Entrepreneurs build things that get them excited. So excited in fact, that they will spend inordinate amounts of time, effort, money and untamed lightning-bolt enthusiasm to make their baby a reality. 

This is good. It is also dangerous. Blind optimism often obscures the obvious – that investing too much too soon in a business idea that isn’t well thought through can result in financial ruin, burnout and/or depression.

Luckily entrepreneurship is a well trod path. You don’t have to fall on your face a couple times in order to learn the right lessons (it does help though). You can just read a book. I recommend reading The Lean Start-Up by Eric Ries. After falling on my own face several times, I can recognise the step-by-step wisdom contained within their process.

In meeting with enthusiastic entrepreneurs, often I have had to ask difficult questions, questions which throw water on the fire of inventive passion. People typically don’t enjoy having their fire turned into damp clouds of face-wetting humidity, but I suspect they would prefer that experience to years of back-breaking effort and financial loss in pursuit of an idea that is only really a vanilla thriller. During these discussions I always come back to a simple equation for success, which I explain below. 

Interestingly this equation is not only useful for creating an entirely new business, but also for evaluating ideas for new products within an existing business. See it as a lens through which to judge your fledgling ideas to see if you can spot golden potential.

So here goes:

Success (money) = DELIVERY x PROFIT x FREQUENCY x MARKET x APPETITE x REACH

A per The Lean Start-up, you want your first few weeks of effort with any new idea to be detective work. Your goal: to try to find very realistic (not optimistic) answers to each and every variable in the equation above, BEFORE you put down real money. Rather spend more time getting a realistic picture of several of your ideas with this equation, instead of trying to force one single idea to work out. Don’t fall in love with your idea before doing a realistic due diligence.

Let's take it step by step:

1. DELIVERY

How easy is it to reliably produce your product, at high standards, and get it to customers?

This applies to a service or a product. Is there a lengthy supply chain, multiple steps and costs along the way, partners to negotiate with, third-parties you need to trust (and depend on), potential stock shortages, a labour force that can strike, price fluctuations, manufacturing inconsistency, international delivery delays, quality standards, licensing, IP issues, etc etc. Each of these add uncertainty to how well you can deliver. Each one is a risk to consider. When you think through all of what is involved to get your product delivered, does it give you a realistic, clean, excited feeling, or a queasy, worried, nauseous, steam-cloud in the face feeling? 

This is why I have always been a fan of purely digital businesses that deliver information-based products and services. There is no manufacture involved, and once the machines are built, they tend to deliver value in huge volumes quickly and reliably. Also I am a techie, so I understand the IT sphere. Go with what you know to reduce uncertainty.

2. PROFIT

Will you make a lot with little effort, or a little with lots of effort?

Let’s think about two common business models: a grocery store, and a doctor’s office. The grocery store shunts thousands of products across the world, to and from warehouses, handled by an army of low wage employees, to get to the checkout point where their profit margin is a couple of cents on cost. A doctor lets people into his room and he pokes a stick in their mouth, looks in their ear, then gives them a substantial bill for his time. The two models have very different levels of reward for those involved. Is your business providing a high value professional service, or a low value service where you make money from margins, volumes and sweat?

My first two businesses were based around earning revenue from moving SMS credits as “stock”. Since SMSs are very low cost, I had to get to very very high volumes before I would see a return handsome enough to buy me dinner. These businesses went nowhere (although I still managed to exit them for a profit). My fourth business involved providing what was historically an in-person, high-value, professional financial service via an all-digital delivery channel, so the profit from just one single client bought me very nice dinners. Please choose a business model that makes good profits for you. Then we can both have nice dinners.

3. FREQUENCY

How often does your customer interact with you?

You might have a great product which people really enjoy using, but you are going to struggle if people only use you once a year. That is because people forget things. Think of how many emails or IMs you get in one day – how will your business compete against that level of distraction after one year of other offers? Marketers call this “staying top-of-mind”. The best businesses are ones that provide a great product that people keep interacting with on a daily basis. Think about Facebook and how they have weaponised AI to make you an addict of their news feed. While you are at it, delete Facebook.

For many reasons, I regret starting a tax business. One of the reasons is because people only really NEED my service once every year. This means that our business cycle is seasonal, and also that people forget about us easily. This led to us having to be extra creative around how we stay relevant and top-of-mind with our customers, apart from having a zippy social media feed and email list. Our solution was to create daily use apps that help the user collect data all year round that then get used on their tax return. Daily brand exposure that is habit-forming helps.

