How to recognise money making opportunities?
Entrepreneurs are always generating ideas for potential businesses. But how can they sift through these ideas and recognise the few that represent true business opportunities? One way to begin is to define the characteristics of a genuine opportunity:
An opportunity is a product or service that:
1. Creates significant value for customers
This is done by solving a significant problem or filling a significant unmet need for which they are willing to pay a premium – customers will pay for a product or service only if they perceive a benefit whose value exceeds its cost. And the greater the perceived value, the more they will pay.
2. Offers significant profit potential to the entrepreneur and investors
At least enough to meet their risk/reward expectation. Is this a lifestyle business? Perhaps the one that can be passed onto children as they mature or a truly ambitious business with 10m turnover over 5 years with 10-12% profit margin?
In the absence of existing customers, revenue figures and revenue growth must be assumed. And therein lies the most dangerous trap for the entrepreneur. An optimistic revenue projection is the most dangerous trap, but not the only one. People often underestimate the amount of advertising and promotional activities they must do to show up on customer’s radar.
3. Represents a good fit with the capabilities of the founder and management team
A good fit would be something the founder and management team have the experience and skills to pursue. Ideally, a situation in which the entrepreneur and management team have the managerial, financial and technical capabilities, along with the personal commitment needed to address a business opportunity.
4. Is durable
Durable in a sense that the opportunity for profits will persist over a reasonable period of time – that is, is not based on a momentary fad or need that will quickly disappear. Some opportunities lack durability even though demand remains high for a long time. Low barriers to entry create these situations. A visible opportunity with low entry barrier to new competition is a deadly combination. The supply of the product or service can quickly exceed demand, resulting in price reductions and business distress all around.
5. Is amenable to financing
One would think that a promising commercial idea will always find its financial backing – from the idea generator, friends and family, bankers and so forth. But experience teaches us otherwise.
Before moving on ask yourself if your idea measures up to these definitions of credible opportunity. Don’t overlook these characteristics. Always consider the attractiveness of the opportunity relative to others you could pursue – including doing nothing.
Remember that leaving your capital in a fund earning 2% interest is an alternative, and one you can follow until an opportunity with the right characteristics appears on your radar.
Post originally published via ICAEW Business Advice Service – click here