9 Must-Ask Questions Before You Start that New Venture
Most mobile app businesses aren't sustainable, says TechCrunch, quoting a new study. According to the large-scale survey, most revenue garnered by these small software applications accrues to the top 1.6 percent of developers.
Half of all iOS developers and 64 percent of Android developers make less than $500 a month, or $6,000 a year, on their apps. Talk about grossing more than $5,000 a month, or $60,000 a year, and you have only 16 percent of Android developers or 27 percent of iOS developers. None of that even discusses how much it might cost to develop, maintain, and market an app, meaning that the money left in pockets is probably pretty damned small.
This shouldn't be a surprise. As I've pointed out before, making money on apps is tough compared to many businesses. There are a number of reasons, including consumer fickleness and the developer's dependence on the platform vendors. But there's something priceless to learn: You should perform due diligence before getting into a new field.
I don't mean checking the financials of some company you're thinking of buying. I mean a real baseline inquiry into whether you are getting into something that offers potential return or will lock you into a world of misery. Here are 9 questions you should ask long before making a decision.
1. Is there a trend and, if so, what kind?
The app business is an example of a trend. More people buy smartphones and then use apps. But there are different types of trends. For example, the mobile marketing is maturing, so overall growth might slow. There are millions of apps out there, but will you drown in a market with few ways of highlighting new entries without the kindness of the platform vendors? When an Apple declares how much it paid out to developers, do you know the distribution? A trend can be up, cresting, or declining. The particulars at a given period of time will have an enormous impact on the opportunity you might see.
2. Do you like to move with the crowd or against it?
Some people like to march with the drummer because they depend on an existing market and demonstrated customer interest in paying for a good or service. Others want to march in a new direction because the chance of getting attention is higher, although the results will be more speculative. There is no right or wrong general answer, only what specifically makes sense for you.
3. Who's hyping the prospects?
Much of the excitement over the app industry came when Apple started revealing how much money it had collectively paid to developers over time. That certainly was a data point, although an incomplete and misleading one. The tech press took up beating the drum because it often acts as a cheerleader collective. But Apple had strong reasons to woo developers and, in particular, give them reasons to avoid other platforms. You could replace Apple with the name of a multi-level marketing vendor, a franchising company, or the people who sold supplies to 19th century gold prospectors. When someone is trying to get excited, ask what benefit they might get from your decision.
4. How do the claims fit into a verifiable context?
Work through the numbers and see if they really seem to deliver what is being advertised. There are usually independent sources of data from the government or analyst firms for comparison. You might even find that some calculations on what an interested party reveals--like calculating the average payout to app developers--can put things into more perspective.
5. Is the business model a fit?
Washing windows for stores could be a fabulous business for some. But if you live in a city overrun with window washers or you hate working outside or have a morbid fear of squeegees, the business model might not work for you. Maybe you thrive in conditions that require person-to-person sales. Whatever the case, you want a business model that suits you.
6. What would the necessary expertise cost?
Unless you've worked in a type of business before, you will need to gain some types of expertise. That could mean hiring someone or taking the time to get through your own learning curve, or both. If you want to design and sell apps and you know nothing about user interfaces or coding, it might cost so much to hire people who do that even the moderate amount of money you might make would be immediately sucked up.
7. Can you afford the start-up costs and time investment?
How long will it take you to get to market? How much do you have to pay employees and other business expenses? Can you keep everyone, including yourself, afloat for the time necessary? Could you have underestimated anything? Can you start on the side, or were you planning to devote full time to the new venture? If you can't afford what the business requires, you'll either need an investor or another idea.
8. How much can you eventually make from this?
Forget what everyone else is bound to be making. How much will you make? Take out all the expenses and look at the risk involved. Even if the chances of profitability are questionable, it can still be worth taking a flier, assuming you have sufficient income from other sources and that you might benefit in other ways, like learning useful skills or gaining experience that will be important to your long-term plans.
9. Have you planned on paying yourself?
This is a tricky one that many would-be entrepreneurs breeze past. A business must throw off enough money to pay its expenses and seemingly keep the owner going, but pretend that you are an employee. If you paid yourself what you needed, how much would be left over? If little to none, then you'd have an unprofitable business on your hands.
Asking the right questions is critical before getting into a new endeavor. No matter how excited you are about the possibilities, discipline yourself to go through this list, adding other questions that might come to mind, and demand answers. Better to put off an opportunity for a bit than to jump into a coming disaster.
ERIK SHERMAN | Columnist
Erik Sherman's work has appeared in such publications as The Wall Street Journal, The New York Times Magazine, and Fortune. He also blogs for CBS MoneyWatch.