4. MARKET

How many people might want this?

You need to have a pretty solid understanding of who is going to buy your product. This is called market research. Are there people buying products similar to yours? Can you find out how often they purchase and why? If you want to do any real predictions of the success of your business, you will want to know (and investors WILL ask) about the size of the pie (total number of potential customers), and how much of it you think you can eat (percentage of market share). You want to be selling something with a large target market, not a niche market (unless you think you can conquer it fully).

One admittedly good thing about starting a tax business is that absolutely anybody who is employed is your ideal customer. I have benefited much from a sales pitch as simple as “Shoh, taxes suck hey?” This kind of simple, anyone-can-relate, emotional pitch will help your idea go far. It is a lot easier to propagate your idea all the way up the corporate hierarchy to get to the top decision-maker when everyone you have spoken to can feel your pain (and can see how you solve it).

5. APPETITE

How much do people want what you got?

It is very easy to assume that everyone shares your rabid enthusiasm for the widget you scratched onto the back of a cereal box last night at 2am. You might even explain to your friends and family the wonder of this contraption, and because they support you (or are a bit scared of your caffeine high enthusiasm right now), they might agree with you. This is not the kind of market validation that you need. What you need now is data – real data from unbiased sources. The best way to quantify appetite is to literally try selling what you plan to produce, before it’s built. So create your product brochure, slick presentation or website landing page, then slap a price point on it and see how many people want in. Initial results will probably make you sad, but you can save face by asking WHY, then adjusting your product features, price or your pitch until your customers start getting excited. Remember: it is FAR FAR FAR easier to iterate, modify and upgrade the features of something that doesn’t exist yet, than to try to modify something you have already built and created a supply chain for. Do the hard work now of finding that ideal product-market fit, and you will be handsomely rewarded.

I have personally never done this step properly. I am a techie so I just like to build stuff even if it goes nowhere. Luckily I build software which costs nothing except my time, so is easily disposed of without much heartbreak. Don’t be a techie. Don't be me. Close your laptop and go outside (gasp!). Talk to people, show people, ask people, interrogate (politely) people. Find out what they want and how to solve their problems best. Make your product solve their problems and they will love you for it.

6. REACH

How will people know you exist and buy from you?

Last but not least. This is make or break stuff. Once you have quantified the size of your market, and you know that some of the market like what you have got, how will you actually REACH the rest of the market? How will they find out about you? How will you get in front of their faces? You could be offering $1,000 electric cars with unlimited mileage, but you will have zero customers if nobody knows about you, or your shop is in Pofadder. 

This is where you need to fully understand the principles of marketing and/or advertising. It is such an important point that a start-up without someone on the team with a marketing background will likely fail. Investors will see right through your pitch when they ask “What is your Marketing strategy?” and you reply wisely “Google ads, Facebook ads, word-of mouth”. It’s one thing to have an idea, it’s completely different to have data – actual proof -  that your marketing strategy is valid. The best way to find this out is to combine your efforts trying to quantify Appetite, with your efforts to establish Reach. 1) You will see if your Marketing efforts really work, 2) you will get a realistic indication of costs involved per customer, 3) you will reach complete strangers who don’t know you, don’t care about you and don’t owe you any sympathy at all. Your ideal outcome from this exercise is to measure a "per customer" acquisition cost, one that is smaller than your profit margin. If you can show potential investors your actual experiments and proof of outcomes, you will be massively more likely to raise funding.

My co-founder and I used to have a regular very loud debate about an expansion idea to our existing product range. He was a CA and used to have tax practitioners bending his ear off saying “When are you making a product for us?”. In his mind, everyone he spoke to was gagging for such a product. But to me, this didn’t make sense because I wouldn’t know how to SELL the product to people outside of the handful that he had heard from. How would we get more customers like them? There was no marketing email list of tax practitioners available for us to purchase, or tax practitioner association to suck up to. This would mean that each and every sale would have been a one-by-one, dedicated direct sale via email, with presentations, negotiations, setup, high levels of personal support etc – not scalable at all. I refused, and because I was the programmer, the product never got built.

Ultimately whatever idea you choose to pursue, like evaluating a potential partner before marriage, you want to explore all the dark corners, hidden rooms and skeletons in the closet before making a commitment. Even though asking and answering these questions is daunting and less exciting than riding the wave of entrepreneurial enthusiasm, the effort you put in will be well worth it in the years to come, especially if you plan to raise investment. Good luck and have fun!