August 26, 2005
Business Idea Assessment, Part 1: Demand
This is part 1 of a series of posts about assessing early-stage business ideas.
Demand is the single most important criterion to me. If I don't agree with the entrepreneur's demand estimates and can't come up with better ones myself, I wouldn't even look at the rest of the plan. A great idea without a market is useless. Besides, at its essence a good business idea is about recognizing unmet demand for a good or service.
Rather than looking at the bottom line of projected financials, the focus should be on the business plan's market definition and estimates of sales potential within the selected market(s). At this stage, it's not about crunching numbers - it's about questioning the assumptions. Even the most sophisticated data model is useless when your financial inputs are fiction: garbage in, garbage out.
On the other hand, it's entirely possible to question the logic behind the entrepreneur's assumptions, as well as assessing the quality of their insight based on their personal experiences in related fields. It's pretty easy to see when someone is tapping a deep vein, and when they're just quoting stuff they found in a google search.
Hard data is useful, but is often not available for, or applicable to, truly new ideas. In this situation, data would be most useful for disproving the hypothesis - I'd be very skeptical about stats that purport to "prove" that a market exists for a product or service that hasn't actually been put up for sale. I think this is the hardest thing for entrepreneurs to understand - we spend so much time trying to come up with financial projections rather than doing only what's needed to get the product to a market trial so we can actually see whether our idea will part people from their money.
As described in a post about market sizing on Coyote Blog, this process is about logic:
"I have been a marketer for almost 20 years, and one of the classic mistakes in marketing is to rely too much on your own experience and preferences..."
"The key to successfully completing the [market sizing] exercise was to break the problem down into cascading assumptions, each of which could theoretically be researched and checked."
My associate Mark got obsessed with golf tees recently, and mucked about with this market sizing method to come up with an estimate for the demand for wooden golf tees in Canada.
Using the golf tee example, begin by defining the annual canadian market for wooden golf tees as being equal to the number of tees used per round multiplied by the number of rounds played by canadian golfers each year. To get to this result, you can use the following formula:
Canadian Population x Percentage of Canadians that Golf x Percentage of Canadian Golfers that Use Wooden Tees x Average Number of Wooden Tees Used Per 18 Hole Round x Average Number of 18 Hole Rounds Per Year
Now that the model has been established, its time to plug in some estimated numbers and begin working towards the final goal of calculating the actual market size.
The point is not whether these numbers are correct or not (at least not yet): the point is that he's defined a way to get to the correct numbers, or close enough to make decisions anyway. Once you've laid out a logical framework for estimating demand for the product, you can set about looking for numbers - filling in the blanks. On the other hand, if you're presented with numbers and no logical explanation for their existence, you're probably best to walk away.
Oh, and if you're reading "we only need to capture 1% of this $X billion market" you should run away.
Next up: Competition
Posted by kenking at August 26, 2005 8:19 PM
