So, you think you’ve found your golden ticket – the perfect business opportunity. Before quitting your day job or taking out that business loan, though, you need to do some research. Twenty percent of small businesses fail in their first year, and that rate jumps to about half of all companies by year five.
There are a few precautions you should take to ensure that this opportunity is worth pursuing. Perform the following research strategies to get a better idea of your business opportunity and lessen the chances of becoming another statistic.
The first, and most important, step of your business opportunity research process is to complete the Business Model Canvas. The Business Model Canvas is a one-page supplement to the traditionally long, 30+ page business model.
The canvas forces you to think about essential business criteria such as your value proposition, cost structure, revenue streams, and customer segments, among other aspects.
Make sure you fill out the entire canvas. If you don’t know what to put in a section, it’s perfectly fine to write down your best guess. As you continue your business opportunity research, you’ll discover those answers and adjust your canvas accordingly. It should be an ever-evolving document.
One session maximum. Limit yourself to one sitdown session to fill out your Business Model Canvas for the first time. It’s more beneficial as an exercise to start you thinking about the questions it asks rather than writing your answers done in stone.
Don’t fear change. Throughout the research process, you might find that many of your assumptions were wrong. That’s fine. Update the canvas accordingly and use that information to tweak your business further.
Knowing to estimate the amount of money it takes to start up your business should be a no-brainer. Your start-up costs will determine if you can bootstrap the business yourself or if you need to find funding. It also helps to cement how big of a risk you’re taking. It’s much more challenging to get started if your initial costs are outside of your budget.
Don’t forget to include professional services costs (lawyers, bookkeepers), operating costs (office space, equipment), and potentially substantial marketing costs depending on your business. This research step is also an excellent time to consider whether or not you should bring on a co-founder or need to make any first hires. Both decisions affect your costs.
Part of your financials research also includes figuring out the size of your potential market. A common approach involves calculating your TAM, SAM, and SOM. To explain further:
TAM (Total Addressable Market) is the total market demand for your product or service. It’s the amount of revenue you would make if you sold to 100 percent of potential customers.
SAM (Serviceable Addressable Market) equates to the total number of target customers multiplied by the average annual revenue for those customers.
SOM (Share of Market) is a realistic percentage of the SAM that you can capture. You won’t have 100 percent market share, and it’s highly unlikely that your SOM will reach even half of your SAM.
At this research step, figure out what you can expect for your revenue streams as well. You’re probably not making money yet, so these figures can be ballpark estimates. You need to have an idea of how long it will take (and what traction you need) to break even. Any potential investor will be looking for these numbers, but you should also know them for your benefit anyway. It’s a fool’s errand to pursue a business that can’t be profitable.
Keep it simple. There’s no need to figure out exact numbers at this point. Costs will change as you move along, so just worry about getting in a reasonable range.
Include some wiggle room. There are bound to be expenses that you miss in your estimates. Add anywhere from 20 to 50 percent on top of your initial forecast.
It’s beneficial to maintain a SWOT analysis during every stage of your business growth, including the research phase. In a SWOT analysis, you examine your business’s:
Strengths (internal): Positive aspects and differentiators of your business
Weaknesses (internal): Gaps in your business and areas you fall behind competitors
Opportunities (external): Underserved markets, media potential, and emerging needs
Threats (external): Rising competitors, unfavorable regulations, and negative press
Following your SWOT analysis, you can begin to form short- and long-term goals. Discuss those goals with your team and figure out what action items you need to complete to accomplish them. Just as your SWOT analysis will change over time, your objectives will shift prioritizes.
Be brutally honest. A SWOT analysis is useless if you refuse to acknowledge weaknesses or threats. Lay everything out in the review, even if it makes you uncomfortable.
Take action. Performing the SWOT analysis isn’t enough. You need to capitalize on your opportunities and strengths while working to mitigate threats and remove weaknesses.
When researching a business opportunity, the most beneficial activity you can do is talk to potential customers. The advantage of doing so is two-fold.
