So now that the Zenie Bottle business experience is behind us – the three of us (Steve, Jim and myself) are spending all our time coming up and evaluating new business ideas. Our evaluation process is pretty basic – we just ask the same four questions over and over again.
What is the business?
We try to describe the business as clearly as possible. Often times we draw stick figures on whiteboards articulating the flow of goods or services identifying who is doing what and when. A common answer to this question starts with, "A dude comes to this web site and clicks…" While this may not embody the big idea or vision, it helps us understand what we need to create to get the business going. Often when I meet with folks and listen to their business, I have to stop them and ask, "OK so describe the process – specifically, step by step…" Many times people get stuck at this question. If this is too hard to answer – move on or keep refining the concept. For some ideas it is OK to be a little vague so long as the cloudy area surrounds something that can be defined later like the UI or interconnecting with a 3rd party. If there are huge chunks to the flow where there isn't clarity or the process seems utterly implausible, we drop the idea and move on.
Why do people care about this business?
Once we get comfortable with the business concept we ask ourselves, "Why does it matter?" Do people really want this widget or service? This is generally, where we spend a meaningful amount of time hunting down people in similar industries and asking their opinion about the idea. We try to test the concept with friendlies or potential customers. If the idea is great but people are unsure of the value – then it's time to move on to another idea. If we get positive feedback on a concept then we do a gut check – people like to tell you what you want to hear – is their feedback simply them stroking our entrepreneurial egos or is the idea genuinely valuable? With Zenie Bottle we had numerous focus groups and they all said great things – but in our gut we always felt like we had a demographic issue – everyone liked the idea for different reasons. All positive feedback – but different – is a bad sign. It shows that the value proposition isn't clear or universal. If we don't get almost universal, consistent feedback – we refine the concept or move on.
Can we actually build this business?
I can dream up some great business ideas – but for most of them, I'm not the guy to run them. Know your limitations in terms of funding, experience, ability to attract talent, geography, etc… For example, some of my ideas require a tremendous amount of capital – while I have raised money in the past – I probably can't raise $1B for some mega buyout. The other part of the "Can" question is around the technical and/or social feasibility. A couple of our ideas are fantastic but only after they have 15 million active daily users. While building huge social network ideas are possible, we feel that success in those businesses is largely due to luck or extreme skill in social networking – two things we most likely don't have. Other ideas may be wonderful but are on the cutting edge of science and/or require very specialized talent. I'm not patient enough to build a business that requires a ton of research. Still other ideas while not particularly technical or require getting the whole world to visit our web site, require large organizations to change their behavior in fundamental ways – like asking retailers to change the checkout process at the point of sale. Ideas like that the "Can" question refers to the likelihood of convincing someone to change – possible but the value proposition has to be huge. The "Can" question really is about looking inside yourself and knowing what you are good at and what you are willing to tackle.
How do we plan to make money?
The fashion today seems that you really don't need to know this answer at the start, especially if you are a web company. I'm too old school to dismiss this as unnecessary at the founding of a company. If you have the idea that brings value to some group of people, you should have a solid sense of how you are going to make money. Now I'm not saying you need a specific rate card established, but you should be able to identify the points of value in your business. This will necessitate that you understand the fundamental economics of the business and broadly identify how much scale you will need to become profitable. I have to know the numbers before we say yes – fully understanding that early financial models are not accurate – they at least help us identify the key operational and economic metrics. "How you make money" also concerns personal economics. Business ideas that require a lot of capital always mean less equity for the founders. So if my goal is to make $X I need to factor in how big a business we need to build so that when we exit my Y% gets me what I want. Some smaller ideas may actually net us founders more money.
We tend to revisit our answers to these questions for every idea several times (and perhaps even after we commit). Some idea that we tossed to the sidelines a week ago may come back to center stage as we get more information. Anyone going through this process knows that coming up with ideas is the easy part – picking the right one takes a little more time.