Assessing business ideas

John Mullins, an associate professor at London Business School, asks how you distinguish between a superficially attractive idea and a real beauty.

There’s lots of interest in being an entrepreneur today around the world. So our question was, how do we figure out how to help our people understand, is this opportunity that I have in mind good enough for me or is there something fatally flawed and maybe I need to tweak it a little bit before I get started, or maybe I should actually put it in the bin and look for something better.

The first lesson we learned is that there is sort of some confusion in most entrepreneurs’ and many investors’ eyes around these two very simple words that we always use – market and industry.

Markets are really groups of customers, and industries are groups of competitors and so there are different questions you ask to understand, is this an attractive market or, on the other hand, is this an attractive industry and attractive game to play.  So that’s sort of the first thing our research taught us – that you have to assess those two sides of opportunity distinctly.

The second thing we learned was that while large fast-growing markets are attractive for example, there is something more important about the market side of the equation and not surprisingly that’s whether the customer is going to buy your stuff.

On the industry side there’s the same kind of problem.  You can do an analysis sort of at the macro level, looking at the industry from 30,000ft, as Michael Portev teaches us to do.

But the real question isn’t so much is the industry attractive, it’s can you build sustainable competitive advantage that’s going to last over time, as opposed to you getting started and then some big company comes in and you’re lunch.

The third one was really surprising. It’s common for people to say around entrepreneurship and venture capital that it’s all about management, management, management; and clearly management teams are important.  But what we learned is what’s important about them isn’t probably found on their CVs and isn’t just about the fire in their belly and their entrepreneurial passion.  It’s about three things.  It’s about their mission and aspiration and propensity for risk.

The second thing is every industry has some things that we call critical success factors.  That is, those factors that if you do them well, your probably going to be successful, even though you don’t do everything else well, but if you do them not so well, you’re probably going to have a tough time, even though other things you get right.

And then the third team issue is the issue about being connected and of course everybody in business knows how important connections are. But the real insight we got from this research has to do with the problems inherent in what we call Plan A. Most entrepreneurs have an idea for a new business and they are passionate about this idea and they just know it’s going to work.  But the evidence suggests that most of the time Plan A does not work and what works really is Plan B or Plan C or maybe Plan Z.

So this issue of being well connected becomes the key to getting to Plan B and Plan B is probably where the money is going to be made but on day one you don’t know what Plan B is. What makes an opportunity really attractive, a great place to grow your business, rather than just a ho hum opportunity?

Nick Britton

Nick Britton

Nick was the Managing Editor for when it was owned by Vitesse Media, before moving on to become Head of Investment Group and Editor at What Investment and thence to Head of Intermediary...

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