What are the factors to consider while evaluating an idea is an opportunity?

Be it an amateur business-dreamer thinking about opening his own venture or a seasoned entrepreneur looking to invest in a new business, thorough research is needed.

Well, as they say, prevention is the best form of cure. So, when it comes to business – Planning is the best form of prevention.

Opportunity screening is the process of evaluating a business opportunity by carefully studying important factors such as market size , market structure, capital required, existing competitors, legal regulations, trend forecasting and most importantly, the scale of disrupting the market through innovative ideas and strategies.

Let’s take a look at four essential factors to consider when evaluating a business opportunity:

1) Identify the Market Need

A lot of good ideas go to waste and a huge chunk of small-businesses close prematurely because they didn’t look at the bigger picture.

Does your potential product or service have the viability to survive the ever-changing market and the brutal economy?

Conduct surveys, initiate pilot runs and conduct focus groups to thoroughly test out your product before you dream about the home-run.

2) Product Differentiation

Do similar products already exist in the market? How well are they doing?

If your product is the first one to be out there, you are very fortunate indeed. It’s very rare to create something completely new these days.

On the other hand, on the most likely scenario that your product is similar to existing ones in the market, there’s a lot to be taken into account beforehand.

How does your product differ from the ones that are already out there?

Why would customers choose your new product over established ones?

What’s your unique selling point(USP)?

The answer lies in innovation or offering something unique. It could be your efficient manufacturing techniques that help you sell your product at a lower price point. It could be the way your brand and promote your product or the additional features you offer at competitive prices.

Quality products at fair prices are the best way to woo customers to your side of the border.

3) Market Size and Analysis

Does your product aim to appeal to a nice market or large scale market?

Large scale market means more competitors and lower price points while niche markets make it harder to sustain long term profitability in addition to higher advertising costs.

Are your products catered to certain genders, races, nationalities, age groups or geographical areas?

How fast is your target market expanding or contracting?

4) Capital Requirement

Cost Analysis is a fundamental part of weighing a business opportunity. Poor financial planning is an operational nightmare.

How much does it cost to manufacture your products? What is the total capital needed to kickstart your business?

Do you rely on your personal funds? Do you borrow from the market and end up paying high interest-rates?

Having definitive and feasible answers to all these factors and problems is the only way to capitalise on an exciting idea.

Relationships. Having existing relationships with necessary customers, partners, hires, investors, etc. can be save a lot of time, reduce costs, and reduce risk. Without existing relationships the team will have to form them, which takes time and there is risk in being able to form them at all. For example, if you don’t know how to code, and you’ll need a technical co-founder for the business, and you don’t know any, that’s one more roadblock to getting your business off the ground. Which doesn’t mean you shouldn’t do it, it’s just important to consider how many roadblocks you’re going to have before you go down the path.  

Access to customers. If I can’t get enough customer development interviews within a reasonable period of time, then it will be that much harder and take that much longer to get started. Conversely, if I have existing relationships with, or at least easy access to, customers I can get feedback on my product much easier. When the time is right, sales and marketing will also be that much easier, shorter, and cheaper with existing access to customers. For example, if Tim Ferriss wanted to launch a productivity related product, he would have an advantage because of all of his existing relevant blog traffic and subscribers. I’ve seen access to customers be especially important to enterprise products. Having relationships with decisions makers helps with customer development and sales.

Passion. Starting a company is hard and time consuming. If I’m solving a problem I’m passionate about and/or serving a customer segment I enjoy spending time with, my overall quality of life will be higher, and I believe I will be more successful. In starting a company, you inevitably have to ask a lot of people for help. For example, big things like introductions to key people, or for small things like to share your site with their friends. I want to be in a business that I’m proud of and passionate about so I’m motivated to hustle. Many businesses require spending a lot of time with customers, so I’ll want to enjoy that time. Lifestyle is an important factor to me.

Skillset required. If the skillset required to execute the business plays to the strength of the team, execution risk should be less. For example, distribution: I wouldn’t want to start a business with a sales distribution strategy if I didn’t know sales. Conversely, if it’s a consumer app that acquires customer through search, a team of SEO experts could be pretty effective. If I’m trying to solve a hard technical problem, I would want to make sure I have incredible technical talent on board. I would be more confident in an entrepreneur that’s started one or more ventures previously, or at least has experience in the skillsets required to start and run the business. As an entrepreneur, I’d want to start a business that requires skills that I have. Of course you can learn, but that becomes one extra cost, time constraint, and risk.

Ability to validate. How confident can I be, or quickly get, that I’m pursuing a viable business? If I can’t get 10 customer development interviews within a week, and begin to prove there’s a viable business within a few months, I don’t want to do it. I know that massively limits my upside, but again, my goals are specific. Does it require product development to get validation (ie something like Snapchat)? Do I have to sit through 10 month sales cycles to know if it can be sold? Those are risky paths to go down. That’s part of the reason I’ve been interested in companies solving known and validated problems or in existing and validated markets (second movers).

Need for financing/ability to generate cash flow. If a lot of money is required to start testing the concept, either because costs are high or because it will take a while to become cash flow positive, financing will be required either from founders or investors. If you don’t have any existing relationships to investors, or at least close connections, that’s, another time suck and risk factor. It’s certainly surmountable though if you’re good. Raising money, while glorified in the media, does have downsides. For example, you can lose some control over your business and you have to give up equity (and therefore upside). The more cash you need at the start, when your valuation is the lowest, the more equity you will have to give up.

Diversified. I never want to have all my eggs in one basket. I don’t want my life to be dependent on one customer or employer. I don’t want one trend, industry, or customer group to effect everything I’m doing. It’s easy for investors to diversify. For entrepreneurs it’s a bit harder, but possible. I personally don’t have a very wide portfolio now, but I plan to.

Size of market/opportunity. How much upside is there? If your goal is to build a massive company, you will need to be in a massive market. This item will largely depend on personal goals.

Quantity and quality of work. How enjoyable will the work be? How much time will it require? Most opportunities will require significant time investments. Overall lifestyle is an important factor to me, so I wouldn’t want to spend 100 hours a week doing something I hate. This factor should likely be considered as a ratio to potential upside (see above). For example, I would trade 24 hours of awfulness for $1M, but I wouldn’t trade 5 years of awfulness.

Conclusion

A lot of entrepreneurial content encourages persistence, hard work etc. “If you put your mind to it you can do whatever you want.” The reality is there are many challenges from starting to growing, and different factors that can make an opportunity more or less likely to succeed.

It’s probably pretty rare for opportunities to meet all of these criteria perfectly. Likely have to accept what I can tolerate and go for it. If it was perfect and easy, there would likely be a lot of others doing it, and therefore less upside.

These are some of the same factors I use for evaluating opportunities others are pursuing. I just put the team in the position of the above.

There are plenty of opportunities out there, it’s just a matter of choosing which is best. Everyone’s personal criteria and factors will probably be different depending on their goals.

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