Great Business Idea? How to Know for Sure

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validating business ideaEvery day, lots of people have new business ideas. But entrepreneurs aren’t like everyone else. Entrepreneurs take action on their ideas. They move beyond dreaming about running a business, to actually take the steps to get up and running.

But, starting a business is risky—and that’s what scares a lot of people away. If your business doesn’t do well, you could lose a lot of money. Plus, it’s a lot of hard work.

But using a few simple steps, you can figure out if your idea is any good—before you invest time and money to turn your business idea into a reality.

This entire process is called “idea validation.” You’ll document your idea—simply write it down —and then test it to figure out if it’s the next big thing, or if you need to go back to the drawing board. You’ll have to do a little work, but it’s nothing compared to what it takes to really start a business.

Step 1: Put your idea on paper

Write it down

The first step toward validating your business idea is to get the idea out of your head and onto paper. This is probably the most important step in the entire process. If you don’t spend a little time formalizing it, it’s just too easy to skip the details. Writing down your idea is also the foundation for everything you’ll do later in the idea validation process.

Keep it simple

You don’t need to write a long, formal business plan at this stage. That’s completely unnecessary and a waste of time and effort. No one will read a complete business plan, and it’s much more than you need at this early stage.

Create a Lean Plan

Instead, focus on putting together a Lean Business Plan. Lean Plans are short and simple—usually just a single page. Most people can put together a Lean Plan in less than an hour and often in just 30 minutes, even if you’ve never done any business planning before.

Here’s what you should include in your Lean Plan. Keep your answers to each section short and simple. A single sentence or a handful of bullet points are all you need.

  • Value proposition: This is a simple one-sentence description of your business. It’s not a tagline or a mission statement. It’s just a description of what you do. For example, this is what a bike shop might use for their value proposition: “High-quality biking gear for families and regular people, not just gearheads.”
  • The problem you are solving: Briefly describe the problem you are solving for your potential customers. Your business exists to solve this problem, so this is arguably the most important part of your Lean Plan. If you don’t solve a problem for customers, you’ll have a hard time finding success. For our bike shop example, they might say something like this: “It’s intimidating for regular people to buy a bike in this town without being an ‘insider’ cycling expert.”
  • Your solution: Very briefly describe your business here. How does it solve the problem that your customers have? For our bike shop, we might say something like this: “Garrett’s bike shop is a snob-free zone where regular people can get top-notch bike gear and expert advice, without the attitude.”
  • Target market: Your target market is a description of who you think your customers are going to be. It’s important to define who your ideal customer is so you can figure out how to market to them. Our bike shop, for example, will target families, bike commuters, and students from the local university. They won’t go after the hard-core bike racers and mountain bikers who want high-end bikes and equipment.
  • Competition: List out your competition and add a brief note about how you’re different. It’s important to think about how you’ll stand out and convince potential customers to shop with you instead of the other guys.
  • Sales strategy: Your sales strategy doesn’t have to be complex at this point. You just need to list out how you plan to sell your product or service. Will you sell online? Or do you need a sales team that will be calling on prospects? Or maybe you’re opening a physical store. Just list the sales channels that you plan on using.
  • Marketing strategy: Just like your sales strategy, your marketing strategy just needs to be a few bullet points. How will you reach your target market to tell them about your business? Will you use online advertising, direct mail, or maybe content marketing? Maybe you’ll use a mix of different marketing tactics.
  • Business model: Finally, your Lean Plan needs to list your key revenue streams and major expenses. You don’t need to do a real financial forecast in this step. Just list out how you’re going to make money and the largest expenses that you’re going to have. This just helps you start to think about what it’s going to take to build a healthy, profitable business.

You can use our free, one-page Lean Plan template to get your idea on paper. It’s fast and easy and gives you simple document that you can easily share with friends and family. As a start, share your Lean Plan with a few people and see what they think. This is the first step in figuring out if your business idea can be transformed from an idea to a real business.

Step 2: Create a list of questions

Once you get your idea down on paper, you’ll be set up and ready for the next step: figuring out what you know and what you don’t know.

The Lean Plan that you created in the first step is really just a list of your best guesses—your assumptions about how your business will work. Just because it’s written down doesn’t make it a set of facts. So, now it’s time to take your guesses and use them to come up with a list of questions that will help you understand whether your guess is correct, or if you need to operate from another assumption.

The easiest way to create this list of questions is to frame them around your target market. For example, does your target market have the problem you think they have?

Go through each section of your Lean Plan and convert it from a statement and into a question.

