Capital markets are also fairly straightforward. Businesses that are profitable, sustainable and replicable will usually attract investment. But one factor that many people fail to identify in the normal business planning process is the cost of capital and projected return on investment and the risk associated with it. If an idea requires a million dollars to start and is projected to return only 100k, then does that make it a bad idea? It depends. Is the return in 30 days, or 3 years? If it is 30 days, then sign me up. If it means 3 years...the internal rate of return for most financial investors may be less than ideal. And by the way, what is the risk to achieving this return?
Here are a few other considerations. What about the financial barriers to entry for your idea’s marketplace? If the required capital is low enough, you may have many competitors entering your space once your idea gains traction, only to compete with you on pricing or some other front unrelated to idea quality. Especially if you are first to a new market, the bleeding edge ideas often require considerable money to educate the consumer regarding your product or service—even before they are willing to buy due to lack of understanding. If the barrier to entry is enormously high (as an example; life sciences or biotechnology plays), then the risk adjusted return may be higher than desired for some investors to stomach.
Business plans also often neglect to look at details beyond dimensions of the core solution related to the core problem. A great example of unbridled ideation meeting innovation is the Netflix innovation contest. If you are not familiar with this story, it is worth examining. The takeaway from this story is that solutions can come from a wide variety of areas for problems, which can then create a wider set of problems that can be fixed with the same solutions. The “addressable” market for a single idea becomes bigger when you think beyond the traditional scope of a single problem/solution relationship when designing your next big idea. And this means a better return on investment. In the end, it is all about the discipline of identifying good ideas, determining if there is a financial market, the risk to achieving that return and then executing.
Turning idea risk into execution risk is never as easy as an entrepreneur would like, but if you can combine a typical business planning process with an appreciation for some of these considerations, it will help you spend more time on the good ideas that are actually worth doing.
There are a lot of good business ideas in today's world but not every idea is worth pursuing. Those interested in learning exactly what it take to turn a good idea into a profitable business should attend Think Big Partners' Entrepreneur Bootcamp. I will be presenting the first bootcamp session next Tuesday, October 11th. In this session, I will identify how new businesses and startups can succeed in today's hyper-competitve global marketplace. Enterpreneur Bootcamp will take place from 3:00-6:00pm at bizperc in the Kansas City Crossroads. Register here today!
Written by Herb Sih, managing partner of Think Big Parnters