How do I Screen My Business Ideas?

If you have a bunch of business ideas, but are having a hard time screening them and deciding which one(s) to choose, you are not alone!  I would say this is one of the most common questions I get.  It usually comes in the form of:  I’m thinking of starting a home based business, but I don’t know which business idea is the best.  Or, I have an idea for an internet business, actually several of them, but I don’t know how to compare them and choose one to focus on.  Sometimes someone has come along and thrown an idea at you for a particular home business opportunity, but you have no way to objectively assess whether the business makes sense.

I suggest that when this happens to you, you rank your various business ideas and business opportunities based on the following criteria.  You may come up with some other ranking criteria to filter your list of ideas, but these are the ones that, based on my experience working with a large number of startups and small business entrepreneurs over many years, give the best indication of whether a business is likely to succeed:

• Startup capital required? What will the initial investment be?  Is it an investment you can afford to make, particularly in light of the upside potential the business opportunity provides?
• Does it suit your strengths? Does the business idea play to your strengths and to those of your partners, if will have any?
• Does the business idea make you enthusiastic? Entrepreneurship is not an easy road, but if you are enthusiastic about what you’re doing, it makes it a lot easier.  How excited are you about this business idea?
• Does the business have the potential for residual income? In other words, can you make a sale once and then enjoy continuing income (or “residual income”) from that same customer without having to make a sale again?  Selling life insurance and many other types of insurance would be a good example of this.
• What is the market growth rate? Is the market for this business growing rapidly, is it steady (mature), or is it on the decline?  It’s not to say that you cannot make money in a shrinking market, but it can be a lot more difficult, particularly if you’re a small home based business that does not have the resources to compete with the big, entrenched competitors.
• What is the competitive landscape? Is the market characterized by a few large, well-capitalized and mature companies, or is it highly fragmented with a very large number of small competitors?  Sometimes in a market where there are a few large competitors, you may still have a chance to cherry pick and go after the most profitable parts of their business.  As a small company, often you can be more nimble and adjust to a dynamic market more quickly that large competitors that have a lot of bureaucracy in place.
• What will be your ability to take a vacation? Some businesses make it very difficult for you to enjoy the fruits of your labor.  In retail, for example, it is often quite hard to get away, particularly for any extended period of time.  Almost every retail entrepreneur I have known has told me that without them there watching over the details of the day-to-day operations, bad things happen, from employees stealing, to employees just not caring about the business.  Some forms of retail are not quite as tough in this regard, like online or internet retailing, for example, where you may be able to outsource some key functions, like order fulfillment.  With some or most key functions outsourced, you may be in a better position to get away from time to time.
• Does the business have high gross margins? When you enter and run a business where the products and services you sell have high gross margins, you are far more likely to be successful and make a reasonable net profit in the end.  There are no hard and fast rules on this, but businesses that have a 60% or higher gross profit margin (which is defined as selling price less cost of goods or services sold) allow you to make a lot of mistakes and still make good money at the end of the day.
• Will you have a lot of employee headaches? In some businesses, such as home construction, you must have employees, as it would be very difficult to profitably build homes by yourself.  In this day of the internet business or the home business though, there are many business ideas and opportunities where you do not need to have any employees at all.  The more you are able to avoid potential employee headaches, in my experience, the better off you will be and the more likely you will be successful in your venture.
• Does the business have potential to make “significant” income? I put “significant” in quotes here because everyone’s definition of what’s significant is different.  You need to answer this question in terms of what is significant to you and to your partners, if you have any.  It is amazing to me how many folks get overcome with enthusiasm for starting their home business, internet business or other type of small business, to the point that they don’t consider the simple but important question:  If I’m successful here, will this business make me the kind of money that I can get excited about, or at least that would be meaningful to me, given my financial situation?
• Does the business have a lot of liability associated with it? There are a lot of types of liability and risk out there, but for the moment, let’s consider the contrast between the levels of liability of the following two businesses:  daycare for infants and dogsitting.  Not to take anything away from dogs, as they are very important to and loved by their owners, but do you think there’s more risk to you as an entrepreneur if you are caring for someone’s infant, or for their dog?  This example is very obvious, but when you are thinking about the riskiness of your business idea, you should consider issues beyond bodily injury risk.  How about intellectual property liability?  How about property damage?  You get the idea.