At Wavyr we describe a business opportunity primarily as a product or service that creates significant value for customers and offers significant profit potential to the entrepreneur. Increasingly, entrepreneurs are focusing on what creates that value to begin with, on defining and refining the problem that needs to be solved for customers and users. You need to be sure that the problem exists and be able to describe it in some detail before you begin to invest heavily in building your solution.
The problem focus has come to the fore because the entrepreneurial journey is rarely a straight line between seeing a need, identifying a solu- tion for that need, and then simply executing on that solution. In the long-accepted standard process for entrepreneurship, would-be business owners would identify an opportunity in the marketplace and, using what- ever data at their disposal, create a business plan and financial forecast that would be pitched to investors. If they got the funding, then they would follow through on the long process outlined in the document to build a team, create the product, market it, and hope the plan panned out.
But more often than not, it didn’t. No matter how well conceived the original product or offering, there are always major unknowns at the out- set of a business venture: What is the right business model? Will it scale? What will competitors do? What will be the unexpected glitches in the supply chain? And there’s the biggest questions: Is there really a market for the product or service as conceived, and if so, how big is it? Many entre- preneurs are so excited about what their new gizmo or service can do that they forget to assess its value to customers. But in the end, the business can succeed only if enough people recognise this value and are willing to pay for it.
Whether your business idea is a local digital operation or the next big thing in the tech sector, begin by asking the following customer and market questions. As you go, evaluate your confidence in your answers, and begin thinking about how you will test them. Note that the questions don’t assume that the person using your offering is necessarily the customer paying for it—many ventures create a product for a user but are paid by a downstream customer like an advertiser.
What is the problem you are trying to solve for your customers or users?
- How many people have this problem? In other words, what is the size of the market?
- Are your potential customers or users aware of this problem, or is the need latent, that is, undiscovered?
- Is the market stable or growing? If it’s growing, at what annual rate?
- How will your solution benefit customers or users?
- What percentage of the total market could the product or service reasonably hope to capture over the next few years?
- Is another product or service from competitors available to fill part of this demand?
- Who exactly are the potential customers? Can you name them? Can you describe them?
- How can you reach the potential customers and make a transaction—directly, on your own website; through distributors like the Apple or Google app stores; or through already-existing retail channels?
- How does the utility of the product or service compare with substi- tutes? For example, a tablet device is easier for a customer to carry around than a laptop. But it may not have all the functionality of the full computer.
2.1 The importance of experimentation 🔍
Chances are that you may have some good, informed thoughts about these questions, but your guesses are no more than that. Approaches to entrepreneurship coming from Silicon Valley take into consideration these unknowns at the outset of a venture and deliberately expect twists and turns—or pivots—in the entrepreneurial path. In a design- thinking approach to creating a new product or offering, innovators actively experiment with their idea to better understand the market and its needs before proposing a solution. One common formulation of this approach is the lean-startup methodology, which focuses on finding a repeatable and scalable business model for a new offering.
The lean startup and other similar models of entrepreneurship are iter- ative and nonlinear—not a step-by-step path—but they realistically reflect how companies change as they grow and learn. Taking an experimental approach from the earliest stages of your evaluation of an opportunity can reduce risk by helping you to home in on the right problem to solve, rather than jumping straight to the opportunity. And while these techniques were originally developed to help rapidly growing tech companies, the practi- tioners who created them see them as equally applicable to other small businesses as well.
In particular, the lean-startup approach emphasises customer development, or working with and learning about customers from the early stages of building a solution.
2.2 Evaluating the opportunity 📈
Especially in an experimental approach, evaluation of a business opportu- nity is less of a onetime event and rather a set of questions that you need to ask over and over as you experiment and learn more about your business.
As you try different elements of your business model in the market, you’ll learn more about the problem you’re trying to solve—and your solution’s viability in the marketplace. What you learn about customers will help you continually evaluate your idea.
The following criteria are important for an opportunity worth pursuing:
- It creates significant value for customers, who are willing to pay a premium to solve a significant problem or fill an important unmet need.
- It offers significant profit potential to the entrepreneur and investors—enough to meet their risk-versus-reward expectations.
- It represents a good fit with the capabilities of the founder and the management team—that is, the idea is something they have the experience and skills to pursue.
- It is durable: the opportunity for profits will persist—and, indeed, will probably grow—over a reasonable time and is not based on a momentary fad or a quickly disappearing need.
- The opportunity is amenable to financing. One would think that a promising commercial idea would always find financial backing, but experience teaches us otherwise.
2.3 Will it deliver a significant profit? 💸
To qualify as a good opportunity, a business must offer the potential for significant profit. But what amount constitutes significant? Each person will have a different view. Some entrepreneurs and investors will look for something capable of providing a comfortable livelihood—perhaps one that can be passed on to children as they mature. Others will seek much more in terms of financial gains for themselves and their financial backers—but potentially over different periods. For example, venture capitalists typically anticipate a long time horizon before they see a return, but they have higher profit expectations than do other business investors.
Risk must play a part in every consideration of profit opportunity because the risk and return tend to go hand in hand. Corporate employees often fret about workplace insecurity: “I could lose my job if the economy doesn’t improve.” For the people who start new businesses, however, the risks are far higher. If things don’t work out, they lose both their employment and the personal savings they’ve invested. Investors are similarly at risk; in the worst case, they can lose all their invested capital. Given the high risks of entrepreneurship, there should be correspondingly high potential rewards associated with an opportunity.
