Last fall, a graduate student of mine identified what appeared to be a good idea for a business. It was a novel concept in the auto industry, in which she had several years of experience. Her initial market research indicated that auto dealers would be interested in the service, and the business would require very little start-up capital and generate high margins. There also were reasonable expectations for growth. However, one major problem existed: she had no desire to continue working in this industry and did not want to be bound to it through business ownership.

So what makes a good opportunity? A colleague of mine at the University of St. Thomas, Dr. Alec Johnson, has come up with what I think is a simple yet effective framework for analyzing opportunities. It is based on what he terms the "Three M's": Me, Market, and Money. All three are related, and if any of them are missing, it's likely the concept is not worth developing.

Me. First and foremost, the business needs to fit you personally as the entrepreneur. The concept should correspond with your goals in terms of money and lifestyle, and should be something you have some knowledge of and can be passionate about. Starting a business requires commitment, and because you won't be able to easily remove yourself from the business if investments have been made and have been hired employees hired, it's important that the concept interests you and supports your personal financial needs and lifestyle goals. If it doesn't you likely need to reconsider your business choice.

Market. The second key to an opportunity is whether there is enough market demand to support the idea as well as a large enough market warrant starting the business. Whether demand exists must be examined from the customer's perspective. For instance, there is a big difference between asking potential customers whether they are interested in your product or service as opposed to asking them what they want in a product or service and how much they would be willing to pay for it.

Market size also must be examined carefully: There are issues with entering a market that is too big, but more often, I see entrepreneurs overestimate the number of potential customers for their concepts. As an example, some entrepreneurs that I am familiar with had developed a product they thought could be targeted to the entire population of asthma sufferers in the United States. However, with just a few exploratory phone calls, it became apparent that only a small segment of this group would actually be interested, and this segment was not large enough to justify further investment in the business.

Money. The third key lies in financial returns. Demand will be an important factor in whether financial returns can be generated, but remember that demand alone does not determine the financial opportunity in a business concept. To justify starting a business, the potential returns from the business must outweigh the upfront investment. This means that high enough margins must be made on each product or service delivered and enough volume can be generated to provide an adequate return on investment for you and your investors. Part of this will be determined by the business idea itself and how you elect to set up the business in terms of revenue sources, costs, and initial investment. For instance, a company that I have done some work with has raised over $10 million to develop a product for the semiconductor industry: Obviously, large potential margins and growth need to exist for this business to justify the investment and risk involved in product development. On the other hand, a graduate student of mine has started a small, niche service company on $1000--she does not need to be as concerned with generating a return on investment as she is with generating an income that is satisfactory for her desired lifestyle.

Although this framework isn't rocket science, it can be effective in weeding out poor opportunities early on, since ideas that lack in one of the "M's" likely lack in the others. For example, demand and market size impact potential financial returns, which impacts your satisfaction with income from the business. Likewise, your knowledge of and passion for the business will likely influence your ability to sell. Another important consideration is your own comfort level with risk and whether the initial investment requirement fits with that.

By performing some simple initial analyses around this framework, you'll improve your chances of identifying opportunities that merit further investment of your time and money…as well as those that don't.

 

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