduct interviews with a range of potential customers before writing that business plan.
Some entrepreneurs have ambitions to conquer the world, others are happy to run a small niche operation. Which category are you? How big is the market and what are its future prospects? Consider trends likely to influence customer buying behaviour such as: demographics (e.g. ageing populations); socio-cultural trends (e.g. a focus on health and weight reduction); economic trends (e.g. increased purchasing power in developing nations); technological trends (e.g. a more mobile workforce); regulatory trends (e.g. alternative energy regulations); natural trends (e.g. resource shortages).
Use Harvard Business School professor Michael Porter's five forces framework to assess industry attractiveness. How easy or difficult is it for companies to enter your industry? A low threat of entry is usually preferred. Do industry suppliers or buyers have the power to set terms and conditions? Weak supplier power and buyer power is desirable. How easy or difficult is it for substitute products to steal your market? A low threat of substitutes is better. How intense is the competition? Hopefully competitive rivalry is not fierce. Finally, as a result of the five forces, is the industry a poor performer overall?
4. Sustainable advantage
The business idea should confer a degree of sustainable competitive advantage. Otherwise, a better-resourced competitor is likely to quickly follow and eat your lunch. Certain attributes, such as proprietary elements, or unique organisational processes, make sustainability more likely. Take a close look at the business model, too. In particular, make a quantitative assessment of: the revenue model - are revenues adequate in relation to capital investment required; gross margins - what revenues remain after paying the direct costs of what you sell; the operating model - what are the costs other than cost of goods sold; working capital - what money is tied up in inventory, what is the timing of your projected cashflows; and the investment model - what is the upfront spend before revenues are able to cover costs?
It can be a bumpy ride starting a new venture; the majority of new businesses fail, after all. How committed are you to making your venture a success? You must be clear about your motivations, aspirations, mission, and about the level of risk you are willing to take in pursuit of the dream. Are you prepared, for example, to put your house on the line? Are you prepared to work 24/7 when you need to?
Behind every successful new business founder is usually a great team. In every industry there will be a handful of critical success factors; decisions and activities that can have a disproportionately negative or positive effect on the business. Whether it's supply chain management, or computer coding, the start-up team must include people with a proven track record in the areas that are critical to success.
Everybody knows that business success is as much about who you know, as what you know. But there's another aspect of this truism that many entrepreneurs don't understand until it's too late. For most new ventures that eventually succeed, it's not Plan A that works: its Plan B, or maybe Plan Z. It's your connections – with well informed suppliers, knowledgeable customers, and others in your industry – that are likely to get you to a more viable Plan B before you run off the road.
Most business plans are written in haste, leaving their entrepreneur authors to repent at leisure. Far better, though, to test the idea rigorously beforehand. Carry out the big business idea 'MOT' first and your business will have a far better chance of speeding to success, rather than ending up in the new business junk yard.
John Mullins is professor of management practice in entrepreneurship at London Business School
and author of 'The New Business Road Test: What Entrepreneurs and Executives Should Do Before
Writing a Business Plan', London: FT/Prentice Hall, third edition 2010, £24.99 www.newbusinessroadtest.com