In an era in which everything imaginable has been invented, it seems, and there are more services and goods available than customers, it’s challenging to come up with a business idea that will work better than the rest. Venture capitalist Henry Davis won’t help you find that idea, but he does have great advice on how to test whether your project is likely to be a winner.
In this article on identifying killer business ideas, Henry sets out six questions you should ask to help figure out whether your business proposal is worth pursuing. Like other experts, he advocates the need to distil your thoughts into simple chunks that can be easily understood by others outside your field.
But Henry doesn’t dismiss the complicated stuff. You need to know the metrics of your industry, he notes. After all, if you don’t know what numbers matter for you, you can’t gauge how you are progressing. – JC
By Henry Davis
I am a venture capitalist and so I have the privilege of meeting a lot of entrepreneurs, each with their own brave idea of how they will change the world. Without exception, the best entrepreneurs know instinctively their place in the eco-system in which they operate, their own strengths and weaknesses and their plan for global domination. They are also willing and able to articulate it.
Below there are six questions to help you think about the business you are starting or running. It will not help you come up with the killer idea – if I knew that, I would be doing it and making bank already… However, I think that if you can answer the questions below, it shows that you are on to something that might just work.
1. Why did you bother starting this business?
What confluence of extraneous factors, new gaps in the market, new technological possibilities and so on, are happening right now that made you want to even think about starting your business? How big do you think your idea can be, such that it motivated you to start it? Be as brutally honest with yourself as possible – is this opportunity truly worth your while?
2. What are you actually doing?
Without a clearly defined statement about what you are going to do, it will be very easy to find yourself wondering off the path to righteousness. There are all sorts of mantras on this – “my five year old guinea pig needs to be able to understand it”, and so on. Whatever rule you adhere to, just make sure that it is clear to you, your co-founders, the guy that serves you in your local deli, and anyone else you speak to about it, exactly what your business does. Use as little jargon, as few sentences, and as simple a definition as you can. Easy as that…
3. Who else is doing this?
Honestly, right now there definitely are a number of smart people who are competing with your idea, if not doing exactly the same thing. Even your target customer choosing to do, or buy, absolutely nothing, rather than engaging with your product, is competition of sorts. This is not something to be ashamed of. Embrace the competitive landscape.
4. Why are you going to win?
Having embraced the competition, work out how you are going to crush them. You must inherently believe there is something different, new or better about you, your idea and your team that means you can win, otherwise you would not have bothered trying. If you answered the previous question well, this answer should trip of the tongue as fluently as a Kafka metaphor. As well as identifying what your winning factors will be, it is really important to know how you will deliver them to bring your competitive advantages to bear.
5. How are you going to make money?
Entrepreneurship is about making money. Is there a path to value creation inherently embedded in your idea? Think in unit economic and customer value terms. Knowing how these flex – and ultimately how they turn into revenues, gross margin and bottom line – will show that you have a real grasp of the economic reality of what you are doing. Potential investors will appreciate it and, if you never want to speak to investors, having a robust means of making money (if not a large inheritance) is going to be necessary.
6. How will you know how you are doing?
What metrics can you now show, or will you want to show in the future, to demonstrate success. These will be somewhat industry specific: SaaS businesses have their ARRs and churn rates, e-commerce businesses have their AOV and repeat purchase rate. Both have CAC. Other businesses have engagement metrics, click through rates and so on. It is all jargon but, if you are going to succeed, you will need a good understanding of what metrics will matter for you and why. This way you can know if you are succeeding or not…
If you can confidently answer all of these questions, then you are definitely setting off on the right path. It requires maturity, intellectual honesty and downright bloody-mindedness to ask these questions. But if you can answer them, then you will be able to confidently sit in front of anyone and know you’ve got your bases covered.
Henry Davis is a Senior Associate at Index Ventures, a venture capital firm. He has previously been a musician, a banker, and pseudo-entrepreneur. You can follow him on Twitter and listen to some of his DJ mixes on SoundCloud.
This article on how to identify killer business ideas is republished here on Biznews.com with the kind permission of under30ceo.com.
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