This article is the first of a series of excerpts from Matt Crowley's new book, "Getting in the Game: Guiding Your Startup Through the World of Venture Capital and Angel Investors", published by Venture Capital Press and available at Amazon.
The Right Question
Many entrepreneurs start thinking about how to launch their businesses by strolling down the "Business" aisle at Barnes & Noble or downloading an eBook. Itís easy to get excited just flipping through these books and imagining how life would be as the next Fortune 500 CEO.
There is a nasty topic many of these books gloss over Ė how many businesses crash and burn. The Small Business Administration issues a report that shows, like clockwork, nearly 550,000 new businesses start ... and 550,000 business close their doors. The SBA likes to say that some of this is seasonal businesses opening and closing in the same year Ė examples would include the Halloween costume stores or fruit stands. Even factoring these businesses in, the numbers can be intimidating.
How does an entrepreneur succeed against those odds? Do you need a great business plan? Does your business need to revolve around something you can patent? How much cash should you carry to get the business through that critical first year?
These are the wrong questions. Each of them leads you down the path of spending time and money before you know what you are getting yourself into. The most important question an entrepreneur needs to ask herself is this:
Is my idea something that can be a real business, or is it just an interesting idea?
Where to Start
There are two basic ways to approach this question.
Without intending to sound like an MBA class, an entrepreneur can look at his idea quantitatively or qualitatively. An analytical person will immediately think about market size and price points. A qualitative person will think about whether their idea solves a problem and whether itís a big enough problem that a potential customer will care enough to want to buy the solution.
Both entrepreneurs are headed down the right track.
New products revolve around solutions to problems. Not all solutions are businesses, though. A solution needs to address a problem that is so big that enough customers will want the solution. It needs to solve a problem that is painful enough for customers to be willing to pay to relieve the pain. The customer needs to be willing to pay enough for the solution to make a profit for the solution provider. It needs to be a solution tied to a problem that a customer understands they have, or like the iPad, is something the customer may not have seen as a need but can rapidly understand its benefits once the solution hits the market.
My Family Thinks Itís a Great Idea
Once you have identified a solution to a problem, how do you decide if enough customers will actually buy it?
Market research is the answer. Before you set up that corporation or LLC or race to register the brilliant website address, scout around first. There is no worse feeling than spending thousands of dollars developing an educational software program only to look on the web three months later and find out there are ten pages on Google with dozens of companies offering the same software listed on each page.
Take the time to interview potential customers. Asking your family, boyfriend or neighbor in the cubicle next to you for their opinions is fine, but most likely they arenít living with the problem you are trying to solve. Making money is a serious business, so pound the pavement a little and ask people with the problem.
Can we fire up the website yet?
You are well on your way to launching an actual business, but you will have to do one more thing on your pre-launch checklist.
You need to determine if you can sell your solution profitably. You have learned roughly how much the customers are willing to pay. Now you need to determine how much delivering the solution to the customer will cost. Doing a budget, on paper or in Excel is a must.
Why Do I Want to Do This?
You have done all of the homework to have a feel for whether your idea is enough of a solution to generate a business that could actually make money.
The next question is: are you the right person for the job?
All entrepreneurs need to be able to absorb risk. It can be a huge undertaking to quit your job, put your own cash and your familyís future on the line. Launching a business can also be a lonely, isolating experience at first since you are likely to be a one man band at the start. Being good at handling "no" thirty times a day is also valuable.
Being excited about making money doing what makes you happy is great; starting a business as a way to fire your boss or call yourself a CEO at the chamber of commerce mixers probably wonít generate the large quantities of inspiration it will take to get through the many rough patches every entrepreneur runs into. Make sure you have thought through why you want to make the jump because starting and running a business can be a long road.
Who is Going to Foot the Bill?
A personal finance inventory check is also an important exercise. If you can start your business as a second job, thatís great. If you have saved all of your acorns and can carry yourself for the first year, or you have a rich Uncle Phil who can cover operating expenses for several months, thatís great too.
Be extremely careful going into debt to set up a business. Racking up enormous credit card debt or remortgaging the house is a fantastic way to end a marriage.
By working through these issues, you have been able to test the viability of turning your great idea into a business, or deciding to go back to the drawing board.
Matt Crowley is a business lawyer with a practice focused on assisting Los Angeles entrepreneurs, and is also author of Getting Into The Game, a new book that helps to guide entrepreneurs through the world of venture capital and angel investing. You can purchase a copy of Matt's book on Amazon.com, and contact him at Crowley Legal Strategy.