If you're thinking about starting a new business, you can test it out with this five-point checklist.
The prospect of starting a business can be frightening. It is a risk and a tremendous opportunity, equal parts challenging and, hopefully, rewarding. Given the enormous risk that's inherent in entrepreneurship, many potential business owners will ask very difficult questions of themselves: Is this worth the risk? Do I have the right personality type to be running a business? And perhaps the most frightening: Is my business idea any good?
These questions, while potentially disheartening, are important ones to ask. The following offers a few basic cuts, a checklist of sorts, to help you determine whether or not you truly have a good business idea.
1. Is your idea grounded in personal experience?
Founding and running a business is like writing a book. It's impossible to write a book that doesn't come from your personal experience. You can't push something out of you that is not inside of you to begin with. The best business ideas come from what's inside you. Henry Ford was an avid mechanic before he developed the assembly line. Bill Gates was a programmer at a young age. Donald Trump's dad was a very successful real estate entrepreneur so Trump was immersed in real estate from birth (too bad his Mom was not a hair stylist).
The core technology behind our company's software products is a system that converts financial statements into easy-to-understand narrative reports. The genesis for this kind of system came about when I was working with business owners and realized that they were good at running their businesses but could not read financial statements. I identified something in my own experience that was a problem then created something to solve it. Good ideas have to come from something within you: something you've seen, something that frustrates you or someone you know really well, something that you want to improve. That's a given.
2. Do you have passion and expertise in the business?
When evaluating the merits of your idea, it's very important for your personal experience to intersect with a passion you have. This can be trivialized and glossed over because it seems so obvious, but it's very important.
Most company founders I know, either A) love running businesses or B) love running a particular business, based on something they're interested in. The best entrepreneurs I know fall into both of these categories. I'm sure there are exceptions; people who can invest in single companies and do really well by picking the right businesses in a strategic, careful, and unemotional manner. There are entrepreneurs who can start businesses in industries they don't care about- buy for a dollar, sell for two. These people exist; I just haven't seen any successful ones. On average, I think you'll find that most successful business owners were (and are) passionate about the original idea behind their companies. The best entrepreneurs are like a musician who has a song and must sing it.
Also, this may seem obvious, but as a function of your interest in something, it helps if you're actually good at that thing. In order to successfully run a lawn cutting company, you probably need to have cut a few lawns before. Subject matter expertise is a tremendous asset and, in most cases, a crucial part of starting a successful business. Specific knowledge is needed.
3. Are you able to articulate the "why?"
The "why" behind your business idea is absolutely crucial. It's important to have a vision for your company- -a strong internal driver of why it is important for you to be successful. A sense of purpose will help carry you through the unavoidable periods of trial, doubt, and struggle. It helps if, as previously mentioned, you care about what you're doing. When the inevitable tough times come, the ones who hang onto the tree are the ones who are passionate about what they're providing to the marketplace. Otherwise, they will not have the gas to make it through inevitable travails.
4. Is it in a healthy market or at least a market that is not unhealthy?
It's possible to be a successful entrepreneur by buying a railroad line or being a tobacco farmer. It is possible to be successful in a diminishing market, but you're certainly not giving yourself the best chance for success. You want to find a market that has health in it. If you're in a healthy market where the tide is rising, you don't have to be as smart or good. You may be passionate about running a telephone booth company or a travel agency, but there's not a lot of room for growth, expansion, or success in an industry like that.
5. Are you cutting out a middle man?
Successful entrepreneurs are always trying to make an argument against the equilibrium of the market. They're arguing that a certain process or service isn't being performed in the most efficient, streamlined, and effective way possible. They're introducing a new entity that will either outperform the current entities or cut them out completely. Remember that every time you start a business, you are adding one more unit of supply to the marketplace so your argument must be a strong one.
The internet has been a tremendously disruptive and devastating force against people who operate in "the middle." Ask real-estate brokers and travel agents about the impact of Craig's List and Travelocity on their business models. Anything that stands between the buyer and seller is being minimized, streamlined, or in some cases, totally leapfrogged. If your idea is cutting out an unnecessary step or (let's face it) an unnecessary profession out of the equation, the odds are that it's a pretty strong idea.
Don't be afraid to challenge and stress test your business idea by asking these questions. If you can answer most or all of these questions with a "yes," you've probably found an idea that's worth pursuing.
BRIAN HAMILTON is the co-founder and chairman of Sageworks, an Inc. 500 honoree. Hamilton is an original co-developer of FIND (Financial Information into Narrative Data), which converts financial numbers into plain language.