How to Start a Business

Does the Business Make Sense?

You have an idea for a new business. You wonder if it has the potential to be successful. If you are like many people, you will think about it for a while, and then let the idea dissolve into the background. Everybody will agree that starting a new company is hard work. But even analyzing a new business idea to determine if it is feasible can be daunting. This help section assists you in determining if your business idea is feasible.

A business idea becomes feasible only when many dozens of conditions are met. To name just a few:

  • Are sufficient customers interested in buying the product or service that the business intends to offer?
  • Do customers see sufficient value in those products so that they are willing to pay the asking price?
  • Does the business have the resources (money and people) to reach potential customers?
  • Are the company's expenses low enough so that it can operate profitably?
  • Will competitors easily steal away your customers?

Financial feasibility is a necessary but not sufficient aspect of feasibility for your business idea. Financial feasibility should be the first aspect of feasibility to explore for two reasons. First, it is so critical to success of the business. But second, and even more importantly, once you explore financial feasibility, the models you build will force you to ask (and answer) questions about every other aspect of business feasibility. The result is that once you complete the financial feasibility test, you have pretty much analyzed every aspect of business feasibility.

Determining financial feasibility requires you to state assumptions you are making about your business explicitly. But stating business assumptions explicitly has an additional benefit: it also enables you to run your business in a more responsible manner. Once you start your business, you will be able to confirm (or refute) each assumption. And if any assumption proves to be valid, you can check it off, and feel more confident that you are on the right path. If any assumption proves to be invalid, you can revise it, immediately see what the financial implications are, and, if necessary, adjust other assumptions to accommodate for the new information.

Envisioning Your Business Idea

People conceive of business ideas in many different ways. Perhaps the most common is: You have thought of a new product. Although this is the most common scenario, it represents “a solution in search of a problem.” Most successful businesses are successful because they address a clear and compelling pain that a group of potential customers feel. If you think of your business idea as “selling some new product,” that is okay, but you should quickly spend quality time addressing what pain (or “need”) is felt by customers that would cause them to want to buy this product. Key to a product being successful is that customers see it as a better solution to their pain than alternatives offered by competition. Better can be mean lower priced, or more convenient, faster, cleaner, greener, more exclusive, more reliable, and so on. These latter qualities are called differentiators.

Another way you could conceive of a new business idea is: Selling an existing product in some new way. For example, your business idea might be to offer the identical product that your competitors are offering, but you are providing your customers with a new (and better) way for them to purchase it.

Another way is: Selling an existing product to an entirely new market that has not had this product before. Perhaps your business idea entails a product that your competitors already offer, but you are bringing it to a market that has never had that product before.

Another is: Identifying an unmet pain within a market. You might stumble upon a problem or you might discover a problem as the result of doing research about some market.

State Your Business Idea as a Set of Assumptions

Start recording all assumptions you are making about your business. What products will you sell? At what price? How large is your market? How many will you sell each year? How much will it cost you to purchase and/or manufacture the product? How many employees will you need? How much will you pay them? And on and on. There are dozens of such assumptions, Record these assumptions in Offtoa. Many reasons exist to record them:

  • It forces you to think through every aspect of your business idea. You don't want to be 6 months into a business and say “Oh, I wish I had thought of that earlier!”
  • The numeric assumptions enable Offtoa to create your pro forma financial statements automatically.
  • You can assign a red flag to each assumption that is not yet confirmed. Remove flags as assumptions are con­firmed.
  • Assumptions that are critical to your success and still have red flags become targets for experiments. Build and deploy prototypes, run focus groups, do anything it takes to find out as early as possible if those assumptions are true or not.

Use Offtoa to Determine if Your Business Idea is Financially Sound

Financial statements are simply tables of numbers that enable you (and others) to easily assess the financial health of a company. As a result, they are extremely useful in assessing the likely outcome of a company if it followed a particular business path. When financial statements are used in this forecasting manner, they are called pro forma. To determine of your business idea is financially sound, use Offtoa to transform the set of assumptions into a complete set of pro forma financial statements. Then use it to perform 50+ checks to assess whether the business is financially sound. This will help prevent embarrassing moments when you present your business idea to others. Of course, there is the old adage “garbage in, garbage out,” so be careful about how you do this assessment. You can easily manipulate assumptions to make the business idea look financially sound.

Refine the Assumptions

If the financial statements fail any of the analyses, you need to decide how critical the situation is. For each failure, Offtoa provides some general guidance concerning how critical the situation is, but only you can decide how critical it is in your specific case. If you want to address the problem, Offtoa provides you with a list of things to change to your business idea (and thus in your assumptions) that could fix it. But you may have good reasons to ignore the alleged problem. If so, make sure you fully understand your rationale and can articulate it because others will likely ask you about it.

Business Accelerators

Business accelerators are environments in which start-ups can immerse themselves for 3 to 6 months surrounded by committed mentors. Although entry is highly selective, the “graduates” from such programs are armed with a wealth of great experience and knowledge about how to run a company, and most accelerators invest a nominal amount ($10,000 to $30,000) in the company in return for a small equity stake. Fundamental to most accelerators is the concept of getting to market as quickly as possible with a minimally viable product (MVP), understanding what the market really needs, and iterating. Accelerators are now available all over the World; the two largest in United States are TechStars and Y Combinator; you can learn about all of them from the Global Accelerator Network (gan.co).

The concepts of capturing your business assumptions in Offtoa, letting Offtoa generate your pro forma financial statements for you, and validating the financial feasibility of the company before launching is perfect for companies in business accelerators because they (a) set the stage for the hypotheses that you will be using in your business experiments, (b) take the pain out of financial planning by reducing it to the statement of business assumptions, (c) allow the inventor-founders of a start-up to focus their effort on product development and market feedback, and (d) facilitate rapid and guided pivoting.

Note: Some of the above has been extracted from Davis, A., Will Your New Start Up Make Money?, Scrub Oak Press, 2014.


Site Tools