By talking with your customers, you primarily gain further insight into the problem that your business is solving. You can discover what products or services people are currently using, what they like about those businesses, and where they’re falling short. Often, you’ll find a customer issue that hadn’t even crossed your mind.
Almost as beneficial, though, are the strides you make in building your initial customer base. By meeting with people during the research phase, you establish relationships that could quickly turn into sales. The potential customers you meet with are more likely to buy your product or service because they had a critical part in creating it.
As you talk with potential customers, you’ll begin to see patterns in their thought processes, behaviors, and pain points. To take your customer research a step further, create personas that represent your target market based on the patterns you notice. These personas should resemble real-life people with names, backstories, motivations, etc. Humanizing the personas enables you to refer to them later and helps to put yourself in the customer’s shoes.
Meet face-to-face. Talking in-person helps to create rapport and allows you to dive deep into topics that pop up. You can’t get that level of personalization through email.
Ask open-ended questions. You want the person you’re meeting with to do the majority of the talking. Avoid yes/no questions or ones that try to lead them to a particular answer.
Don’t be afraid to reach out to other, more experienced entrepreneurs about your business opportunity. They can provide a treasure trove of invaluable advice. If you’re worried about them stealing your idea, you shouldn’t be. Most are too busy working on their own business to take the time to build yours.
The entrepreneurship community is generally quite helpful. Experienced business owners will often tell you about the mistakes they’ve made to (hopefully) prevent you from doing the same thing in the future. If they’re okay with it, take down notes that you can refer back to as you talk with them. Unless you have a perfect memory, there are likely to be valuable tidbits that you won’t remember.
Additionally, try to find some experts in the same industry in which your opportunity resides. They’ll not only know the ins-and-outs of the market but can also guide you on what you may need from a licensing and regulatory perspective. You’ll still need to hire a lawyer down the road, but talking to industry experts is a low-cost way of getting an idea of what’s involved.
Similar to customer research, the more people you network and meet with, the better. Who knows? You may find an advisor or two in the process.
Offer value. When reaching out, try to offer something in return. Everyone’s tired of getting their coffee bought for them. Leverage your particular skillset to avoid a one-sided relationship.
Keep in contact. One meeting is great, but a lifetime relationship is even better. After meeting, ask the other person if you can stay in touch or add them to your company update list.
You know the adage, “Keep your friends close and your enemies closer?” Well, the same idea holds in business. An in-depth competitive analysis needs to be part of your business opportunity research. Determine who your competitors are and, more importantly, what sets you apart from them. Ideally, your product or service has at least one aspect that’s ten times better than any of your competition.
After talking to potential customers and experts in the industry, you should have a good idea of the competition you face.
Other than noting the particular products and services your competitors offer, discover how they position themselves in the market. Try to position your business differently. When starting out, it’s significantly easier to carve out your own niche than it is to steal competitors’ business.
Not every company is a competitor. A business being in the same industry as you doesn’t automatically make them a competitor. Look for potential partners as well.
Never stop researching competitors. You should always have your finger on the pulse of your competition. Have an understanding of what they’re up to and where they’re heading next as a company.
Many entrepreneurs, especially first-timers, trap themselves into a “my way or the highway” mindset as they research new business opportunities. They become so in love with their idea (solution) that they end up missing the opportunity (problem) right in front of their face.
Keep an open mind as you research your business opportunity. Instead of working to validate your solution, try to understand your customers’ problems as best as possible. Wait until you have an in-depth appreciation for the issues your customers are facing before forming business solutions. Unfortunately, that process is easier said than done.
The biggest mistake new entrepreneurs make when researching a business opportunity is to stay in the research phase indefinitely. It’s easy to get stuck in analysis paralysis, in which you overwhelm yourself with so much information that you become incapable of taking the next steps.
In the end, nobody has all of the answers. The best you can do is start working with the information you have and keep learning along the way. Good luck!