What constitutes a good idea for a business (part 1)?

What are the criteria for judging the quality of a startup idea? Some criteria are important in general; others vary depending on personal resources, strengths and interests. They key is to find an idea that’s good for you.

Microsoft is one of the biggest entrepreneurial success stories in the past 50 years, and made founder Bill Gates one of the richest men in the world. Clearly Microsoft was a great idea for Bill Gates. But would it have been a good idea for you? In “Outliers”, Malcolm Gladwell argues that Gates had an ideal background to take advantage of the personal computer revolution because he had very rare access to computers through his elite high school, started programming at age 13, and had 10,000 hours of experience by the time he did his famous deal to provide software to IBM. Experience may not be important for every venture, but, as Gladwell points out, it was a critical advantage for Gates.

Over the years, I’ve crafted a set of criteria for good startup ideas, building on concepts I learned from a favorite business school professor, Amar Bhide, and modifying them based on my own experiences and interests.

Keep in mind that these criteria are tailored to individuals who can’t just snap their fingers and raise millions – though they might be in a position to raise millions after bootstrapping their way to more modest goals.

Low Startup Costs. One thing I look for is low startup costs. Sounds obvious, but it’s often ignored. For example, consider a choice between launching a business based on an innovative design for a pen vs. launching a Public Relations (“PR”) firm. Starting the pen company will probably include hiring an agency to design a prototype ($$), and developing the machinery or “tooling” for production ($$). Since demand for the pen is unproven, you might have to conduct market research ($$) and / or do test marketing ($$) before you can convince retailers to carry it in their stores. All of a sudden, starting with an innovative idea doesn’t sound so attractive. Now consider the PR firm. Yes, it will probably need some promotional materials like a website, business cards, etc. – but so will the pen company. Other than that, you can probably start the PR company with few minimal out-of-pocket costs. As Bhide would say, look for ideas that are evolutionary, not revolutionary, because someone has already spent the time and money to make sure they’ll sell. To differentiate your business, provide better service, or develop a specialized practice area.

Another way to keep startup costs low is to take a phased approach. Want to launch a new beverage? Start with bottles used by other companies before investing in your own design. Get the business started with second-tier talent, and upgrade later. Partner with a local distributor and piggyback on their retail accounts. Prove you can generate demand from retailers and consumers locally before looking into expansion.

In general, it’s a good idea to focus on something you can launch with your own savings. If you must, borrow money from friends or family members. But avoid raising capital from the outset. That way, you’ll have more flexibility to change the business as you progress, you won’t have the added stress of worrying about providing returns to your investors, and you’ll probably end up making smarter, more economical decisions because you’ll have little room for error or waste.

(more to come shortly). Got your own criteria? Please comment!!!

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3 Responses to What constitutes a good idea for a business (part 1)?

  1. […] Another important criteria for a good idea is low marketing costs. Let’s go back to the pen vs. PR comparison. To make money in the pen business, you’ve got to convince millions of consumers to ditch their current pens and buy yours. You can accomplish some of the marketing by convincing a few big retailers to carry your pen, so consumers will see it while shopping (that’s called “push” marketing). It’s not easy to get them to carry a new brand, but let’s say you do it. To be successful, you probably have to get customers talking about the pen, and looking for it when they shop. That will probably require advertising and promotions, which are expensive (aka “pull” marketing). You may even have to hire a PR firm!  Speaking of which, marketing costs for a PR firm probably consist of you making sure everyone you know is aware of your services, chatting up prospects at every event you attend, and pounding the pavement to generate as many client pitches as possible. Cost? Not much. […]

  2. […] find topics like what’s in a business plan, how to think about whether you’ve got a good idea for a business, and how to think about financing your business. You’ll find that my approach […]

  3. […] find topics like: What’s in a business plan, how to determine whether you’ve got a good idea for a business, and how to think about financing your venture. You’ll see that my approach favors […]

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