How good is that idea really?

Last week I mentioned I was going to have lunch with an old workmate, Glenn, to discuss a business idea he been asked to get involved with.

I responded to his initial email in detail about things to think about in regards to getting involved, but not whether the idea was a good one in the first place. We discussed that over lunch.

To judge whether the idea was a good one, I adapted an easy framework written about by Amar Bhide who has been a Professor at Harvard and Columbia Business School for many, many years. He calls it the three questions that every entrepreneur must answer.

The three questions before going into any venture are: What are my goals, what is my strategy to achieve my goals, and finally, what do I need to execute this strategy?

To flesh it out, I put these questions to Glenn.

What are the Goals?

• What exactly do the founders want to achieve? Saying you want to create a profitable business isn’t exactly a tight goal. How, much, when, why, how, are great places to start if you want goals you are likely to achieve.
• What type of business is this and how will this business work? Understanding what business you will actually be in, how the offering is to be monetized, who will buy and what is the value proposition are essential.
• What growth rates do you need to hit the targets desired? It’s great to say you will trade sale the business for $5 million in two years, but what growth rates does that require?
• What are the risks to the venture? Any venture you expect to make a return on has risk (finance 101). If risks are not explicitly recognised, they don’t get planned for, which turns setbacks into failures.
• What sacrifices are being made? Only in fairy tales do start-up founders get to have it all. If nothing else there is an opportunity cost of focusing on this deal. But much more likely it’s salary and time with family that’s being missed out on.
• Can the founders live with the risks and sacrifices? This is the question that will normally determine whether a partnership will disintegrate as soon as things get tough.

What is the Strategy to achieve the Goals?

• Is there a clearly defined strategy that addresses all the goals? As the old adage goes, “those that fail to plan, plan to fail”.
• Can the strategy generate sufficient profits? You’d be surprised how often there is a disconnect here.
• Can the strategy generate the growth required? If you want to deal with Australian dog owners, do your research to understand what your real market is, not just a percentage of our population.
• Is the strategy sustainable? How will you protect your growth rate as you come to the notice of others?
• Is the rate of growth too conservative or too aggressive? A rate of growth picked to hit the target revenue is meaningless if it’s not deliverable by the strategy.

Can the founders execute this Strategy?

• How much money will it take to get this business operational? Entrepreneurs are notorious for underestimating this and assuming that they will simply get the money. So is the number realistic and have sources of funding been validated?
• The customers: How many, who are they, how are you going to get to them, how much will it cost to get to them, will they buy and how
  much? If you haven’t validated the customer base then the risk increases astronomically.
• What does the supply chain look like to deliver products and has every step been validated? If you haven’t done this, how do you know you can deliver at the right price and make the profits required?
• What organisational systems and processes will be required, are they clearly identified and available? Tight organisational systems are always a major competitive advantage against copycat offerings and comprise a large chunk of the goodwill of a business being sold (think franchises).
• What is the founder’s role in the business and are they the best people for the job? This is of course always the toughest question because founders never want to recognise that maybe they aren’t the best person for the job (its part of the entrepreneurs raison d’être)

So, a tough session with Glenn. I asked a question, then stuck pasta in my head. Asked more questions, more pasta.

Glenn’s lunch went cold and he got grumpy because there were simply too many questions that couldn’t be answered. So the idea was good, but was it a good idea for him to invest? The answer clearly appeared to be ‘not yet’.