James Banks, the co-founder of Web3 (my web agency), first started his very first business as a freelance web designer at the age of 17. His business idea validation process went something along these lines:
- Learn how to write website code and create pretty pictures from a class he was studying at school.
- Talk to a friend and agree to build him an email newsletter template for his company. He said that he would pay for James to do it and James said yes.
- The newsletter template was built and a huge success. Based upon that conclusion, James thought he could make a business out of doing just that.
The keyword out of that last bullet point was thought.
What he didn’t realise was just how difficult it was to survive off a startup wage that a low-experienced business person would earn. It was just him doing everything. From marketing, sales, accounts and book keeping, project management, customer support, administration and a dozen other odd jobs piled on top of that.
He barely had the time to do all these tasks while delivering a quality service. So much so that he could only work on one project from one client at a time.
Due to the fact that he was chasing his tale trying to manage everything, he couldn’t afford to hire anyone else to take care of all the jobs.
He had one of the best work ethics from anyone I knew working his butt off every day. But due to his lack of delegation, he was working well into the early hours of the morning and every weekend too. He was barely breaking even and worst of all had little idea on how to fix the problem.
Fortunately his story turns around in a great way but does this sound like a familiar problem to you?
This is all to common in the idea and startup phase of a lot of businesses who have broken free from the chains of working for the man.
Many entrepreneurs will have been in this situation at least once in their career.
The thing is, you may be the best at something to the point where lots of people want your product or service. But that definitely does not mean you can make a good business out of it.
Owning or running a business is completely different from producing a product or service and requires its own set of skills to do right. Most startup businesses don't know this and is one of the main causes for a business to fail in its first years.
There are many people who are happy being a 'solopreneur' who are able to make a lot of money but it is often at a result of wearing all the hats in the business and working long hours day in day out.
There is absolutely nothing wrong with that but chances are if you are reading this then you are dreaming bigger and want more.
To build a scalable, sustainable and sellable asset, you are going to need to ask yourself some hard questions. Preferrably before you even start.
Nine years on and many lessons learned along the way from his first attempt at business, James and the team have built Web3 into a successful and scalable business with over a dozen people working for him and earning over 7 figures in revenue.
Lemodus was born out of a need to help scale and grow Web3 as well as their clients companies too. We knew Lemodus was something that many business owners were screaming out for. But first we wanted to take the right next steps by validating the idea against 10 principles that every successful business needs to fulfil.
These principles have come from insights learnt from our journey over the years.
Here are ten questions every person who is thinking of starting a business should rate their business idea against before committing to the idea.
Disclaimer - Idea validation plays a small role in the grand scale of what makes a successful startup. A great idea can fail and a terrible idea can succeed.
The aim of this exercise is to help clarify your business ideas against the matrix of what commonly makes a startup idea successful at a foundational level.
You can’t build a skyscraper on top of poorly poured foundations. The same goes for business.
1.Does your product or service solve a real problem better than current solutions?
The most foundational principle for a successful businesses is the ability to solve an existing problem.
Google’s first product, Google Search, solved the problem of not being able to quickly find relevant information on the internet. Since early to mid-2000’s, Google has become synonymous with the term “search engine”. It owns the search engine market in the western world, to the point where The Oxford Dictionary defines the verb ‘Google’ as to search for something on the internet.
However, Google did not invent the search engine. What Google did invent was a significantly better way to search for relevant, useful information online. That significant better way, the PageRank algorithm, even to this day remains one of Google’s most tightly guarded and protected secrets.
Although Google was not the first search engine to market, it managed to solve the existing problem of low-quality, slow and irrelevant search results significantly better than anyone else.
You don’t need to be the very first business ever to solve a problem to be successful. In fact, if you were first, you may be trying to solve a problem before the mass market actually consider it a problem.
Regardless, solve the problem so well that your users would not even consider the alternatives.
Does your business idea really solve a common problem significantly better than your competitor’s offerings?
2. Does your idea fit your skillset and desire for this business?
A business that solves a problem is an important foundational factor in the makeup of a successful business. How good your business is at solving that problem is just as equally important.
Every entrepreneur has their own unique strengths and weaknesses. Knowing what you are truly good at, and creating a business that makes best use of your strengths is a fundamental step towards building a successful business.
If you lack in that required skill, work out how to utilise other people who have these skills by either hiring or outsourcing.
For example, it may not make much sense for a software developer with zero skills or experience outside of the tech industry to start a beauty salon.
The time required for the software developer to go from little to no understanding of the beauty industry to a point where they can make informed business decisions is time that most startup businesses can ill afford.
8 out of 10 businesses fail in their first 18 months.
Your time needs to be focused on selling a significantly better product or service than your competitors and selling it fast. No one should be waiting to get their skills up to par first.
Focus on what you already know. On whatever it is that you’re good at that is inline with what the business aims to solve for its customers. It will allow you to get to market faster.
The most vital step in business is to know if people will actually pay for your product/service - not becoming the best at a certain set of skills.
3. Will your role be something that you are passionate about?
Typically, an entrepreneur's strengths correlate with things they enjoy doing.
