1.03 – Confirming Your Concept’s Viability
An idea, however exciting, unique, revolutionary and necessary, isn’t a business. An idea is a great starting point, and an essential one, but you have to do a good deal more work before you can sidle up to your boss and tell him exactly what you think of him.
The following sections explore the steps you need to take so that you don’t have to go back to your boss in six months and plead for your old job back (and possibly eat a large piece of humble pie at the same time).
Researching the market
However passionate you are about your business idea, you’re unlikely to have the answers to all the important questions concerning your marketplace already. Before you can develop a successful business strategy, you have to understand as much as possible about your market and the competitors you’re likely to face.
The main way to get to understand new business areas, or areas that are new to you at any rate, is to conduct market research (head to Chapter 4 for all the details). The purpose of this research is to ensure that you have sufficient information on customers, competitors and markets so that your market entry strategy or expansion plan is at least on target, if not on the bull’s-eye itself. In other words, you need to explore whether enough people are attracted to buy what you want to sell at a price that gives you a viable business. If you miss the target altogether, which you may well do without research, you may not have the necessary resources for a second shot.
The areas to research include the following:
» Your customers: Who may buy more of your existing goods and services and who may buy your new goods and services? How many such customers exist? What particular customer needs do you meet?
» Your competitors: Who are you competing with in your product/market areas? What are those firms’ strengths and weaknesses?
» Your product or service: How can you tailor your product or service to meet customer needs and give you an edge in the market?
» The price: What do customers see as giving value for money, so encouraging both loyalty and referral?
>> The advertising and promotional material: What newspapers, journals and so forth do your potential customers read and what websites do they visit?
Unglamorous as may be, analysing data on what messages actually influence people to buy, rather than just to click, holds the key to identifying where and how to promote your products and services.
» Channels of distribution: How can you get to your customers and who do you need to distribute your products or services? You may need to use retailers, wholesalers, mail order or the internet. These methods all have different costs, and if you use one or more, each wants a slice of your margin. (Check out the ‘Carwow: Adapting distribution to changing circumstances’ sidebar to see how to change distribution channels when the situation calls for it.)
» Your location: Where do you need to be to reach your customers most easily at minimum cost? Sometimes you don’t actually need to be anywhere near your market, particularly if you anticipate most of your sales coming from the internet. If you’re in this position, you need to have a strategy to make sure that potential customers can find your website (see Chapter 15).
CARWOW: ADAPTING DISTRIBUTION TO CHANGING CIRCUMSTANCES
Buying or selling a car is a difficult process in the best of times, but add a pandemic into the mix and the difficulties grow exponentially. The UK-based car-buying comparison site Carwow (www. carwow. co. uk), founded by James Hind, simplifies this process for both dealers and car buyers. With operations in Germany and Spain, Carwow’s website lets you choose a vehicle, compare dealer offers, and purchase a car without ever leaving your home. When reviewing offers from dealers, you can see which dealerships let you purchase 100% remotely or which might offer disinfected delivery or ‘click-and-collect’ type handovers.
Prior to 2020, Carwow had charged dealers a fee per car sale; during 2020, it switched to a cost per enquiry model. Carwow invested further in its Web presence, and monthly unique visits to its UK website rose on average from 2.2 million to 2.4 million. From 2020 to 2021, the company more than doubled its number of YouTube subscribers from 1.5 million to 3.1 million.
The Covid-19 pandemic caused car dealers to adapt to reduced showroom walk-ins, pivoting quickly to online sales. Consumers adapted, too, quickly becoming comfortable making a purchase without ever physically seeing the car. Carwow claims that the sales leads it delivered to dealers accounted for one in 12 UK sales during 2020, putting its share of December 2020 private new car sales at 9.81 per cent, and 8.35 per cent for full year 2020.
Try to spend your advertising money wisely. Nationwide advertisements or blanketing the market with free offers may create huge short-term growth, but little evidence exists that indiscriminate blunderbuss advertising works well in retaining customers. Certainly, few people using such techniques make any money. Chapter 10 contains lots of tips on advertising.
Doing the numbers
Your big idea looks as though it has a market. You’ve evaluated your skills and inclinations and you believe that you can run this business. The next crucial question is – can it make you money?
You absolutely must establish the financial viability of your idea before you invest money in it or approach outsiders for backing. You need to carry out a thorough appraisal of the business’s financial requirements. If the numbers come out as unworkable, you can then rethink your business proposition without losing anything. If the figures look good, you can go ahead and prepare cash flow projections, a profit and loss account and a balance sheet, and put together the all-important business plan. (Chapters 6 and 13 cover these procedures.)
You need to establish the following for your business:
» Day-to-day operating costs
» How long it will take to reach breakeven
» How much start-up capital you need
» The likely sales volume
» The profit level you require for the business not just to survive, but also to thrive
» The selling price of your product or service
Many businesses have difficulty raising start-up capital. To compound this, one of he main reasons that small businesses fail in the early stages is that they use too much start-up capital to buy fixed assets. Although some equipment is clearly essential at the start, you can postpone other purchases. You may be better off borrowing or hiring ‘desirable’ and labour-saving devices for a specific period. The higher your fixed costs, the longer it usually takes to reach break even point and profitability. Time isn’t usually on the side of the small, new business: it has become profitable relatively quickly or it simply runs out of money and dies.
