Six Proven Methods to Evaluate a Business Opportunity

As a serial Entrepreneur, I’m regularly evaluating a new business opportunity.

Whether these ideas involve launching a new company or adding a new product line to an existing company, I tend to evaluate the opportunity based on six specific criteria.

Criteria #1: Can I clearly define the market and direct my advertising efforts to target the prospects with laser-like precision?

One of my companies is rolling out a product designed specifically for Certified Public Accountants.   It solves a real problem and is, in fact, a very good product at a fair price.   That’s great.   But, I’m far more concerned with and excited by the fact that we know exactly who our customer is.  We know exactly how to reach them.   We know how to talk to them so that our message will resonate and we know when precisely they’ll most welcome our message.

Most business and product ideas are vague and it’s a classic mistake of new entrepreneurs to think that their great product should appeal to everyone.    Even worse, it’s easy to assume that great products sell themselves.   I assure you, that doesn’t happen.

Great products can languish while mediocre products become blockbusters so long as the mediocre product has a clearly defined audience who is easily reachable through measurable advertising.

Criteria #2: Does the idea solve a real problem?

In 2010 alone it’s estimated that venture capitalists dumped $1.67 billion into social media companies. I don’t have any major objection to social media companies, but I have a hard time seeing how most of these companies solve any real problem.

Let’s look at one example from earlier this year. Color, a mobile photo sharing app, raised $41 million in venture money before launching. Okay. Color might be a cool little app, but it’s a big stretch to say it solves a real problem or makes people’s lives better, which, by the way, explains why they have no clear strategy to make money.

When you’re adding value to the world and solving real problems, it’s generally much easier to come up with a worthwhile strategy to make money.

This all reminds me of 1999 and the ‘dot com bubble’. I was there in the trenches and made several huge mistakes which ultimately cost me everything I’d accumulated up until that point. It was a humbling learning experience for me, but a great reminder that as an entrepreneur my primary objective is to create value by solving real problems.

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Criteria #3: Is it scalable?

As a child with entrepreneurial inclinations, I looked around for things I could sell or services I could provide.  Not knowing where to start, I went for the low hanging fruit by trading my time for money.  Kool-aid stands, paper routes, selling little crystals from a broken chandelier to my classmates ($.10 each or 3 for $.25).

I did okay as a kid by being a little creative and working my butt off.   But, everything changed for me at about 19years old when I came to understand scalability. Trading your time for money is a devil’s bargain. It is the easiest way to bring in income, but in the end it is still a job.

The ability to scale means you have obvious leverage.  You don’t have to do all the work and when you do, you’re efforts are multiplied significantly.  That’s one of the things I like most about the publishing business. It takes about the same amount of energy to communicate with 10 people as it does 1,000,000.

Look for businesses that can be systemized, grown through good marketing and with large enough target markets that the whole exercise proves worth the effort.

Criteria #4:  Is there a special advantage I can leverage?

People are often surprised that I’m not a competitive person.   I don’t care if you’re better at something than I am.  I do, however, care deeply about outcomes and objectives.  For whatever reason, there are certain things I want to see happen and the fact is, I prefer to take shortcuts to reach those objectives.

I ALWAYS look for ways to gain a special advantage in any new opportunity and you should too.  Here’s an example of one relating to the CPA product I described earlier:

I would never consider adding this product to the existing business if I didn’t have a special advantage up my sleeve.   In this case, we happen to have a very close relationship with a pair of high ranking, well respected university professors who are already in this space.

These folks are at the top of their game with all the credibility in the market we could hope for. Leveraging their massive credibility and expertise makes this particular opportunity so easy it really does feel like cheating.

When evaluating your opportunity ask yourself these questions:

-How can I leverage my current customer base to support this new opportunity?

-Do I know anyone who has unique expertise that I can leverage to make this a home run?

Criteria #5: Does it fit within my core objectives?

After losing everything in 2000 my primary objective was to rebuild and add to my wealth. I started a marketing company built around generating leads online. The business grew quickly from there and branched off into software development where we created and marketed our own products.

The products we made were good and they solved problems, but the only reason I launched them was because I thought they could put lots of money in my pockets. There’s nothing wrong with making money. In fact, there’s a lot RIGHT about making money and, at the time, building and launching these new products helped to support my primary objective: rebuild and add to my wealth.

Today, however, there is no way I could pursue projects like that simply because my core objectives are fundamentally different then they were back then.   Making money is important to me, but I have other objectives that override that one all the time.

Before I launch any new business or product I ask myself if this product fits within the vision I have for my life.   Is this how I want to spend my time?  Does this get me closer to my medium and long term objectives?

Criteria #6: Can I build an immediate feedback loop by defining and watching key numbers?

I’ll probably never be the guy that comes up with an idea that changes the world or builds a business that revolutionizes anything.   That’s the downside of Criteria #6. Fortunately, the upside makes up for it.

Our time is the most valuable asset we have. The worst case scenario for an entrepreneur is to waste their time and priceless energy on a business that will not succeed.

How do you know if an opportunity will be successful?

Start with the five criteria above to select the businesses you start or opportunities you pursue and you’ll dramatically increase your odds of success. Add to this a good feedback loop and you’ll know quickly and with relatively low risk whether the business will succeed.

A couple of weeks ago I was in Lithuania speaking at our annual Leadership & Entrepreneurship camp designed for university students from all over the world. As part of the sessions, we had the students pick individual business ideas and break into teams to actually work out how they would implement the ideas.

One of their tasks was to define some key numbers in their businesses that would help them understand the relative health of the business at a moment’s notice. These key numbers create the feedback loop we need in order to know if we’re going in the wrong direction.

In most businesses developing a feedback loop is pretty straight forward.  I like to identify some key numbers in the business and watch those numbers every day. As the business grows the numbers your watching will likely change, but that’s not the point.

Most entrepreneurs don’t bother establishing key numbers for their business or, if they do, often focus on things that are too far away from the objectives of the business to make much of a difference.

For instance, many businesses will know how many new customers they have or what their revenue was for last month, but they’d be better served to focus on cost per customer acquisition and Customer life-time value.

Using these six criteria, we were able to better evaluate the business ideas put forward by the students at our camp. And more importantly, once the students understood these criteria, they were better able to create an action plan for taking their ideas to market.

No matter if you already have an established business or if you are simply on the verge of creating one, set aside some time to run your idea through these six evaluation steps. Each one will help you refine and improve your plan.