Passion for these things resonates from the enjoyment and fulfillment of doing them.
On the contrary, an entrepreneur's weaknesses tend to correlate with the things that they hate to do.
Don’t start a business where the day-to-day activities will consist of the things that you hate.
Going back to James's startup story, he made this mistake when he first started. He enjoyed solving people’s problems and making sales. However, two thirds of his time was spent on management and tasks he did not enjoy like book keeping. So he identified what he liked and what his strengths were and paid other people to do the rest.
Build a business that allows you to do the things that you love. Often the things you are not good at or do not enjoy are what other people excel at. Let them do their job right and your business will benefit as a result.
If you find it very difficult to express what you are truly passionate about, then ask yourself what is it that you enjoy doing. It might be the things that you do in your spare time or the things that make you happy doing what you are doing.
If you can’t articulate what is it that you are passionate about, don’t let that fact stop you from starting a business.
Focus on building a business around the things that you enjoy doing the most that solves a real problem in people's lives. Passion will naturally flow from doing just that.
4. Does your idea have the ability to own the market?
A monopoly by definition is a single company or group that owns all or nearly all of the market for a given type of product or service.
The general consensus in the community is that monopoly businesses are inherently bad. Monopolies often bully or buy out any up and coming businesses that threaten to chip into their monopolised market share.
As a result, governments have antitrust laws in place to protect the population from these monopolies.
So why on earth should you aim to build a monopoly? Let’s examine a household monopoly to answer that question. Google has a monopoly on global internet search with over 80% of the search engine market.
Whether you believe in Google’s tagline ‘Don’t be evil’ or not, there is one unshakeable fact of value that this company possesses. It is incredibly difficult/near impossible for a startup business to dislodge Google at its own search engine game.
A startup business simply cannot compete with the manpower, resources, capital and intellectual property that Google maintains. This protects Google from descending into a market of perfect competition where most of the company’s time and resources are spent on trying to get a leg up on the competition.
War of competition is a costly game that saps vital resources away from what companies could be using to innovate.
Google has owned the search engine market since early 2000’s. Thanks to Google’s ownership of the search engine market, the company has been able to invest resources into building products like Gmail, Google Maps, Google Apps, Android OS and self-driving cars just to name a few. These products will contribute to the longevity and relevance of Google, even if the current search engine industry is replaced with a better solution over the long term.
If Google was fighting a gruelling trench war of competition from day one, it would be highly unlikely that the company could afford to diversify beyond the search engine industry and reach the level of success that it has today through ownership of the market.
Does your business idea have the potential to own the market? Are you entering an industry where no single entity owns and controls the market?
Businesses that are able to claw away market share from their competitors will have a much bigger success than those who are trying to win against a company with a moat so high that it is impossible to do.
5. Can your business model scale rapidly to own the market?
A business model is the rails in which your business travels along from an small idea or startup to a fully-grown organisation. Certain business models are much easier to scale than others.
For example, a Software as Service (SaaS) business model allows companies like Basecamp to service a user base of over 9 million with only 47 employees. Since the software services most of the customer’s needs, Basecamp can have thousands of customers sign up without needing to hire another employee let alone open up another office. This is what is called unhinged scalability.
On the flip side, let’s look at your local baker. If the bakery wanted to scale to serve more customers then they would likely need to open multiple stores in different regions. They would need to hire more bakers, shop assistants and a shop. Given that bakeries are already competing in a highly competitive environment against other bakeries as well as supermarket chains, the bakery would need to price their services aggressively to remain competitive.
Competitive pricing forces the bakery to sell their food at lower profit margins. This problem can affect lots of local businesses.
How can your business model achieve unhinged scalability so you can rapidly grow to own your market?
6. How dependent is your idea on your founding team?
A lynchpin between the success and failure of achieving rapid growth is key person dependency. That is, how dependent is your business on key people, primarily the Co-Founders in order to achieve growth?
Can the business scale independently without direct involvement of the founding team?
If you think building a business that doesn’t need you to run it isn’t for you, think again.
If you were hit by a bus tomorrow, would your business grind to a halt? You may not ever want to leave your business and you may not ever want to sell it either. The true is all things come to an end.
When you get to this stage, you will want to be able to sell what you have worked so hard on to achieve. This means that you need to be able to be free from any chains of your business and the same goes for all members of your team.
Being a key dependancy of your business is not only is a huge burden for the business and the team to carry, but it is also risky for potential investors.
You certainly cannot underestimate the importance of the founding team’s involvement in the business. However, a business that is wholly dependant on the founding team’s time and efforts to scale is not a good long-term business.
This does not mean that you should not be the most heavily involved. It simply means that you need to have redundancies in place so that if you were unable to work, your business will continue to operate for years to come.
Can your business idea scale independently of your level of involvement?
7. Is your idea serving a large market?
Launching a business and expecting millions of people to sign up across 50 different countries right from day 1 is an unrealistic expectation for most startups. Building a business that can only ever serve a very small minority of people is a business that will be almost impossible to grow.
