Starting a Company

How to Evaluate a Business Idea

Wondering how to evaluate a business idea? To me, every business idea can be categorized as being a HomeRun, a Struggle, a Joyride or a TimeWaster.

When somebody sends me a business plan or gives me their elevator pitch, I quickly run it through a mental filter to see if it's a HomeRun.

If it is a HomeRun business concept, I'm interested. If not, I'll quickly move on to other things.

It usually takes me 15 to 30 seconds max to figure it out, and it's all based on this handy little chart below.

Decision Matrix for Evaluating Business Ideas

The PR Dimension and the Customer Demand Dimension

I happen to like companies that do well with PR.

They easily get the attention of editors, journalists and bloggers.

If they do well on the PR front, then it means there won't have to be a massive investment in marketing.

Instead, with a little bit of effort, the media and the blogosphere will get the word out. There's the potential for massive word of mouth and viral marketing. Word gets out with very little effort...and no big investment.

However, it's sometimes easy to get PR with a business idea that has zero chance of creating a decent revenue stream.

For example, a new website just announced that you can buy an excuse for why you aren't going to work. For about $25, students and employees can buy excuse notes that appear to come from doctors or hospitals. You can even buy a fake jury summons or an authentic-looking funeral service program.

Needless to say, journalists love the story. It makes you say "Wow. Isn't that interesting?"

But are people really going to line up in volume to buy this? No.

Based on my matrix above, it's a JoyRide. If you get involved with a JoyRide, you'll get to see your name in print a zillion times, but at the end of the day, you won't make any money.

Then, residing kitty corner on the matrix, there are the companies that have potential to make money, but they are not all that interesting and have little PR potential. These I call Struggles. You can do well with them but it may require a Herculean effort. In fact, it's usually a struggle just to understand what these businesses do. You hear the elevator pitch or you read the executive summary, and you find yourself nodding off.

Some investors love these businesses. For example, I'm sure you can do a rollup of actuarial consultants and make a fortune. But, for me, I need at least a little bit of excitement.

I want a joyride experience and I want something that customers will actually want.

When you see an opportunity that's got high PR potential and is something that customers will actually want, it's time to pay a little more attention. That's what I call a HomeRun opportunity.

The only thing to watch out for on a HomeRun is that it's not too obvious or easy to implement. If so, you may find that you launch your business just as several others launch the identical business model.

When great minds think alike, most of them don't make much money.

A related problem with high PR potential businesses is that they tend to stimulate a lot of copycats. Even if you are first out of the gate, others will follow. So, you need to figure out how to drop a few landmines in their way.

The last category in my matrix is something that I hope this article hasn't been for you - a TimeWaster.

Amazingly, I hear people talking about business ideas where my immediate reaction is "Nobody will ever buy that, and nobody will even care if you do that."

You'd think the entrepreneurial filters would kill these ideas in the womb, but there are quite a few delusional entrepreneurs out there, with bad instincts for what the market wants.

Assuming you are not a TimeWaster and have a good business idea, it's not a bad idea to run your startup idea through this simple filter.

If you've got a Struggle, think about ways to turn it into a HomeRun by adding something exciting to the lineup.

Likewise, for a JoyRide maybe you can add some substance to the offering that makes it a true money maker, not a just a flash in the pan.

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Conversation Board

How do you evaluate a business idea? Please contribute your own business evaluation techniques by posting a comment below.

  • Ananth posted on 12/22/2008
    A good business idea should address a strong unexpressed need. It should be life changing and have a ready target niche market. Mobile phone was indeed an unexpressed need. Now life cannot be imagined without it. So are computers and e-mails. Before they came in to the scene, none of us ever "felt" the need for them. But the need existed nevertheless.
  • Michael Williams posted on 2/6/2009
    Michael Williams
    Irritants, problems, needs, and conveniences are all starting points for great business ideas. If you find that something really irritates you, it probably irritates someone else. This may be a good business idea. The same goes for the other areas listed above.

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