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The best entrepreneurs formulate a plan before they launch their next project. Rod Drury poses five questions you need to answer before you venture into business.
(Previously published in Fortune magazine.)
Entrepreneurs are a special breed. We like the thrill of the chase. We’re usually highly competitive, goal-oriented, and driven to come up with solutions that make the world a better place.
But before you dive deep into your next venture, you need to know that the best entrepreneurs formulate a plan. They think about the numbers, identify the market and its needs, and test acceptance of their solution.
Here are five questions every entrepreneur needs to answer before launching their next business:
1. How big is the opportunity?
You may have an idea, but without defining the opportunity, sizing up the potential market, and putting some numbers around that idea, it can be very difficult to execute.
When I launched Xero nearly 10 years ago, we wanted to get every small-business owner and accountant out of spreadsheets, off desktop software, and into the cloud, so that they could work together using a single set of data that’s updated in real time.
That opportunity to modernise the way the world’s small businesses are run is the biggest in technology right now. Millions of small businesses and accountants are yet to transition their operations to the cloud, which makes it an incredible green-fields opportunity that has the potential to seriously impact the global economy.
When sizing up the opportunity, it’s also important to look at the macro environment. For Xero, we saw that small businesses are the largest job-generators in the world – they’re the biggest contributors to gross domestic product (GDP). By enabling them to be more productive and arming them with the right information to make better business decisions, you can improve the health of the entire economy.
Our opportunity gave us a purpose to make every business decision around.
2. What is the competitor landscape and industry history?
Figuring out who your competitors are and how you’re going to be different is important to an idea’s success.
Some companies may be direct competitors, while others will just be in your space. Map it out so you can understand what a customer’s options are. It’ll help you understand what your product roadmap should look like, what your competitive advantage is, and how you should position yourself.
For Xero, we were born in the cloud. We didn’t have any desktop legacy to contend with. It’s been what has defined us as a cloud-accounting platform, enabled us to take on the incumbents across the world, and given small-business owners and their financial advisers a technology tool to better run their businesses.
3. What is the sales model to address the opportunity?
It’s one thing to come up with an idea. But without sales or customers, it’s not a business. Mapping out how you will monetise your idea and how you will reach your market is key to transforming an idea into a business.
• Will you have a process that allows customers to just sign up online?
• Will you use a sales force to knock on doors and call down potential customer lists?
• Will it be a mixture of both?
• Can you encourage others in your industry to sell the product on your behalf?
Whichever method you choose, you need to ensure the numbers are right. Using the wrong sales method means you risk spending too much time and money acquiring customers or attracting the wrong customers.
4. What is the funding plan?
Launching a new venture requires capital. You’re usually lacking sales in the early stage, so you’ll need to figure out how to bankroll your workforce, overheads, and development costs until revenue receipts start to kick in.
The deciding factor on how you fund a new venture will depend on how capital-intensive the execution of your idea will be. Xero did its initial public offering (IPO) in its first year, as it was one of the only ways we could fund the development of a platform that’s cost more than $200 million to build.
That strategy won’t work for many companies, but there are other options.
Consider seed funding from investors who under-stand and are passionate about your venture. There’s the friends and family option, the high-net worths who like to dabble in early-stage start-up investing, and the more conventional institutional investors.
But regardless of the method, make sure the money you take is the right capital. Taking on investment will fundamentally change the structure of your company, especially as you need to be accountable to investors.
5. Who’s going to be in your winning team?
Once you’ve figured out the market opportunity, the competitors you’ll need to muscle up against, how you’re going to sell your idea, and who is going to fund the execution, you need to build a winning team. Figure out who your A team is and start pitching to them.
Without the right leadership and talent, a business will struggle to gain the momentum it requires to expand. The team is the defining point between a thriving enterprise and one that is doomed to be just a blip on the radar.