Your success must be based upon data that is solid and sometimes flexible enough to pass several critical tests if it is to guide a business enterprise to greatness. Here in brief are ten tests for your business success. Try these on for size, and test yourself for attractiveness to the marketplace, to investors and to history.
Ten tests for your business success:
- Is your market identifiable and accessible? Test yourself as to whether you can identify the size of your market niche, and whether you can overcome the many barriers to access customers within your niche.
- Where in industry life cycle? If your vision is for a product or service that fills a need in a mature industry, you may be flying against the prevailing winds as a market shrinks over time, taking your business with it. Conversely, a fast-growing industry lifts most all good participants, making excellent companies excel even more and grow even faster, like a small plane flying at 150 knots with a 75-knot tailwind.
- How large a total market? If the total market for your niche is under $100 million per year, it is going to be difficult to build a $50 million business, even if not impossible. If the market is ten times that size, there is probably room for competitors to fight for dominance and still succeed if you are not number one.
- Can you dominate that market? The dominant player in any niche controls pricing for all those under it, and often sets the risk profile for new entrants into the niche if the dominant player’s products or services fill the needs of customers at reasonable prices and quality. [Email readers, continue here…]
- Have you created high barriers to entry? If your business is a “me too” entrant into any market niche, even the smallest success will soon attract competitors that will sap some degree of your potential growth. What can you prove as a barrier to entry for competitors? Is it the advantage of time – years of development ahead of any competitor? A core patent or “thicket” of patents protecting your offering? A strategic relationship with one or more of the largest customers?
- Are margins high enough? Some great ideas just can’t make money and ultimately die for lack of profit potential. Profit margins are higher for unique products or services early in the life of an industry niche, or for products protected by patents that prevent others from undercutting you simply by releasing a cheaper product. High profit margins are a sign of high barriers to entry and attract investors and ultimately good buyers for your business.
- Can this business grow to above $20MM to $50MM in annual revenues? This is a basic test for investors, separating your business from those with smaller visions. There is nothing wrong with a vision for a smaller enterprise if not in need of professional investors to make it a reality.
- Do you have a world-class management team? The best way to protect against failure is to attract a team with members who have experienced success and failure and can recognize the ways to manage toward success and avoid the pitfalls previously experienced from past failures. From a professional investor’s perspective, the team should be able to be flexible, coachable and experienced enough to get a business through breakeven and beyond the next level of outside investment, greatly reducing execution risk.
- Can you translate an idea into a compelling product? Some great ideas just cannot be made into a product at a reasonable enough price to attract customers. And some attract early adopters but cannot pass into the mass market. Sometimes, an idea is just too early for the available technology to make it attractive. Early cell phones were large bricks that required a large carrying case and cost up to a dollar a minute to use. As technology caught up, allowing miniaturization and light weight, mass adoption drove the price down and allowed the building of infrastructures everywhere to support the use of inexpensive minutes. Do anything you can to develop compelling products or early prototypes as proof of ability to reduce technology risk.
- Is there an exit strategy for the investor(s) over time? There are many professional services businesses that make fine lifestyle opportunities for architects, doctors and dentists. But these types of businesses are not attractive to potential buyers willing to pay a premium for businesses that are worth millions more than their asset value. Building a great business to create wealth for the entrepreneur at exit, means thinking of the exit strategies from the beginning. Who or what type of buyer would be attracted to this business if successful? Great wealth is made from selling great businesses at immense profit for the entrepreneurs and investors who took the journey.