Are you contemplating investing in a business idea? Here are 5 questions to ask yourself before you do. Read the latest blog post from our President, Jory Lamb.
In the early days as a founder of a self-funded small business, I found one of the toughest things to do was to focus. The question that eluded me in those early days was, how do you decide what opportunity to chase? Many ideas had merit and looked like great opportunities; however, when I got into them, I quickly learned as great as an idea may have been, we lacked the capital, contacts/network or expertise to exploit that opportunity.
While doing my MBA at Wharton, I was fortunate to listen and learn from alumni who were partners in the private equity community of Silicon Valley. One of the speakers condensed his milestone investment decisions down to a 5-layered onion.
Each layer had to be addressed before he’d continue with the next tranche of investment.
This learning was invaluable and it is now how we evaluate our opportunities at VistaVu. The following are his five layers in order:
- Is the market substantial? For this investor, they looked for a market potential of at least $1B. While $1B may be too large or too little for you to consider, it must be substantial enough to warrant your effort and the efforts of your team.
- Is there a history of a strong partnership among the founders? The investor gave credence to partners who had known each other for a long time, struggled through something together and had a very strong bond. It wasn’t all about the idea but more about the collaboration and complementary nature of the team.
- Can they get a working prototype built? By treating this as a project with budgets, timelines and deliverables, along the way you will quickly determine if this offering is economically or technically feasible for your company to deliver.
- What is the business model? Business models come in many forms. Understanding and then proving out how you can monetize the product determines if your company or idea can pass to the next gate. One thing I observed repeatedly in my time at Wharton was the importance of research and testing. In the end, the information will probably still be imperfect and subject to scrutiny, but forcing your company to go through the process to validate business models will greatly reduce the chance of huge and costly mistakes.
- Does the business model and the offering scale? To capture a material portion of the $1B+ market potential, the final question that needs to be answered is if the business model and the offering are scalable. Are you prepared for the sales/support requirements and deployment of new infrastructure to properly serve the market when acceptance occurs? Does the cost of production or delivery reduce on scale?
The above questions are not meant to minimize analysis and modelling that goes into investment decisions – I appreciated them as the major tenants of this decision making process.
If you are searching for guidance on how to decide on continued investment into a new venture, product or idea, ask yourself these five questions and they should point you in the right direction.
Jory
