Archive for April, 2006

Vetting Your Idea

April 18, 2006

Seth Godin could most easily be compared to business-book gurus Tom Peters and Jim Collins. All three have made names for themselves as writers of best-selling business tomes — Purple Cow: Transform Your Business by Being Remarkable, In Search of Excellence, and Good to Great, to name one from each respectively.

But BusinessWeek Online Innovation & Design editor Jessie Scanlon can’t help associating Godin with rapper and hip-hop mogul Jay-Z, who boasts (in a recent Kanye West hit) “I’m not a businessman, I’m a business, man!” Like Jay-Z, Godin has used his skills and insight to build a brand name. He has also published six books, runs six Web sites, and delivers countless speeches. Most of those books, sites, and talks have focused on how others can transforms themselves into “a business, man!” One of Godin’s most essential offerings for the entrepreneur is the e-book The Bootstrapper’s Bible.

Scanlon talked to Godin about an entrepreneur’s first steps, prototyping, the dangers of focus groups, and more. Edited excerpts from their conversation follow:

An aspiring entrepreneur has an idea for a new business. He thinks it’s great, but how can he test it?
The first thing people considering starting a business should do is ask themselves — honestly — whether they’re building a freelance venture or an entrepreneurial venture. A freelancer gets paid to work. An entrepreneur makes money while she sleeps.

There’s nothing wrong with freelancing — with creating something interesting on a bespoke basis. It’s like having a job, but you’re the boss. But you have to recognize that at the beginning and build the business accordingly. You shouldn’t raise money, you should keep costs low, and so on. An entrepreneur, in contrast, raises money and hires people to do the work so that she can focus on growth.

In other words, concentrate less on the idea and more on the business model?
Startups face enough challenges. Overcoming a bad business model shouldn’t be one of them. In general, people don’t think about it enough. They focus on their great idea. But an idea requires five minutes of effort. You should throw it away if it’s a bad one.

Let’s get back to evaluating the idea. In The Bootstrapper’s Bible, you write that “a great idea can wipe you out.” And you define a great idea as something that has never been done before, something bold and daring that will be worth millions. How can people distinguish between a great idea and a good idea?
You make a list of all the things that have to work in order for the idea to be successful. That means focusing on the process rather than the product. For instance, distribution: Where is the product sold to the consumer, and are there middlemen? Who’s selling it for you? What’s the pricing model? Where do you get the raw materials? What’s your marketing strategy, and how will it scale?

Then you give yourself an honest appraisal of whether it’s going to work, recognizing that not one of the people whose help your success depends on cares about your idea unless it helps them make money. I can’t tell you how many people I talk to think they have a brilliant idea and can’t figure out why other people don’t agree.

So I have an idea, I’ve thought through all the links in the value chain, and think the business model is solid. But it’s a new business model. How do I prove to the investors or partners I’ll depend on that the new business model is viable?
Most successful entrepreneurs don’t invent a business model. They trade on the success of a proven one. Not only can you be certain that it can be done but also you can learn from others’ mistakes. And not all business models work in all industries.

Say you have an idea and you want to license it to a larger company with sales and marketing capabilities. Have people licensed their ideas in that industry before? If the answer is no, then you need a new idea. My chances of licensing a successful board game to a big toy company are very slim. However, the book industry licenses 50,000 new ideas a year.

Should I organize some focus groups to test the idea and get some evidence that it will work?
Focus groups are foolish and dangerous. It’s almost impossible to run one properly, and the data that you get isn’t accurate.

What about building a prototype?
Prototyping is valuable, and you can prototype almost anything today and make it look real. Once you’ve prototyped your idea, you don’t have to persuade people to like it — they can judge it themselves. Also, if you don’t go to the effort to build one, it’s going to be hard to find investors willing to help you build 50 or 50,000.

When should entrepreneurs take their idea to investors?
Most often, people go for money too early, because they’re afraid. My rule of thumb is that debt is bad. You should borrow money only if the money is going directly into something that will generate profits exceeding the interest.

In general, you have the greatest chance of success if your business makes money as it grows. You don’t have to be McDonalds to make money. A small chain of restaurants can still be successful. Compare that to something like Dolby Noise Reduction, which isn’t successful until it’s the default.

In The Bootstrapper’s Bible you warn, “if you try to steal the giant’s lunch, the giant is likely to eat you for lunch.” In other words, don’t compete head-to-head with big companies. Any other final bits of advice on picking the right idea?
You have to figure out how your idea fits into the architecture of the world. If your success depends on your product being sold in thousands of CVS stores across the country, that’s a problem. If your product is 5% better than the existing version, no one is going to buy it. People will only switch if your product is significantly easier to use and more effective. So the first step is being remarkable. Then comes the methodical planning.