How To Evaluate a New Business Idea

by Dan Johnston

On Sunday it happened again. An all too familiar and all too painful experience…one I’m afraid I’ll never be fully free of. How the Dragons and Sharks continuously survive this slow torture I can only guess.

I like to call it the “Blind Pitch”.

“Yeah but the market is so big…”
“Yeah but this other company has already…”
“Yeah but all you have to do is…”
“Wait, let me finish…”
“Wait, I didn’t explain…”

It’s the business pitch blind to the difficulties of entrepreneurship.

Blind to the realities of launching a business.

Blind to the realities of cashing out or sustaining profitability.

It’s the pitcher blind to the importance of their own strengths, weaknesses and resources.

It’s the conversation packed with “Yeah but” and “wait, let me explain”.

It’s always funny to me when people think they are onto something simply because they have a business idea that could work, or someone else has already made work.

model-doesnt-equal-success

People aren’t machines. However slowly, even Economists and MBAs are starting to realize this.

People drastically over estimate their own discipline and ability to follow through when the times are tough. They think “Hey, if I just do this I will get this” with no consideration for the human factor.
Even if you COULD build a business you dislike, through discipline and drive, why would you? Why not save that discipline for the gym and do work that makes you happy?

The reality is your first few years of business aren’t likely to be profitable (at least after paying yourself a similar wage to what you’d make in a regular career).

Even “overnight” successes aren’t that overnight. Groupon was another company before pivoting to their model that took off. And even so it’s a 1 in a million kind of company.

And in case you didn’t notice, they aren’t going so hot.

Don’t Chase Easy Money

Most people, reading that last part on Groupon probably thought “Yeah, but their founder got rich so who cares if the company fails now?”

This isn’t the right way to think. Here’s why:

1) All Human Perception Is Relative

If your net worth jumps from $100 to $100 million, you’ll feel an initial burst of happiness. Yet, within a few months being rich “normalizes” and becomes your regular state.

You don’t wake up happy just because you’re rich.

Happiness comes from from relationships, progress and feelings of accomplishment (among other things). This isn’t fluff, it’s been proven by dozens of studies and the latest neural science (i.e. brain scans).

So believe it or not, the CEO of a failing billion dollar company, seeing his name slammed all over Bloomberg, knowing he disappointed thousands of investors, isn’t likely to be that happy.

2) You Aren’t Going To IPO

You aren’t Andrew Mason or Mark Zuckerberg. Your next venture is not going to IPO. Accept you’re not going to get rich quick and you’ll be in a much more powerful position to make decisions and design your future.

A Viable Business Model

For me, a good business is one that could sustain itself in the long run, with a viable 10 year plan. That doesn’t mean you won’t change course or will even be in business for 10 years…it just means it would be possible.

And yes, this means all those “Six Figure Business In A Box” ideas are bullshit. Any business based on tricking a system or holes in the market can’t be sustained…why do you think everyone is focused on teaching you how to get rich instead of just doing it themselves?

Business models aren’t the focus of this article. Before you start a business you need to thoroughly evaluate the model and determine if it has the potential for financial success and longevity.

Basic considerations include income (how will you earn money), expenses and profit margins, and a unique differentiator.

This requires more knowledge than I can supply in these few paragraphs. If you’re trying to make a decision around this you may want to considering hiring a coach to help you through the process.

Generally any business idea involving “hot topic” for “broad niche” is stupid. As some pitchers on last week’s Shark Tank learnt, “Social Media For Doctors” is not a good business idea.

Fortunately, most businesses aren’t reinventing the wheel. This means you can usually determine if there is a viable business model by looking at existing companies doing something similar. For example, restaurants are a proven business model; their success or failure just depends on the details of their business plan and execution.

Find Success With Your Business

A friend of mine was encouraging another friend to open a new kind of grocery store that focuses on pre-packaged meals based on weekly recipes.

The model has been proven in Germany.

I agreed with her that it was a decent business idea, but it was a horrible idea for our friend.

Me: “Do you like going to grocery store”
Him: No

Me: “Do you like have any interest in organic food or healthy eating?”
Him: No

Me: “Do you like cooking?”
Him: No

Me: “Have you ever worked in a grocery store”
Him: No

Me: “Do you have any interest in working with people day to day and talking to them about food or cooking?”
Him: No

Her: Yeah but, he should do it! They already have 12 stores in Germany!

A Great Business = A Viable Model Which Aligns With YOU. You Are The #1 Determining Factor of Success or Failure.

How I Evaluate Business Ideas

Authenticity and value are tremendously important to me. I’ve always been turned off of people chasing a quick buck at the expense of others. When I am evaluating a business model I ask myself “Does it provide value to everyone involved?” It the answer is yes, the odds are the model is sustainable.

Next I ask “Is this business aligned with my strengths, passions and resources?” If it isn’t aligned with at least 2 of the 3 I think “Why should I be the one to bring this business to life? The world will be better served if another entrepreneur takes this project on.”

How-To-Evaluate-a-Business

There is no shortage of viable business ideas. Having one of these ideas isn’t much of an advantage unless the idea lines up with the founder (you). In the diagram above, the inner box represents good business ideas.

A good business idea that falls outside your resources, strengths and passions is a recipe for years of slaving away, constantly feeling as if you are swimming upstream.

Passions are areas you enjoy learning about or spending time in such as cars, food, technology or art. I also include here kinds of work you enjoy, such as working with people, helping others and inventing new things.

Strengths. What are you naturally good at? This includes existing business strengths and personality strengths that can translate into business strengths. For example, if you’re naturally good with people and competitive you can easily become great at sales.

Resources include people and your network, personal finances or the ability to raise money, and your experience in specific industries or types of business.

If a business idea is only aligned in one area (the blue) I say let it go. If you’re passionate about a topic but lack the experience, skills or money you need you will find yourself exhausted and soon hating what you were once passionate about.

If you have a strength in an area but aren’t interested or experienced in it, let it go. You’ll be able to use your strengths elsewhere.

If you have resources but no skills or passion you don’t really bring a lot to the table. You’d be better off advising someone else who is passionate about the idea.

What if you hit two of the three? I say go for it. Green is good.

If you have the Passion + Strengths you will find the resources (aka Richard Branson).

If you have the Resources + Strengths you may be in for a nicely profitable business.

If you have the Resources + Passion you will be able to find the right partners or develop the skills you need to make the business succeed.

All 3? This is your Gold Zone. When you have a business idea with a viable financial model that aligns with your passions, strengths and resources you are in the Gold Zone.

Gold is great, jump right in.

For The Comment Section – I really want your feedback on this article and the ideas in it. Please share one comment on the article, or ask a question, below in the comments sections. Thanks.

Comments 9

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      Author

      Great call Lisa! It was always there, quite hidden, in the “Share This” row at the end of the article. I’ve remixed it so it’s more prominent now.

      One of these day’s I’ll need to figure out Pinterest!

  1. I enjoyed the article. In your email, you said you were thinking about turning this idea into a book. Go for it. There are books like that our there, but I like your take on things and I think this idea has ‘legs’. I am sure you could expand on this topic in a useful and interesting way. I would love to read it!

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      Author

      Hey Cyprus,

      Thanks for the encouraging comment, I loved reading it and being reminded of this article and this idea. It may have to finally be turned into that book.

      Thanks Again,
      Dan

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      Author
  2. Many people unnecessarily complicate things. You have made it so simple and easy to understand. Great article my ENFP friend : )

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      Author

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