So you’ve got a wicked new idea that you think will earn you big bucks, and you can’t wait to get started.
Before you rush into anything, you should first ask yourself: Do you have your market sizing done? A fallback plan? Enough savings to tide you over, in case you don’t experience success immediately?
In this article, we continue our series on how to start a business by discussing discuss 5 things you need to consider first.
By the time you get to the end of this article, you’ll hopefully be more well-prepared, and have a better idea of what being an entrepreneur entails.
Read on to find out more!
1. Is there demand for your product or service?
It’s common for newbie entrepreneurs to identify a gap in the market, realize they can fill it, then go all in on their idea.
On one hand, finding a niche where you can establish your brand might be a good strategy.
But on the other hand… have you ever asked yourself why there’s a gap in the market?
There’s one school of thought that says: If it’s worth doing, it’s been done before.
So if you come up with a brilliant idea that no one has done before? It’s very possible that someone actually has done it, but then realized that it was too unprofitable or unsustainable to last.
Now, we’re not saying that you can only stick to tried-and-tested products.
But, if you’re doing something radically different, or something that doesn’t currently exist, make sure you’re extra vigilant in your market research and market sizing.
You don’t want to spend all your time and energy developing a great product and marketing that product, only to realize later on that there’s too little demand to actually sustain a business.
2. What are your margins?
Margins are pretty straightforward—it’s basically your revenue minus your cost.
The lower your margins, the more volume you’ll have to move in order to make money. The higher your margins, the less volume you’ll have to move.
Now, does this mean that high margin businesses are always better than low margin businesses? Not necessarily.
For example, if you’re selling phone accessories online at $10 a pop, the barrier to entry to making that sale is lower—simply because it’s that affordable. Customers won’t think too much about buying your product, since it doesn’t take up a significant proportion of their purchasing power.
On the other hand, say you’re selling luxury speakers that cost upwards of $5,000. Obviously, your margins are higher here, but the barrier to entry is also higher. Because your product is more expensive and less accessible to the average person on the street, you can expect to sell far fewer units.
On top of that, you should also consider that the higher the price tag, the higher your customers’ expectations are. For those selling cheap phone accessories, you can probably get away with a really basic, run-of-the-mill eCommerce store and framework, with no frills or extras.
If you’re selling luxury speakers, however, you might need to provide free shipping, after-sales support, or even demo sessions where your customers can book a slot to experience the speakers in-person before buying.
3. How long is your runway?
If you’re in the startup scene, you might have heard this term before: “runway.”
For those who are uninitiated, “runway” refers to the amount of time that you can operate before running out of cash.
This is commonly used for tech or app-related businesses, where you’re creating an app or platform for consumers to use. However, the same idea can be applied to any business.
Before figuring out your runway, you’ll first need to calculate your net burn rate. Here’s the formula:
Net burn rate = Gross burn rate (how much you spend per month) – monthly revenue
Once you have your net burn rate figured out, you can then calculate your runway:
Runway = amount of cash on hand / net burn rate
So say you’ve built a marketplace app that allows people to swap their old used clothes. Your net burn rate will be your total expenses (server costs, what you spend on marketing, your own salary) minus your total revenue (this could be zero if your app is completely free to use, or it could be what you earn from app ads and premium accounts).
If your net burn rate is $5,000 and your amount of cash on hand is $80,000, this gives you a runway of 16 months.
With this in mind, you know that you have 16 months to either:
- Monetize your app more effectively, so you increase your revenue generated, or
- Increase your userbase drastically, to a point where you generate more revenue from the ads that your users click on (since ads pay poorly, this is not likely!), or
- Increase your userbase drastically, to a point that a bigger company will buy you out
4. Is the timing right?
We’re not talking about market timing here—we’re talking about the timing for you, in a personal capacity.
Obviously, starting a business is a big endeavor, and one that will impact your life in many ways.
Ideally, you should consider the other things that are going on in your life, before making a decision as to whether it’s the right time to start a business.
For example, it might not be the right timing to start a business if you’re experiencing these:
- Your partner or spouse has also recently started a business (or recently been retrenched)—this means less stability for both of you at the same time
- You’re having a baby or trying to have a baby (this will put a dent in your finances)
- You have personal debt that you haven’t managed to clear
5. Do you have a proper plan?
Take it from us—proper planning can be what makes or breaks a business.
We’ve talked about market demand and sizing earlier in this article, but that aside, there are so many things to consider and plan for, such as:
- Your target audience
- Your Unique Selling Proposition (USP)
- Your competitors and what they’re doing
At the end of the day, an idea is just an idea—even if it’s the most creative, innovative, game-changing idea that’s ever crossed your mind.
Before you leap into starting your own business, make sure your idea has legs by fleshing out a proper business plan.
A final word on starting a business
It’s important to ask the tough questions before you dive into your entrepreneurship journey.
If the math doesn’t add up, you’ll save yourself a lot of heartache and grief by recognizing this up front. This way, you can turn your attention to another opportunity that makes more sense—and might actually work out. If you’re not sure where to start, survey templates from Sogolytics can help you to collect the feedback you need to inform smarter decisions!
All the best in your road to entrepreneurship—we’re rooting for you!