A successful entrepreneur must understand the economics of a business opportunity. The next set of questions will help you think through and evaluate the economics of your opportunity. Try to provide a complete answer to each.
- Will the business be a price setter or a price taker? What are the constraints on pricing what the business sells?
- What is the supply-and-demand situation for your product or service?
- Is demand elastic or inelastic—that is, would a price increase dra- matically reduce buyer demand (elastic), or would demand be only slightly affected (inelastic) in the short run?
- What substitutes do prospective customers have for your product or service?
- Will the business be dominated by fixed or variable costs?
- To what extent can suppliers and employees enforce cost increases on the proposed business?
2.4 Will it last? ⏳
Some opportunities are durable—that is, they are opportunities that busi- nesspeople can exploit over long periods. They are long-lasting and des- tined to grow over time. The software industry has demonstrated this durability. Other industries are too fleeting to sustain profitability over the long term. From the 1970s pet rock fad to the virtual world Second Life, most opportunities associated with fads and fashion are equally short lived. By the time customer requirements are defined and addressed, the market has lost interest and moved on to the next new thing.
Some opportunities lack durability even though demand remains high for a long time. Low barriers to entry create these situations. A visible opportunity with low entry barriers to new competition is a deadly combination. The supply of the product or service can quickly exceed demand, resulting in price reductions and business distress all around.
As you evaluate your business idea, consider first whether the need you’ve identified is likely to be sustained. Sometimes, you just need to take the time to see if a new fad has staying power. It can be worth the investment of time to wait before making an investment, according to London Business School entrepreneurship professor Freek Vermeulen, even in digital industries.
But speed is often what is called for to achieve one much-lauded source of durability in many industries: network effects. Where the value of a business’s offering depends on the number of users it attracts, being the first to achieve scale in a particular market can create high defensibility; users are less likely to defect to a competitor with fewer users, because it’s less valuable to them. This means that eBay and Etsy become more valuable for sellers as they attract more buyers, and more valuable to buy- ers as they attract a wider variety of sellers. In these kinds of businesses, defensibility comes from growing very, very quickly, becoming the first mover at scale in your target market so that you can be the first to capture those users or customers. But effectively capitalizing on network effects isn’t just about scaling your user base as quickly as you can—you also need to be aware of issues like building trust among the participants on your platform, focusing on the right kinds of users, and avoiding disintermedi- ation. (With disintermediation, participants’ trust in one another and the ease of the transactions grow so great that the participants can sidestep you as an intermediary.)
Can you defend the solution you are offering? Can you take advantage of network effects? Do other aspects of your offering make it difficult for competitors to emulate or replace?
2.5 What’s the competition? 🗣
Now try to answer the next set of questions, which address your compet- itive landscape. If you’re entering an existing market, you’ll be up against competitors. Some may be entrenched and capable. If your market is new and attractive, you can be sure that it will attract other profit-seekers like you.
- How are customers currently satisfying the need you’ve identified (e.g., going to their auto dealer rather than seeking alternative places to get their car serviced)?
- What are the strengths and weakness of the main competitors (e.g., high quality, poor customer service, high price)?
- How would a smart competitor respond to your entering the mar- ket (e.g., by reducing price, bundling with other desirable offerings, improving customer experience)?
- Are the barriers to market entry high or low? Low barriers usu- ally mean that competitors will continue to enter the market until returns are driven to a low level. If entry barriers are high, how will you surmount them? And will they stay high in the future?
- Have current competitors shown themselves to be agile and responsive to customer needs and technical change?
- What is the single worst thing that a competitor could do to your business prospects (e.g., drop the price 20 percent)? When you’ve answered this question, think about how that worst thing would affect your prospects for success and how you would respond. What strategy on pricing, positioning, service, distribution,
or product features would give you a sustainable competitive advantage?
Thoroughly examine and answer each of these questions with docu- mentation. If you will be seeking outside capital, this documentation is essential.
2.6 Is your idea amenable to financing? 💰
A good business opportunity must be amenable to financing. You would think that any promising commercial idea would find financial backing—from the idea generator, friends, family, bankers, and so forth. But experience does not bear this out. Between 2000 and 2004, for example, entrepreneurs in the biotech industry had plenty of ideas for new vaccines and therapies. Several years earlier, these great ideas would have found the financing they needed, but they were starved for financing during the period in question because of a lack of investor confidence.
After you’ve identified an opportunity and evaluated it in terms of the mar- ket, competition, and economic value, ask yourself two other questions:
- Is it still attractive in terms of the risk-to-return relationship?
- Is it more or less attractive than other opportunities available to you?
Don’t overlook these questions. Always compare the attractiveness of an opportunity with other prospects you could pursue—including doing nothing. Leaving your capital in a money-market fund earning an anemic 2 percent interest is an alternative, one that you can follow until an oppor- tunity with all the right characteristics appears on your radar.
Summing up part two
- A business opportunity (1) solves a real problem for customers, (2) offers significant risk-adjusted profit potential, (3) fits well with the capabilities of the leadership team, (4) is potentially profitable over a reasonable time span, and (5) is amenable to financing.
- Entrepreneurs often spend inadequate time considering the problem they are setting out to solve and testing how potential users and customers experience the problem.
- An experimental or lean approach to entrepreneurship lowers your risk and helps you understand customer needs and reactions to your solution before you make significant investment.
- Evaluate promising opportunities by considering the market, the current and anticipated level of competition, the underlying economics, and the resources you’ll need to be successful.
Keep an eye out one wavyr.nl to read the next part of the Digital Entrepreneur’s Handbook! Part three will be published Wednesday, September 12th.