DON’T START A BUSINESS, until
DON’T START A BUSINESS, until you think about these three questions. Entrepreneurship is synonymous with risk, reward, and the unknown. Although those associations have been established with good reason, there is an important distinction between risk and recklessness.
Entrepreneurship is synonymous with risk, reward, and the unknown. Although those associations have been established with good reason, there is an important distinction between risk and recklessness. The best entrepreneurs I know take calculated risks. Before jumping into things, they do extensive research and build expert level knowledge of their customers, market, and business model.
Having supported many entrepreneurs in planning their business, I would absolutely NOT start a business until I had answers to these three questions.
1) Is this an idea or a solution?
Did you dream this up or is this something people will pay for? I would rather build my business around a solution to a customer problem, than a neat idea. So, how do you know if your idea is solution? Go talk to some people, and it can’t be your mom or best friend. Go talk to people that you think could be customers. Find out if your product or service would solve a problem that they care about. The best scenario is you’re suggesting a solution to an urgent problem.
2) Is there a margin in this business?
Obviously, there are costs associated with any business. Before I invested my time, energy, and money into an opportunity I would want to know if there could be a reasonable profit margin. The lower the margin the higher your sales volume needs to be. For example, the average restaurant in Canada has a 3-5% margin, so you need to sell A LOT of plates of food to make good money. A better margin for example would be found with iPhones, they are around 65%. That’s an incredible margin that most businesses won’t achieve. However, the takeaway isn’t I need a 65% margin, it’s thinking about if your solution has the POTENTIAL to become a high margin business.
3) What is my path to break even?
So, customers want my product or service, I have a reasonable assumption that there is a good margin at scale. Now, you need to think about, how much product do I need sell to cover my expenses? Is this an achievable number? If I’m looking at starting a car dealership, do I have to sell a car a day to keep the lights on? Is it three cars a day? You need to know this number. The higher the number, the better your marketing plan needs to be. The more working capital you need. A lower number means less risk and quicker path to profit.
When it comes to starting a business the more you know, the more you can reduce the risk. You will never eliminate the risk, but you can be aware of it and thus mitigate the risk. Customer needs change. You’ll uncover hidden costs, and things will be more expensive than you thought. Your breakeven will probably be wrong too. However, you can ballpark these things to give yourself something to assess the merit of your idea. Everyone needs a starting point, and if you’re really an entrepreneur you’ll adapt and change your business as you learn. Regardless of your credentials starting without doing the research is just reckless. Don’t be reckless.
If you have an idea, and you want help to answer these three questions; we’re currently accepting applications for our next cohort of the Venture Validation Program. If you’re interested in learning more, contact, Dakota Lutes, by email at email@example.com