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Eureka! You’re overcome with a genius (or so you think) business idea while going about your day. But is your idea good enough to actually act on? Knowing when it’s time to start a side gig or, better yet, to leave your job can be challenging.
This article will give you some guidelines to help you better understand if it’s worth acting upon your supposedly game-changing business idea.
Can the business model be patented or protected in some way?
You want a moat. The wider, deeper and more alligator-infested, the better. A moat refers to obstacles potential competitors would have to contend with in order to directly compete with your business.
Examples of a moat are patents, exclusive licenses or unique information that would make it difficult for competitors to copy your business model.
If your business lacks significant moats, that can be OK. There are many examples of consumer packaged goods companies that have found success with little to no moats. The mail-order shaving company Dollar Shave Club is just one example.
If your business lacks a moat, and you don’t have a positive answer for the questions below, then it’s back to the drawing board for you and your business idea.
Would the business idea require you to operate in a heavily regulated industry?
Regulation is great if you’re a consumer; it protects you from being harmed by organizations that you might otherwise have a hard time defending yourself against. But when it comes to running a business, regulation is expensive, and often prohibitively so.
There’s a reason why sectors like health care or government tend to lack innovation. It’s because all of the red tape discourages entrepreneurs from entering a market where regulation eats profits for breakfast.
The easiest way to know if an industry is heavily regulated is to talk to a few folks who are already operating within it. As part of your due diligence, you can also research the local and federal laws that govern the industry in question.
If you find it difficult to surface any laws directly related to the industry you are thinking of entering, then it may be time to rejoice.
Has the idea been done before? If so, how did other businesses fare?
In the venture capital world, there are two ends of a spectrum in which to operate. One is a "blue ocean," where there isn’t a single competitor in sight. Then, there's a "red ocean," a world in which competitors are more plentiful than seaweed.
Ideally, you’d like to operate somewhere in between. Contrary to popular belief, creating an entirely new market can be a bad idea. It often requires market education, which means you’ll need a big marketing budget or some viral component to user adoption.
Look for potential competitors, or for businesses that originally operated in your market before pivoting or going out of business. If you find one or two organizations operating successfully, and a large market cap exists for your product or service, then that’s a good sign.
Would the business idea require large up-front costs?
As has been alluded to already, it’s best to avoid a business idea that will require large up-front costs, all things being equal.
A few caveats before continuing: First, it should be noted that large up-front costs is a relative measure. Most businesses will require meaningful up-front costs to get started. Second, up-front costs aren’t necessarily a bad thing; they can mean that you are able to gain market share faster thanks to early investment. Third, up-front costs aren’t concerning if the risk that the business will fail is relatively low or, at the very least, if you are tolerant of a high-risk business scenario.
That said, you should be able to roughly calculate the up-front costs that will be required to successfully launch your business idea before actually doing so.
Can you use your expertise to give your business a meaningful edge?
Back to the moat discussion — if you have access to some sort of hard-to-find expertise, your business will be in better shape than if you have to learn skills central to the success of the business.
That’s not to say that your new venture should not require you to learn new skills. It simply means that developing a business that plays to your strengths will increase the likelihood that the business will be successful in the long run.
If you think you’ll need to develop a variety of skills essential to the success of the business, consider bringing on a co-founder or a handful of highly skilled early employees.
Improving your odds
Successfully developing a business from idea to IPO (or at least to successful small business) is a part of the American dream. While the vast majority of small businesses will fail in the first 10 years after founding, if you carefully vet your business idea before launching, you will be able to markedly improve your odds.