The Four Critical Success Factors for a New Business

If you spend countless hours and hundreds of pages planning your new business venture, you are wasting a lot of time. That’s mostly because you don’t know the most important secrets about the new (to you) market.

What’s most critical to know about any business is invisible to newcomers. No amount of planning or preparation is going to change that. The key to being successful in start-ups is having a good general idea of what you want to do but being flexible enough to change plans quickly as you discover the invisible secrets of the market you’ve jumped into. (Remember the ETR “Ready, Fire, Aim” approach.)

I’ve always recommended that business plans be limited to four pages. An article in the Harvard Business Review on entrepreneurship provides a structure that would work very well for such a pared-down proposal.

The structure, suggested by Harvard Professor William A. Sahlman, is based on the idea that there are four factors critical to the success of every new venture.

1. the people

2. the opportunity

3. the context

4. the risk/reward ratio

Each of these factors can be approached by asking/answering questions. For example, you can write your page on “the people” by asking/answering:

* Who will we use?

* What do they know?

* Who do they know?

* How well are they known?

As for “the opportunity,” your plan should profile the business itself (what it will sell and to whom) and answer the following questions:

* Is the market sufficiently large and growing at an acceptable rate?

* Is the industry/sector structurally attractive?

By “the context,” Sahlman means the big picture — the regulatory environment, the demographic and market trends, economic factors, etc. These are usually factors that are beyond the control of the people engaged to run the business. Questions of context should include:

* What can happen that could sink the business?

* Are there any contextual problems we haven’t thought of?

The “risk/reward” questions must take into account everything that can go wrong, assess the damage that might be caused, and discuss how the team could respond. On the positive side, ask “How big can this get?”

This is a pretty good platform. I especially like the “people” and “opportunity” questions. But given the inspiration of a four-page plan based on four questions, I’d prefer (and recommend) the following:

1. The opportunity: What market niche does this fill? How will it help our customers? How much money can we make?

2. The people: Who can run this? Who can provide advice? Who are the leading experts in this area? How can I create a network that will ensure success?

3. The risks and costs: How much will it cost us? How much if everything doesn’t work out? What are the legal and regulatory risks? What are the opportunity and distraction costs?

4. Plan B: What do I do if it doesn’t work out? How can I limit losses and recoup a reasonable portion of the resources invested?