New businesses open every day, and a great many of them close within a year or two. Why is it that some companies are positioned to be wild successes while others can barely seem to get off the ground? Well, the truth is that there are a lot of factors that contribute to a company’s success — or lack of it. And often, a problem with entrepreneurship is that with all the hopes, dreams and enthusiasm that usually surrounds the launch of a new venture, one important thing can easily get lost: the answer to the question “Is it viable?”
Business leader Christopher Kape, founder and CEO of Vancouver’s JAMCO Capital, an early stage venture capital and consulting firm focused on opportunities that can generate high returns on investment opportunities, has played major roles in launching and running many successful companies across a range of industries. From gaming to technology and from food to wellness, several of his companies have been, and continue to be, thriving.
But he’s also seen countless startups fail, often because they performed little or no due diligence on the front end to determine whether they even had a fighting chance at success.
This is a common occurrence. Long before any new venture opens its doors, most experts agree that one of the most important things any aspiring business owner needs to do is perform thorough research to determine if there’s potential for success and the profit that accompanies it. And this means real, unfiltered research, not simply asking a few family members and friends, “If I build it, will you come?”
To do this, Christopher Kape says there are at least five steps that you need to go through.
Research the market.
Before committing to any new concept, it’s essential that you gain a thorough understanding of the market in which you’ll be operating. If you plan to sell products or services in a specific geographic area, learn as much as you can about the area and the people who live or work there.
A very important component during this part of your research is to conduct a comprehensive competitor analysis to learn whom you might be competing against, how they’ve attracted and built relationships with their customers, how loyal their customers are, what their price points are, how they position or promote themselves, and — this is extremely important — how you plan to build your customer base, which might well mean attracting some of their customers.
The due diligence is the same, and requires potentially more thoroughness, if your company is going to operate online. Afterall, operating an online business likely means that you will be competing with a lot more companies that all have a lot fewer barriers to entry.
“Search around to learn who else is doing what you plan to do and how you’re going to capture part of the market,” suggests Kape.
Test your idea.
Is your idea a good one? Will it make money? Many marketing-driven companies live and die by testing to ensure that they’re on the right track.
The good thing about testing is that there are many ways it can be done. You can assemble a group of people who represent your target audience, which in market research is referred to as a “random sample,” to gain valuable, honest input before you go too far.
Kape adds, “This is a very common exercise across virtually all industries and it can be very helpful. Ask them questions related to what you’re planning to do and encourage them to be completely candid. This can be a great way to not only determine your company’s viability but also to shape your product or service before it goes to market.”
Again, you can do this online as well. Many startups use crowdsourcing platforms like Kickstarter and Indigogo to assess viability, and social media is a near-perfect medium for soliciting input and opinions. Just be careful to use the social media platforms that your target audience uses, so everyone is on the same page and your research is not skewed.
Determine if there are even customers to support your company.
What if you opened a business and no one came to buy from it? Christopher Kape says this happens more often than many people likely realize.
“Cash flow projections are part of creating a business plan (which you absolutely need), and cash accompanies customers and clients,” he says.
If Tiffany & Co, opened a retail store in a depressed market, especially within a lower economic demographic, for example, it would likely close in a matter of weeks due to lack of sales. You’ll want to learn if customers will support your business, where they are, and whether they’ll buy for you at your price point. You’ll also want to determine a realistic cost related to acquiring each customer, and if it will work with your budget and projected revenues.
Consult with a mentor.
One very effective way to determine your startup’s potential viability is to consult with someone who’s been there, or at least understands the economics of opening a new business. Christopher Kape says he often serves in such a role with the companies he’s funded, even holding director positions on their boards to help them navigate. He notes that having one or more people that you can consider advisors, who want you to succeed, is extremely valuable.
Ask if you can afford it.
And then there’s the money. It generally takes time for a new business to turn a profit. Are you financially prepared to wait it out while working hard to build business? Can you afford the raw materials, equipment, supplies, and other items you need? Can you meet payroll? Will you have to pay for employee (and your) benefits? Take a hard look at your budget and your balance sheet and consider whether your finances will enable you to launch and sustain your business.
As anyone who’s ever launched a new business knows, it’s an exhilarating feeling. But you do need to do your homework first, and modify your plans as needed, to ensure that you’re ready and well-positioned to build what will hopefully, eventually be a successful business.