Here’s a list that can get you started:

  • Does my target market have the problem I think they have?
  • What other target markets might have the problem I’m trying to solve?
  • Do my potential customers (target market) think my solution is a good idea?
  • Does my target market want to shop via the sales channels I’m thinking about using?
  • Can I reach my target market with the marketing strategies I’ve listed?
  • How much do my potential customers want to spend on my solution?
  • Are my expenses realistic? What’s it really going to cost to run my business?

Step 3: Make a plan for answering your questions

With your list of questions in hand from Step 2, your next step is to get out there and start answering those questions. This is by far the hardest part of the idea validation process. You’ll need to get out of your comfort zone, get out from behind your computer, and go and talk to potential customers.

To be successful at this step, you really need to “get out of the building” and talk to as many potential customers as you can. And you need to not be afraid that they’ll tell you that they don’t like your idea. This is the crucial step where you’ll figure out if your business idea is any good—and you’ll be able to find out before you’ve wasted a bunch of time and money actually starting your business.

Here are a few ideas that you can use to get some answers to your questions:

  • In-person interviews: As I mentioned above, this is by far the most valuable thing you can do. Find people who are in your target market and set up interviews with them to see if they have the problem you think they have and if your solution is a good fit for them. You’ll want to ensure that you avoid biased responses, so try and move beyond your normal circle of friends and family. Find people who will give you honest responses and won’t just tell you what they think you want to hear. Also, be careful about how you frame your questions. You don’t want to artificially lead people into giving you the answer you want to hear.
  • Test a minimum viable product: A minimum viable product (MVP) is a greatly simplified version of what you want to do and it’s something you can use to see if your target market really wants your solution. If you are thinking of starting a restaurant, for example, you could host some dinners at your home where you test out your menu. If you’re thinking of building a website that performs a service, see if you can build a very simple prototype so you can put it in front of people and see what they think.
  • Run some ad campaigns online: Even if you don’t have a complete product or service, you can use a service like Squarespace or LeadPages to build a quick one-page website for your business idea. You can then spend a little money to try advertising your fake business and see if people are willing to sign up or give you a call. If it works, you can just tell these potential customers that you aren’t quite open for business yet but that it’s coming soon!

Step 4: Decision time—move forward or go back to the drawing board

Invest some time and money

You should be prepared to invest a few weeks and possibly a few hundred dollars getting your questions answered. Keep in mind that this is a small fraction of the time and cost of getting a real business up and running.

Positive responses? Start planning

If you’re lucky, you’ll have positive responses to all of your questions and you’re ready to move onto the next phase of launching your business. You’ll probably want to start fleshing out more details of your plan and taking the steps to make your business real.

Mixed responses? Refine and re-test

But, if you’re like most entrepreneurs, you’re going to have more of a mixed response to your questions. You may find out that your target market doesn’t have the problem you think they have. Or, perhaps they do have the problem but aren’t willing to spend much money on your solution.

In cases like these, you need to go back to step one and refine your initial Lean Plan. Maybe you need to look at a different target market, refine your problem statement, or think about offering a different solution to your problem.

At this point, you need to “rinse and repeat.” Make changes to your Lean Plan and then come up with a new list of questions and start the process over again. Don’t be disheartened if you have to do this—almost all entrepreneurs need to refine their business concept several times before they get it right.

What’s great about finding the holes in your idea now is that it didn’t cost you very much time or money to figure out that your first idea isn’t perfect. You’ve greatly reduced your risk and given yourself the opportunity to figure out a business idea that will work.

Failure is an opportunity

The most important thing about the entire idea validation process is that you can’t be afraid of failure. During idea validation, it isn’t a big deal. In fact, it’s a real learning opportunity to figure out what’s going to work for your business—all without the prospect of losing tons of money in the process.

Idea validation in action

Here at Palo Alto Software, when we came up with the idea for Outpost, we tested it first. We built an MVP—a very simple version of the product—and tested it internally with our own team.

Then we started to show it to potential customers and gather their feedback. We didn’t get things right the first time, but we kept adjusting until we understood what exactly we needed to build. It took some trial and error, but we kept our risk level low by not rushing out to build what we thought our customers needed right away. Just by having some conversations and sharing our ideas, we were able to build the product that our customers really wanted.

If you have a great business idea, don’t be afraid to test it. The last thing you want to do is pour thousands of hours and dollars (or more) into an idea before you’re reasonably sure there’s a need and that people will pay for it.

I’d love to hear about your business ideas and answer any questions you have about idea validation. You can find me on Twitter @noahparsons.
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Noah Parsons
Noah Parsons
Noah is currently the COO at Palo Alto Software, makers of Outpost and the online business plan app LivePlan, and content curator and creator of the Emergent Newsletter. You can follow Noah on Google+ or on Twitter.
Posted in Growth & Metrics