Starting a business? A few things to consider

Posted on July 03, 2013

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by David Gauthier
 
In my previous series of blogs, I highlighted some challenges that entrepreneurs face when growing a company and provided some advice on how to finance and plan for growth. In this blog, we will go back to the beginning and examine the challenges that entrepreneurs face when starting a business.
 

As highlighted in the first article on company growth, there are common evolutionary stages that businesses need to undergo to maximize commercial potential and sustain growth (see Figure 1). Entrepreneurs who skip a step or move to the next stage before the company is ready often experience significant problems that can cause a business to stagnate or, in many cases, fail. Starting-a-company

Figure 1: Entrepreneurial Development Process

At Level 1 the entrepreneur needs to flesh out an idea and determine whether or not a product or service can be produced and sold to generate a reasonable profit. The excitement that many entrepreneurs feel at this level is both wonderful and dangerous. The drive to make an idea a reality is the heart of entrepreneurship. However, unbridled enthusiasm can also blind an entrepreneur to risks associated with the idea and bias judgment regarding whether or not the idea is really feasible. Consequently, many entrepreneurs try to skip Levels 1 and 2 altogether and start a company without doing adequate homework—leading to the high failure rates that I referred to in Part 3 of the “Growing your Company” series.

Great discipline is required at Level 1 to ensure that the idea is truly feasible. To keep things as objective as possible, entrepreneurs should take a scientific approach (i.e. try to disprove the “null hypothesis”) and ask themselves "what data do I need to convince myself that I shouldn't waste any more time with this?" rather than asking, "what evidence do I need to support the case for moving forward?" The bottom line is that the idea should prove itself to the entrepreneur that it is worth pursuing rather than the entrepreneur blindly believing that a bad idea is worth continued investment of time and resources.

Recognizing the importance of both the product and the market

There is a constant interplay between the market opportunity and the technology, product or service. As entrepreneurs progress through the various stages of development, they need to continuously evaluate how their solution matches up with a current market gap and keep informed regarding other potential solutions that competitors are offering.

It is often easier to move an idea forward if it originates with the identification of a gap in the market place. By recognizing the gap and validating that nothing else exists to fill it, the solution can be designed from scratch to meet that market need. If the solution can be feasibly developed for the right price, the demand should be there.

Alternatively, if a technology, product or service concept comes first, entrepreneurs may have to go looking for a market in which to sell it. Sometimes this works out magnificently (e.g. the accidental discovery of an inferior adhesive that led to sticky-notes). In other cases, this leads to throwing something at the market that it really doesn't want or need (e.g. New Coke), or choosing a mediocre market that presents itself first rather than being patient and discovering the blockbuster application for it. For example, at a chemical level, a product may be a good household cleanser, but if the entrepreneur searched hard enough he/she might also have found that it is a cure for cancer!

To avoid the problems that can result from a technology or product driven approach, entrepreneurs need to ensure that they do not begin expensive prototyping or product development until the product/service idea has been matched with a market need to form a rational business concept. Investment of time and money in prototyping before the most appropriate match in the marketplace is made may make it harder to walk away from the opportunity in the future and lead to throwing good money after bad. Many “inventor” types fall into this trap and produce expensive prototypes (or in some cases even warehouses full of product) before determining if there are any potential buyers out there.

The use of advisers, consultants, and not-for-profit organizations that serve your industry can be very helpful at this stage to help with feasibility analysis. They can also challenge you on your assumptions and use their industry experience to help you refine your business concept. However, you will need to develop an ability to sort through and prioritize all of the advice that will be thrown at you. A seasoned business mentor can be extremely helpful to keep you on track.

One you are comfortable that there is a solid business case, then moving to Level 2 (prototyping and full business plan and capital plan) is the next step to complete before launching your business. Some tips on dealing with Level 2 will be outlined in a future blog.

This blog is extracted from materials originally developed by the Entrepreneurial Foundation of Saskatchewan.

Dr. David Gauthier
is a business consultant in Saskatoon, SK