The New Business Road Test

What entrepreneurs and investors should do before launching a lean start-up

John Mullins

• Publisher: FT Publishing International
• Year: 2017
• ISBN:
  9781292208411
• Edition: 5
• Topic: Business
• Subtopic: Small Business
• Index: Business

ROAD TEST YOUR IDEA BEFORE YOU LAUNCH YOUR LEAN START-UP

Thinking about starting a new business? Stop! Is there a genuine market for your idea? Do you really want to compete in that industry? Are you the right person to pursue it? No matter how talented you are or how much capital you have, if you’re pursuing a fundamentally flawed opportunity then you’re heading for failure. So before you launch your lean start-up, take your idea for a test drive and make sure it has a fighting chance of working.

Now in its fifth edition, The New Business Road Test is the essential handbook for anyone wanting to launch a start-up. The new and fully updated case studies – Ella's Kitchen, Whole Foods, eBay and more – and ‘seven domains’ framework will help you avoid impending disaster and enhance your chances of achieving your entrepreneurial dreams.

This book will help you answer the live-or-die questions:

· Are the market and industry attractive?

· Does the opportunity offer both customer benefits as well as competitive and economic sustainability?

· Can you deliver the results you seek?

The accompanying app (available on iTunes and Android) makes it easy to assemble all the evidence you need for your road test, wherever you are. www.newbusinessroadtest.com

Part 1

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Road test your new business idea

Chapter 1

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Our opportunity: why will or won’t this work?

You may have capital and a talented management team, but if you are fundamentally in a lousy business, you won’t get the kind of results you would in a good business. All businesses aren’t created equal.

Long-time venture capitalist William P. Egan II¹

Passion! Conviction! Tenacity! Without these traits, few entrepreneurs could endure the challenges, the setbacks, the twists in the road that lie between their often path-breaking ideas – opportunities, as they call them – and the fulfilment of their entrepreneurial dreams. The very best entrepreneurs, however, possess something even more valuable – a willingness to wake up every morning and ask a simple question about their nascent opportunity: ‘Why will this new business work when most will fail?’ Or, to put it more realistically, ‘What’s wrong with my idea, and how can I fix it?’

They ask this simple question for a very simple reason. They understand the odds. They know most business plans never raise money. They know most new ventures fail. Most of all, they don’t want to end up starting and running what Bill Egan would call a ‘lousy business’, one that consumes years of their energy and effort, only to go nowhere in the end. Despite asking this crucial question every day, their passion remains undaunted. So committed are they to showing a reluctant world that their vision is an accurate one that they want to know before bad things can happen why they might be wrong.

If they can find the fatal flaw before they write their business plan or before it engulfs their new start-up, whether lean or otherwise, they can deal with it in many ways. They can modify their idea – and pivot to a better version – thereby shaping the opportunity to better fit the hotly competitive world in which it seeks to bear fruit. If the flaw they find appears to be a fatal one, they can even abandon the idea before it’s too late – before launch, in some cases, or soon enough thereafter to avoid wasting months or years in pursuit of a dream that simply won’t fly.

Better yet, if, after asking their daily question and probing, testing and especially experimenting for answers, the signs remain positive, they can embrace their opportunity with renewed passion and conviction, armed with a new-found confidence that the evidence – not just their intuition – confirms their prescience. Their idea really is an opportunity worth pursuing.

Tools to answer the question ‘Why will or won’t this work?’

Just as most car buyers take a road test before committing to the purchase of a new vehicle, so serious entrepreneurs and street-smart investors run road tests of the opportunities they consider. Each road test resolves a few more questions and eliminates a few more uncertainties lurking in the path of every opportunity.

This book provides a road test toolkit that any serious entrepreneur or investor can use to resolve these questions and eliminate these uncertainties before writing a business plan and before getting started on a path to nowhere. It addresses the seven domains that characterise attractive, compelling opportunities. It recounts the vivid case histories of path-breaking entrepreneurs who understood these domains, to their enduring advantage. Perhaps more importantly, the book brings to life the less happy stories of other entrepreneurs whose opportunities ran foul of one or more of the seven domains and who, as a result, failed to achieve their goals. Learning from failure is something most successful entrepreneurs do well. As many entrepreneurs put it, in talking about their battle scars, ‘If I can make each mistake only once, I’ll be in good shape.’ The common as well as some not so common mistakes are here in this book for all to see.

What this book is and what it is not

This book is not about how to write a business plan. It’s about what to do before you write your business plan, and before you embark on a lean start-up and its series of hypothesis tests leading to possible adjustments. If you’re a budding entrepreneur, its purpose is to help ensure that your venture has a better chance to compete for the time and attention – and hopefully the money – of the financiers and other resource providers you will approach, be they the three Fs (family, friends and fools, as the saying goes), angel investors, bankers, venture capitalists or prospective partners or employees. Or even your prospective customers, as we explore in some detail in Chapter 12! If you’re one of those investors, my purpose for you is to help you avoid at least some of the errors commonly made in investing in early-stage ventures. You surely don’t want those mistakes to offset the gains from the best of your deals.