Finding your ‘niche’ is one of the most overused and overrated solutions in business. But focusing on a small group of people from the very inception of your business is necessary to build a group of early adopters. These early adopters will help propel your product/service towards the mass majority.
Focusing on serving a small group of people that is small by default and has no signs of growing means that your business will most likely enter a space called startup stasis.
Startup stasis is a business that has achieved growth initially, but has barely been able to grow beyond this initial traction for the years that follow. Businesses that exist in startup statis are stuck in the awkward limbo between not quite a failure and not quite a success, which is sometimes worse than outright failing.
There are a number of reasons why businesses fall into startup stasis. The most common reason is because they’ve ‘niched’ themselves down to serve a market so small, they either find it hard to generate consistent business or they simply cannot grow. This is because the demand for their service/product is limited by a small market that isn’t growing in market size.
Economies of scale exist for a reason. Start small but aim big. A business that can either scale up to, or ideally begin serving a large global market from inception will allow you to grow big.
8. Is your idea geographically unbound?
Thanks to the internet, we live in a world that is relatively flat and geographically unbound. The most successful businesses have leveraged the internet to reach a geographically unbound customer base.
Some will argue that successful high-growth startups today that are geographically unbound are internet-only startups. This is untrue.
Uber started with one car and one driver in San Francisco. Just 4 and a half years later, Uber has drivers in 300+ cities across 56 countries and growing.
With a valuation of $41 billion at the time of writing, there is nothing stopping the company from scaling to every major city and regional area thanks to the Uber’s deployment, distribution and driver onboarding models (not to mention the millions of dollars in venture capital backing).
Is your business idea not bound by a particular geographic area?
9. Are you creating a saleable asset?
Every entrepreneur should have an exit plan in mind before launching their business. If you’ve answered positively to the eight questions so far, then your business idea will most likely be able to develop into a highly valuable asset.
Even if you never, ever want to sell your business, you should still aim to build a business as if you were building a saleable asset. Focusing on creating a saleable asset will result in building a business of high value. A business of high value will allow you to:
- Bring on investment capital at a higher value multiplier.
- Attract highly-talented people to your business.
- Allow you to afford to hire those talented people to build your A-team.
- Attract more customers of better quality.
- Allow you to publicly list the company at a higher valuation.
Selling or merging your business to another company or group, floating it on the stock market or conducting a management buy out are the three most typical exit strategies for businesses.
In most cases, the founding team of the business live by humble means on a modest salary as the company's profits are reinvested back into the company to fuel growth. To truly receive a personal return on your investment of time and resources into building up your business, you will need to sell off your portion of the company.
Knowing when the right time to exit is like answering the question how long is piece of string.
Most entrepreneurs that have successfully exited do so after 7-10 years of growing the business. Some entrepreneurs exit in a much shorter time frame. For example, Kevin Systrom and Mike Krieger sold Instrategram to Facebook for $1 Billion in cash and stock in less than two years of launching the company.
Ultimately, building a business that is a saleable asset gives you the option to exit, whereas building a company of little saleable value is not much different than creating a job for yourself.
Is your business idea creating a saleable asset, or are you creating a job for yourself?
10. Can your idea be launched quickly with minimal capital?
Having a good business idea is only one factor in the equation of many as to what makes a successful company. Being able to execute your idea and bring it into reality is another. Some business ideas have a much lower barrier to entry and require less capital than others to launch.
Service businesses can typically be launched quickly with minimal capital. Even if the business ultimately fails to attract any paying customers and generate any income, at least the time and capital spent to reach that realisation is minimal which reduces the impact and fallout of failure.
On the other hand, a company that requires bucket loads of capital and time to get to market are by an order of magnitude more risky endeavours to undertake for the entrepreneur.
That is not to say they wont succeed.
For example, Elon Musk’s Tesla Motors took 5 years and spent $25 million to develop the company’s first product, the Tesla Roadster.
Ultimately, the company has gone on to succeed with a market cap of $49 billion at the time of writing. However, success has come at the cost of Elon investing his last $35 million of his own money plus money he borrowed from friends to keep the company alive when no other investors would invest during the Global Economic Downturn of 2008.
One would argue that only an experienced and cashed-up and well connected entrepreneur like Elon could have turned Tesla’s fortunes around. For a first time entrepreneur, the reality would have been much worse.
Can you quickly launch your business idea with minimal capital?
Everybody has one or many business ideas that they think will make a good business. To help you quickly validate your business ideas, I’ve created a business idea validation calculator, which you can download for free here:
Simply make a copy of the sheet, enter in your ideas, rate them on a scale of 1-10 against each question (be honest) and see what the final total rating is.
Action the good ideas. Rethink the ones that rate less than good.
It is a good idea if you have any business partners to get them to rate the business idea without seeing your ratings then see how aligned they are with you on the idea.
Do you think business idea validation is useful or a waste of time?
Please share your thoughts on whether you agree or disagree with my ten business validation principles from above. I would love to hear if you have any other ideas you follow when considering your business ideas.