"Following your heart" will only get you so far in business. Most entrepreneurs open a business in an area they're passionate about, but the chance of failure is high. In the U.S., the failure rate for a business after 10 years is a sobering 70 percent. While entrepreneurs are certainly risk takers, it's important to ensure that these are calculated risks. Before rushing to open a business, it's critical to vet your idea.
Vetting and Viability
Determining whether an idea is viable and likely to succeed should be step one on any entrepreneur's checklist. The most successful business founders are trained to see opportunities across all industries and then zero in on those that utilize their own expertise. Consider Elon Musk, who recognized the potential of an internet payment system and then co-founded PayPal. Even though PayPal became a sizable success, Musk also saw the opportunities presented in two other stagnating industries -- electric vehicles and aerospace --which is when he created Tesla Motors and SpaceX.
It's fairly easy to find industries where the products or services offered have actually gone down in quality over time, but positioning yourself for success in these spaces is quite difficult. In spite of the obstacles, Musk recommends this practice because the industries people believe are impossible to improve are the ones with the least competition. Many entrepreneurs choose to do business in industries they believe are "ripe for disruption," but chances are good that other competitors feel the same way.
Hootsuite founder and CEO Ryan Holmes says sharing your idea publicly is a great way to determine its potential: "There's no greater validation that you're onto something than having actual users. If people are willing to choose your app or widget or service over the countless other options out there, that says something -- and better still if they're willing to pay for it." To gain insights about the validity of your idea in the early stages, you could also use crowdfunding websites or create a landing page to gauge interest.
One of the biggest issues entrepreneurs face, however, is how to determine validity before publicly marrying themselves to an idea. To conduct your own test, see if your idea can check the following boxes.
1. Your idea relates to a point of friction
An idea is far more likely to succeed if it operates where there is tension in the marketplace. Ian Wolfman, co-founder and CEO of startup Hyperlift, advises that this is the best place to begin in business: "I have always liked to operate where there's a point of friction, where there's potential disruption that's clear in the marketplace. From there it's a matter of developing solutions that mean a business model transcends nice-to-have and reaches need-to-have."
For Wolfman, that point of friction was the Medicare Stars system, which is used to rank Medicare Advantage health plans. By using machine learning, data science, and predictive modeling, Hyperlift was able to determine the most efficient way for Medicare providers to improve their ratings -- and thus become eligible for millions in federal bonus payments.
2. Your idea truly, not just sort of, stands out
Never underestimate the importance of a unique value proposition. Why should customers choose you over your competitors? If you don't have a good answer, it might be time to go back to the drawing board.
When Netflix entered the DVD rental space, it had tons of competitors in towns all across the country. What those competitors didn't offer, however, was a system that delivered DVDs in the mail. Thus, the unique value Netflix provided was the ability to rent from a large DVD library without ever leaving your house. Over time, of course, Netflix's method of delivering the stay-at-home viewing experience changed from DVDs in the mail to a streaming model. The company sees itself as unique and even has a whole host of patents in order to protect itself against competitors who consider trying to copy its ideas.
3. Your idea contributes to the betterment of humanity
It's increasingly important for companies to demonstrate that they value societal improvement, and potential customers will want to know how your idea makes people's lives better. According to the Cone Communications 2017 CSR study, 87 percent of customers will make a purchase from a company that advocates for an issue they consider important.
Investors also are increasingly looking for ideas with social impact, and the industry is holding summits and conferences focusing on how to do just that. An Arch Grants summit this May in St. Louis will poll business leaders from across the country on the best ways to use resources to fund impactful ideas. In addition, the Social Good Summit, held annually during the United Nations General Assembly week, looks at how technology can improve the world. The Social Enterprise World Forum, an international event, likewise encourages social entrepreneurs, policy makers, community leaders, and investors to work together to make the world a better place.
So, you think you have a good idea. Before you open your doors or launch your app or create your e-commerce website, though, you need to make sure you'll be able to attract real, paying customers and can sustain your costs while still turning a profit. In the beginning, optimism tends to prevail, but you're better off putting your idea through the wringer upfront. If you've done everything you can to vet your idea, you'll be that much better positioned to power through when the going gets tough.