Step 1. Do Some Homework
If you try to know everything about your industry and market before you start your company, you will never launch it. Instead, learn the most important aspects of the market and the competitors.
Start with the great checklist of things you should try and learn about your market and industry from Mullins’s book, The New Business Road Test: What Entrepreneurs and Executives Should Do Before Launching a Lean Start-Up, but concentrate on looking for showstoppers, i.e., reasons why you perhaps should not start the company.
Step 2. State Your Business Idea as a Set of Assumptions
Since you cannot possibly know everything about the market and the industry, record all assumptions you are making about your business. What products will you sell? At what price? How large is your market? How many will you sell each year? How much will it cost you to purchase and/or manufacture the product? How many employees will you need? How much will you pay them? And on and on.
There are dozens of such assumptions. You can find a checklist at What Assumptions Does an Entrepreneur Make? Many reasons exist to record these assumptions:
- It forces you to think through every aspect of your business idea. You don’t want to be 6 months into a business and say “Oh, I wish I had thought of that earlier!”
- The numeric assumptions can drive the creation of all your pro forma financial statements, which you will need anyway.
- You can assign a red flag to each assumption that is not yet confirmed. Remove flags as assumptions are confirmed.
- Assumptions that are critical to your success and still have red flags become targets for experiments. Build and deploy prototypes, run focus groups, do anything it takes to find out as early as possible if those assumptions are true or not
Step 3. Determine if Your Business Idea is Financially Sound
Pro forma financial statements enable you (and others) to easily assess the expected financial health of a company. As a result, they are extremely useful in assessing the likely outcome of a company if all your assumptions prove to be true.
So the next step is to transform your assumptions into financial statements and confirm that the company makes financial sense. Some of the checks you want to perform are:
- When is it profitable?
- How much cash does it need to get started?
- Does it grow fast enough?
- When is breakeven?
- How much of a return do investors make?
Step 4. Refine the Assumptions
If the financial statements fail any of your checks, you need to decide how critical the failure is. For each check, you can change your business assumption, or you may have good reasons to ignore the alleged problem. If so, make sure you fully understand your rationale and can articulate it because investors and other stakeholders will ask you about it.
Step 5. Launch and Run the Business
As you start to run your company, you will discover that some assumptions you made during the planning stage will prove to be false and you will need to make adjustments. If you are smart, you will actually run myriad experiments with your customers to explicitly prove or refute the most crucial assumptions.
Step 6. Change Refuted Assumption and Determine if Your Business Idea is Still Financially Sound
Whenever you determine that a stated assumption is no longer valid, change that assumption based on what you just learned. Next check that the company is still on solid financial ground using the same techniques you used in Step 3.
If so, continue on the current path.
Step 7. Pivot when Necessary
If not, revise other assumptions to compensate for the new reality. Verify that this makes financial sense using the techniques you used in Step 3, and then manage your company in the new direction as defined by the new assumptions. This is called a pivot.
The odds of success for a startup are very low. Improve your chances by diligently planning and being ready to adapt when new information emerges. These 7 steps will help you balance both.
ABOUT THE AUTHOR:
Dr. Al Davis has published 100+ articles in journals, conferences and trade press, and lectured 2,000+ times in 28 countries. He is the author of 6 books, including the latest, Will Your New Start Up Make Money? He is co-founder and CEO of Offtoa, Inc., an internet company that assists entrepreneurs in crafting their business strategies to optimize financial return for themselves and their investors. Formerly, he was founding member of the board of directors of Requisite, Inc., acquired by Rational Software Corporation in 1997, and subsequently acquired by IBM in 2003; co-founder, chairman and CEO of Omni-Vista, Inc.; and vice president at BTG, Inc., a Virginia-based company that went public in 1995, acquired by Titan in 2001, and subsequently acquired by L-3 Communications in 2003.
If you’d like to learn if your great business idea will make money, take a look at Will Your New Start Up Make Money? If you’d like to verify that your great business idea makes financial sense, sign up for www.offtoa.com.