INFLATED NUMBERS ON THE INTERNET
If you plan to advertise on an internet site, make sure that you check out the different sites you’re considering. Be aware that some sites publish a fair amount of gobbledygook about the high number of ‘hits’ (often millions) they receive. Millions of hits don’t mean that the site has millions of visitors. Some internet sites increase their hit rate by the simple expedient of leading each viewer through a number of pages, each of which adds to the number of hits. Another mildly meaningless measure of the advertising value of a site is the notion of a subscriber. In internet parlance anyone visiting a website and giving over an email address becomes part of that company’s share price! Compare that to the suggestion that anyone passing a shop and glancing in the window turns into hard cash the following day.
Any real analysis of website use starts with page impression, which is a measure of how many times an individual page has been viewed. The Audit Bureau of Circulations, which started its life measuring newspaper response, has now turned its attention to auditing websites (www.abc. org. uk). Also check out the World internet Usage website (www.internetworldstats. com/stats. htm) for the latest statistics on internet pene- tration by continent and country. That gives you a realistic measure of the maximum traffic and relative importance of each market you’re interested in.
Raising the money
Two fundamentally different types of money that a business can tap into are debt
and equity.
>> Debt is money borrowed, usually from a bank, and that you have to repay. While you’re making use of borrowed money, you also have to pay interest on the loan.
>> Equity is the money that shareholders, including the proprietor, put in and money left in the business by way of retained profit. You don’t have to give the shareholders their money back, but shareholders do expect the directors to increase the value of their shares, and if you go public they probably expect a stream of dividends too.
If you don’t meet the shareholders’ expectations, they won’t be there when you need more money – or, if they’re powerful enough, they may take steps to change the membership of the board.
Alternative financing methods include raising money from family and friends, applying for grants and awards, and entering business competitions. Check out Chapter 8 for a review of all these sources of financing.
Writing up the business plan
A business plan is a selling document that conveys the excitement and promise of your business to potential backers and stakeholders. These potential backers can include bankers, venture capital firms, family, friends and others who may help you launch your business if they only know what you want to do. (Chapter 8 considers how to find and approach sources of finance.)
Getting money is expensive, time consuming and hard work. Having said that, you can get a quick decision. One recent start-up succeeded in raising £3 million in eight days, after the founder turned down an earlier offer of £1 million made just 40 minutes after he presented his business plan.
Your business plan should cover what you expect to achieve over the next three years. (Chapter 6 gives full details on how to write a winning business plan.) Most business plans are dull, badly written and frequently read only by the most junior of people in the financing organisations they’re presented to. One venture capital firm in the USA went on record to say that in one year it received 25,000 business plans asking for finance and invested in only 40. Follow these tips to make your business plan stand out from the crowd:
>> Hit them with the benefits. You need to spell out exactly what you do, for whom and why that matters. One such statement that has the ring of practical authority is: ‘Our website makes ordering gardening products simple. It saves the average customer two hours a week browsing catalogues and £250 a year through discounts not otherwise available from garden centres. We have surveyed 200 home gardeners who rate efficient purchasing as a key priority.’
>> Make your projections believable. Sales projections always look like a hockey stick – a straight line curving rapidly upwards towards the end. You have to explain exactly what drives growth, how you capture sales and what the link between activity and results is. The profit margins are key numbers in your projections, alongside sales forecasts. Financiers tend to probe these figures in depth, so show the build-up in detail.
» Say how big the market is. Financiers feel safer backing people in big markets. Capturing a fraction of a percentage of a massive market may be hard to achieve – but if you get it, at least the effort is worth it. Going for 10 per cent of a market measured in millions rather than billions may come to the same number, but the result isn’t as interesting.
» Introduce yourself and your team. You need to sound like winners with a track record of great accomplishments.
» Include non-executive directors. Sometimes a heavyweight outsider can lend extra credibility to a business proposition. If you know or have access to
someone with a successful track record in your area of business who has time on his hands, you can invite him to help. If you plan to trade as a limited company (Chapter 5 has details on legal structures), you can ask him to be a director, without specific executive responsibilities beyond being on hand to offer advice. But non-executive directors do need to have relevant experience or be able to open doors and do deals. Check out organisations like The Non-Executive Directors’ Association (www.nedaglobal.com/organisations/ recruitment-services) or First Flight’s non-executive search site (https://firstflightnonexec.com) for information on tracking down the right non-executive director for your business.
» Provide financial forecasts. You need projected cash flows, profit and loss accounts and balance sheets for at least three years ahead. No one believes them after Year 1, but the thinking behind them is what’s important.
» Demonstrate the product or service. Financiers need to see what the customer is going to get. A mock-up is okay or, failing that, a picture or diagram. For a service, show how customers can gain from using it – that it can help with improved production scheduling and so reduce stock holding, for example.
» Spell out the benefits to your potential investors. Tell them that you can repay their money within x years, even on your most cautious projections. Alternatively, if you’re speaking to an equity investor, tell him what return he may get on his investment when you sell the business in three or five years’ time.
