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I have an idea, but how do I know its a business

People pitch business ideas at me all the time.

Unfortunately, almost all are fundamentally flawed, and almost all in obvious ways.

With a few exceptions, there are natural laws of technology businesses that you should take note of, so you don’t find yourself repeating the mistakes made in previous start up businesses. There are a number of business ideas that are just too hard and not worth putting your energy into.

  • Anything that involves text messaging or mobile data is unlikely to be a success. That’s because mobile carriers just don’t leave enough on the table to make a buck from. It’s hard to think of anyone who has built a successful business based on text messaging.
  • Taking on dominant market makers (like eBay) will not work. They already have the customers and therefore they own the market, and only one player wins.
  • Anything aimed at taking bricks and mortar retailers online will not work. History tells us that.
  • Anything to do with document or content management will not work because that has been done 10,000 times before.
  • A start up involving retail point of sale will not work because the cost of sales and support will be too high.
  • An export-focused business where the founders are not willing to travel abroad will not work because you need to be in the market to understand it.
  • Any business where the founder is not happy to step aside and letanother person be the CEO will not work.
  • Any business that only wants to give up 10 per cent for $1 million in its first investment round will not get funded and will not work.
  • Any business depending on low-cost Google AdWords will not work, because the price of those AdWords becomes valuable, and then it blows your business model.
  • Any software business where the software development is outsourced to a consulting company will not work because you need to be nimble to close the feedback loop between your customers and your product strategy.
  • Any business without a business plan will not work.
  • This might sound like a grim reality, but almost all of the hundred or so businesses I’ve looked at over the past couple of years are flawed because of one or more of the reasons above.

You only need to look at the very few angel or venture capital deals done in New Zealand during 2007 to see that very few ideas are actually valid business ideas.

As a first step before presenting your idea, you need to be able to write a high-level summary of what the business is and why it will be successful, in not more than three pages.

Then you need to test that idea. Try out your idea on friends first.

Make sure you check with someone who will tell you honestly, and not just what you want to hear. Make sure you check with someone with industry expertise. A “fast fail”, where you quickly discover that your idea is flawed, will save you time and money.

My ideas usually come from problems that I have experienced personally. In areas where I have significant base knowledge, I can intuitively know where there is an opportunity. Once you’ve tested your big idea, you need to back yourself and go. One of the first activities is building a team.

Next up, we’ll look at setting up a business with multiple shareholders.

6 comments

Vik Arun
13 March 2010 #

Man this is the biggest load of BS I have come across on the internet….and that’s saying a lot as there is a lot of BS on the internet.

* Anything that involves text messaging or mobile data is unlikely to be a success. That’s because mobile carriers just don’t leave enough on the table to make a buck from. It’s hard to think of anyone who has built a successful business based on text messaging.

How about value added services? Such as receiving SMS alerts based on certain events! OK it may not be the bread and butter service offering but it’s value customers will appreciate. The big banks in OZ are already doing it.

* Taking on dominant market makers (like eBay) will not work. They already have the customers and therefore they own the market, and only one player wins.

Your not really an entrepreneur are you? You sounds more like a scared poodle in the spotlight. I really hope the XERO founders are not scared of taking on some big competition which is already brewing.

* Anything aimed at taking bricks and mortar retailers online will not work. History tells us that.

Sure, that’s why the thousands of ecommerce sites online fail to make a profit. Because customers are going to the bricks and mortar players. Your a n00b!

* Anything to do with document or content management will not work because that has been done 10,000 times before.

That’s because this market is massive. A slice of the pie is maybe what some start-ups desire. Maybe it’s collaboration they want….maybe content management is a side “value add”

* A start up involving retail point of sale will not work because the cost of sales and support will be too high.

Ever heard of a start-up called “Square” go Google it. It’s a retail POS startup….valued at 40million USD even before it has been launched. Clearly again you demonstrate your lack of knowledge in such industries.

* An export-focused business where the founders are not willing to travel abroad will not work because you need to be in the market to understand it.

Everything is global. We have manufacturers here in OZ who sell online to overseas buyers….that’s the beauty of the internet. Beyond bounds…

* Any business where the founder is not happy to step aside and letanother person be the CEO will not work.

This might be the most decent statement you have made in your post.

* Any business that only wants to give up 10 per cent for $1 million in its first investment round will not get funded and will not work.

So you speak for all VCs…maybe this is the case in NZ.

* Any business depending on low-cost Google AdWords will not work, because the price of those AdWords becomes valuable, and then it blows your business model.

The long tail contains enormous profit potential.

* Any software business where the software development is outsourced to a consulting company will not work because you need to be nimble to close the feedback loop between your customers and your product strategy.

Fail again. If software development is not your core strength are you saying you fail? Why do the Telcos around the world have compelling services built by consulting companies?

* Any business without a business plan will not work.

yes…and if your the type of hire Xero are taking on…they they most certainly did not consider this during their business plans.

Rod Drury
13 March 2010 #

Hi Vik, glad you took exception to the article. It was meant to provoke a reaction. For each point there are obvious exceptions but I see a lot of business plans and these are some examples of areas where I roll my eyes. I expect that every so often there will be an exceptional entrepreneur than can pull it off. Very rare though.

Hopefully you will be one of those.

Good luck.

Db
18 August 2010 #

Rod, I have to say i do agree with you! I mean you are a very succesfull person. With regards to your last post, yes their is always an exception for EVERY point. We could argue about them for days or even weeks, but at the end of the day what works in business works and what doesnt, doesnt. Your advice in my opinion was aimed towards a business growing bigger and better, not a business staying small and simple. Unfortunately these days there are people in this world that can not take Criticism in life and business and i believe that is why they WILL NOT be successful.
P.S. The only statement made by Vik that i do agree with is that their is alot of BS on the internet…..butit makes me wonder what sites you are going to, because i tend to stay away from BS sites and only go on sites i actually enjoy visting.

Thanks Rod for your blog. I will take it on board in my current business and i hope other will to.

Chris
9 November 2010 #

Hey,

What if the people you test the idea on steal it because they have more expertise in that arena?

Should you not patent it first? Or am I just being schizo? I honestly don’t understand that part..

Rod Drury
9 November 2010 #

That is always a risk but in my experience I’ve never seen that. You could ask them to sign an NDA, or get them to sign a simple disclosure as part of seeing the plan. Normally your business plan will be unique to you – your insights and your passion – so practically this shouldn’t be a risk.

Angel investors you’re talking to live and die on their reputation so they are unlikely to run away with an idea.

Hope that helps

Mark Smith
16 July 2013 #

Chris/Rod, I’ve had my product stolen by a large multinational that was intending (they said) to buy the naming rights to my application. It happens, you just have to make sure that there are elements that they cannot copy e.g. your knowledge of the market.

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