Trade Secrets

Incubate your business idea!

By The Chilli analysts

Editors note: for the latest, and more formalised framework for validating and improving your business idea, check out the Chilli Value Test™

So you have a business idea, do you? However clever an invention or an idea it is, a few fundamental tests need to be met - if it is to turn into a viable business. We call this The Chilli Value Test. Your invention or idea will have to pass at least five of the ten criteria, if it is going to reach the stage of developing an effective business plan.

Try The Chilli Value Test

1. What problem are you solving?
2. What value are you adding?
3. How will you make money?
4. Barriers to entry?
5. Competition (companies, not products)
6. Is the market large enough? Is it growing?
7. Start validating your idea
8. A map of your world
9. Are you a PEST or a SWOT?
10. How will you overcome Customer Inertia?

1.What problem are you solving?

What is the problem you propose to solve? Are you putting out a fire? Are you making life easier, cheaper & more enjoyable? An example of the former is CISCO, which put out the fire of companies unable to route messages through incompatible hubs and routers. An example of the latter is the microprocessor, which allowed the mass production of computers and advanced consumer applications. Potential customers are usually willing to attach value for something that removes a "pain" or inconvenience factor, in other words they will be willing to pay for it. Start-ups are best focused on solving well-defined problems - call it an expanding niche - anything else may lead to a black hole, with valuable resources committed to a never-ending development. Think SMART: specific, measurable, achievable, realistic & time-framed.

2.What value are you adding?

Is this a case of better (more efficient), faster, cheaper? There is value to such an idea, but you need to be able to quantify the improvement. Does the magnitude of the improvement justify a customer changing over to you? You can't always give an accurate answer to this without fully developing your idea, but a reasoned estimate will give you credibility in front of potential investors and customers. It goes without saying that if it was free before, you cannot expect people to pay for it now. If your product is likely to become a commodity product, beware the marketing horsepower, large financial and logistical resources needed to stand out from the crowd.

If you are looking at a totally new disruptive technology or medicine, you may not be able to answer such questions, but you should bear in mind the areas and applications where your product or services will have the potential of being used.

3. How will you make money?

How many customers do you estimate there are? Who are their current suppliers? Bear in mind the time it takes to change old habits, especially if the supplier is internal to the organisation. How many of them are likely to have a strong interest in trying something new? Will it give them a competitive advantage or will it just reduce their costs? Out of those willing to change, how many are in a good enough financial shape to pay for it?

Relationships are generally acknowledged as being more fulfilling than one night stands. Using your idea as a basis, what possibilities do you envisage for sustaining an ongoing relationship, beyond shipping the first product? Will the customer come back for more? Is there an ongoing service you can add, something to maintain an ongoing revenue stream and keep you close to your target customers?

4. Barriers to entry?

What are the barriers to entry? Are there already a large number of competitors? Is the technology or know-how required out of your reach or theirs? Don't despair. A measure of an entrepreneur's worth is their ability to remove barriers. An absence of a certain competency could be plugged by partnering with an organisation on a win-win basis, provided you have something to offer them, such as a new channel, product, technology or even a new market.

5. Competition (companies, not products)

When people are asked about their competition, they often reel off the names of products. Entrepreneurs, like everyone else in the business world, will be competing against companies, not just products. Examine not just their product/service portfolio; look also at their capabilities in terms of their financial resources, core technology, r & d, management, partners, and so on. How quickly can they turn around and emulate your idea? Or is your idea too small or niche, so that they will ignore it until you are well established? A competitor's biggest strength may be their ownership of a particular sales channel, market segment or access to something unique through a strategic supplier relationship. Can you find and exploit weaknesses in the business model of your competitors? Remember, if you have no competition, than the chances are that there is not yet a market for your product. So if you have a compelling idea, it may be worth creating a competitor, if one doesn't exist.

You need to find a sustainable, defensible advantage - something that lasts 9 - 18 months, depending on the rate of innovation in your industry. It could be in your product or in your business model. If you can establish a rolling lead ahead of your competition in such a way that you render their deeper pockets meaningless, then you have one less thing to worry about.

6.Is the market large enough? Is it growing?

Is there enough food on the table to sustain your business? If the market were too small, it would be difficult to pick up any crumbs left by the big guys. If the market is growing, it can afford many new players and mistakes are often forgiven. Investors will have more exit or liquidity opportunities, as chances of merger and acquisition and eventual consolidation is high. If a market is already consolidating, does it open up an opportunity for a new niche? A market with just one or two customers is often unattractive, as they command monopoly or duopoly powers, which can determine if they will support or destroy any new players. If you become dependent on one large customer and they cancel an order, say adios to your business.

7. Start validating your idea

Use every moment you have to test and refine your idea. Read trade journals; try getting in touch with potential customers. Go to trade shows - remove your badge before you go onto a competitor's stand. An entrepreneur must be flexible, and be willing to change their tactics or strategies upon receiving new information. By going out to validate your idea, you are getting free market information, and well on the way to building relationships.

8. A map of your world

Although it may sound patronising, it is worth remembering that businesses have customers, partners, employees, suppliers and competitors. Without a map, you can't navigate. Get a blank sheet of paper, and draw a map of your world, listing your potential customers, partners and competitors. This will eventually be used to gear up an effective business plan.

9. Are you a PEST or a SWOT?

Weak jokes about business schools aside, it is a good idea to use some basic analytical tools, such as PEST+ CL (political, economic, social, technological + competition, legal) and SWOT (strengths, weaknesses, opportunities and threats) analyses. A PEST + CL analysis allows you to take a structured look at the business environment you will be entering. This could expose some new opportunities, such as an emerging standard or new law, that could wrong-foot the competition (asleep at the wheel) and allow you an entry point. A SWOT analysis allows you to examine yourself, your competitors, your partners and your customers with an open mind, so you know what you are letting yourself in for.

You will not get this right first time. The point is to understand where you fit in and what the opportunities and risks are. Your understanding will evolve over time, as the market changes, allowing you to develop your idea and make it more appealing and much more robust.

10. How will you overcome Customer Inertia?

This is quite tricky, as you will not face this challenge until you have a product or service to sell, but it is worth thinking about it upfront. Sometimes, you will find that customers love your ideas, they like your company, they will invite you back, but that purchase order remains elusive. One way of addressing this problem is figuring out how purchasing decisions are made, who has the budget, who signs it off and who will champion your cause. Sales people are good at this kind of work, but you should expect to do some of the research yourself on one or two prospective lead customers. By doing this, you will know the type of sales person you will eventually need to hire. Remember you are in the business of making money, so be careful about giving free trials, evaluations, support or maintenance, as this can become a habit for the whole organisation, and generate a costly legacy. Doing this to one special customer, perhaps the first customer, is OK, but only if you do it with eyes wide open and under strict terms.

So how did you do on The Chilli Value Test? If you'd like to let us know, e-mail editor@TheChilli.com. Future issues of Trade Secrets will address various elements of the secrets behind building successful enterprises in high-tech, biotech and media. In the next issue we will be looking at going beyond the idea, with the founding team.

© Chilli Publishing Ltd 2003

20SEPT2002