This book doesn’t just tell the story of one entrepreneur’s route to glory – there are already plenty of books in that category – for it’s grounded in solid research into what characterises attractive opportunities across a wide variety of market and industry settings (see the Appendix). This research brings together insights gleaned from leading venture capital and angel investors and successful serial entrepreneurs. Their insights apply equally to high-potential ventures and to lifestyle businesses that can enable an entrepreneur to be his or her own boss and get out of the corporate rat race.

It’s also not a book about the personalities and traits of successful entrepreneurs, for an abundance of research has made clear that successful entrepreneurs come from all walks of life, from all strata of society.² The sources of their opportunities, however, do show some patterns, which we examine later in this chapter.

Finally, this book is not about how to get rich quickly. And it’s not for those who want to start a business – any business – over a weekend. It’s about how serious entrepreneurs and their investor partners – whether embarking on a new start-up or building something new within the confines of an existing organisation – can prepare a solid foundation for the development of an enduring business that creates and delivers value for its customers and owners alike. There’s nothing more fun in business than doing this, and the results are well worth the effort, as any successful entrepreneur will attest.

So what is this book? It’s a map for the opportunity-assessing, opportunity-shaping process. It provides a useful framework – the seven domains – to lay a solid foundation on which to build a business plan or to create a successful entrepreneurial venture.

Opportunity assessment and shaping in today’s lean start-up world

The lean start-up movement has burst onto the entrepreneurial scene and is revolutionising the way many entrepreneurs think about starting their ventures. Drawing on the work of Steve Blank, Eric Ries and others,³ the central notion is that before investing lots of money into a venture that’s based on numerous untested and highly precarious assumptions, it makes more sense to think flexibly at the outset and invest fewer resources – staying ‘lean’ as the lean start-up moniker indicates – to begin systematically testing the most crucial assumptions to see whether they make any sense. If the assumptions prove erroneous, then you ‘pivot’ – altering the strategy, without abandoning your vision, as Eric Ries defines the term – and use what you’ve learned to work your way toward a better strategy that’s more viable.

While the lean approach doesn’t work for all kinds of start-ups, it holds great promise for many of today’s new ventures, especially for the technology-enabled internet and mobile ventures that many readers of this book are probably contemplating. You’ll find several compelling case histories of such ventures – some successful, some not – between the covers of this book. But, as the next section points out, not all markets or industries are equally attractive settings in which to launch a start-up, whether lean or otherwise. And you or your entrepreneurial team are probably better placed to start some kinds of ventures than others, if you’re honest about it. Hence there are some crucial steps you should take before launching your lean start-up to ensure that the opportunity you plan to pursue – in lean fashion, perhaps – is one that’s really worthy of your time and effort.

The seven domains of attractive opportunities

At its heart, successful entrepreneurship comprises three crucial elements: markets, industries and the one or more key people who make up the entrepreneurial team. The seven domains model (Figure 1.1) that drives this book brings these elements together to offer a new and clearer way to answer the crucial question that every aspiring entrepreneur and every early-stage investor must ask themselves every single morning: ‘Why will or won’t this work?’ The model offers a better toolkit for assessing and shaping market opportunities⁴ and a better way for entrepreneurs or entrepreneurial teams – and investors, too – to assess the adequacy of what they themselves bring to the table as individuals and as a group. The model also provides the basis for what I call a customer-driven feasibility study that entrepreneurs may use to guide their assessments – before they invest the time and effort in writing a business plan or getting started in earnest.

Figure 1.1 The seven domains of attractive opportunities

At first glance, the seven domains model appears simply to summarise what everybody already knows about assessing opportunities. So it does. Upon more careful scrutiny, however, the model goes further to bring to light three subtle but crucial distinctions and observations that most entrepreneurs – not to mention many investors – overlook:

• markets and industries are not the same things;
• both macro- and micro-level considerations are necessary: markets and industries must be examined at both levels;
• the keys to assessing entrepreneurs and entrepreneurial teams aren’t simply found on their resumés or in assessments of their entrepreneurial character.

Moreover, the model’s seven domains are not equally important. Nor are they additive. A simple scoring sheet won’t do. Worse still, the wrong combinations of them can kill your venture. On the other hand, sufficient strength on some factors can mitigate weaknesses on others. Good opportunities can be found in not-so-attractive markets and industries.

As the model shows, it is made up of four market and industry domains, including both macro and micro levels, and three additional domains related to the entrepreneurial team. These seven domains that emerged from my research address the central elements in the assessment of any market opportunity.

• Are the market and the industry attractive?
• Does the opportunity offer compelling customer benefits, an economically sustainable business model as well as a sustainable competitive advantage over other solutions to the customer’s needs?
• Can the team deliver the results they seek and promise to others?

Before examining these questions, let’s address the first of the three crucial distinctions, that between markets and industries.

Markets and industries: what’s the difference?

A market consists of a group of current and/or potential customers having the willingness and ability to buy products – goods or services – to satisfy a particular class of wants or needs. Thus, markets consist of buyers – people or organisations and their needs – not products.

One such market, for example, consists of businesspeople who get hungry between meals during their workday. We’ll call this the market for workplace snacks.

An industry consists of sellers – typically organisations – that offer products or classes of products that are similar and close substitutes for one another. What industries serve the market for workplace snacks? At the producer level, there is the salty snack industry, the confectionery industry and the fresh produce industry, to name but three. There are also industries providing the distribution of these products to workplaces, including the supermarket industry, the restaurant industry, the coin...