Have you stress tested your business idea?

As advisors to start-up businesses, we see a lot of people with ideas for a new business.

Generally, the idea is based on a new product or service concept, developed off the back of a limitation or frustration with what’s available on the market.

Your idea could come from a passion you have for a particular industry, cause or technology. Or you may have an entrepreneurial seizure after reading about the riches and success that a business owner has achieved. After all, you may feel, ‘If he or she can do that, why can’t I?’

All of these can spark enthusiasm and entrepreneurial zeal to start a business. But the fact is most ideas, no matter how good they sound, are simply not good business opportunities.

So, before you spend a significant amount of time, energy and money (yours, but more usually other people’s) on starting up a business, make sure you ‘stress test’ your idea to see whether it can be turned into a real business.

Spending just a little bit of time and money up-front researching and validating the idea can save you a lot of pain and heartache later on.

To stress test your idea, answer the following questions:

Is your business idea actually your idea?

This might sound simple and obvious, but is often overlooked. Unless your idea is truly novel, it’s likely that someone else has already thought of it or something very similar.

A simple Google search should help here. If your idea involves innovation, it’s wise to perform a patent search to see if there is something already in existence that has been conceived of and protected.

This will give you an idea of whether there are other businesses providing the same or similar products or services. It also prevents you from infringing someone else’s patent and being sued for doing so.

Can you make a profit?

To have a viable business you need enough customers who will buy your product. It also has to be sold at the right price point, with a margin that allows you to make a profit and generate an adequate return on investment.

Once again this sounds simple, but often is not fully appreciated by inexperienced entrepreneurs.

Spend some time researching the market and industry. Define the particular market segment you will be targeting and learn all you can about the customers and the competition in that space.

How big is the market?

Smaller markets may mean you have to become a dominant player to be profitable. In larger markets you can still become profitable by capturing less market share.

If your idea is to launch a new product or service to an existing market, will there be a sufficiently compelling reason for customers to start buying from you?

Where you can, get feedback from potential customers. Talk to them about your idea and whether they would purchase from you. In some instances it may be appropriate to create a mock-up of the product, so that you can demonstrate its features and what it can do. (Obviously, this should only be done if it doesn’t put your idea at risk by giving away your intellectual property.)

Do you have the capacity and abilities to start, run and grow a business?

Building a successful business requires a lot of time, energy and cash. And while it can be rewarding, it can also be very stressful at times. The risk of failure for small start-ups is high. Make an honest assessment of your abilities.

You should ask yourself:

• How well do I cope with stress?
• Do I have the time or is my time limited by other commitments such as family?
• What is my financial position? Can I afford to invest money in the business? Can I afford not to be paid for a period of time?
• What experience and skills do I have? Compare these to the skills and experience required to run a business and identify where the gaps are.

Get good advice early on

To help you assess your idea, find mentors, confidants and professional advisors who are positive but realistic and have relevant knowledge and industry experience. Use them as a sounding board. Get them to test, challenge and validate your thoughts and assumptions.

Stress testing your idea will give you the hard, objective data you need to decide whether to start a business or not. If it doesn’t stack up, don’t proceed. If it does stack up, you will have the knowledge and confidence to proceed with launching a business that is more likely to succeed.

Marc Peskett is a partner of MPR Group, a Melbourne-based firm that provides business advisory services as well as tax, outsourced accounting, grants support and financial services to fast-growing small to medium enterprises.