In this six-part series, Rod Drury explains the pitfalls many people experience when trying to start businesses and suggests ways to avoid them. In part one: Identifying and eliminating potential flaws.
KEY POINTS:
People pitch business ideas at me all the time.
Unfortunately, almost all are fundamentally flawed, and almost all in obvious ways.
With a few exceptions, there are natural laws of technology businesses that you should take note of, so you don't find yourself repeating the mistakes made in previous start up businesses.
There are a number of business ideas that are just too hard and not worth putting your energy into.
Anything that involves text messaging or mobile data is unlikely to be a success.
That's because mobile carriers just don't leave enough on the table to make a buck from.
It's hard to think of anyone who has built a successful business based on text messaging.
Taking on Trade Me will not work.
They already have the customers and therefore they own the market, and only one player wins.
Anything aimed at taking bricks and mortar retailers online will not work. History tells us that.
Anything to do with document or content management will not work because that has been done 10,000 times before.
A start up involving retail point of sale will not work because the cost of sales and support will be too high.
An export-focused business where the founders are not willing to travel abroad will not work because you need to be in the market to understand it.
Any business where the founder is not happy to step aside and letanother person be the CEO will not work.
Any business that only wants to give up 10 per cent for $1 million in its first investment round will not get funded and will not work.
Any business depending on low-cost Google AdWords will not work, because the price of those AdWords becomes valuable, and then it blows your business model.
Any software business where the software development is outsourced to a consulting company will not work because you need to be nimble to close the feedback loop between your customers and your product strategy. Any business without a business plan will not work.
This might sound like a grim reality, but almost all of the hundred or so businesses I've looked at over the past couple of years are flawed because of one or more of the reasons above.
You only need to look at the very few angel or venture capital deals done in New Zealand during 2007 to see that very few ideas are actually valid business ideas.
As a first step before presenting your idea, you need to be able to write a high-level summary of what the business is and why it will be successful, in not more than three pages.
Then you need to test that idea. Try out your idea on friends first.
Make sure you check with someone who will tell you honestly, and not just what you want to hear.
Make sure you check with someone with industry expertise.
A "fast fail", where you quickly discover that your idea is flawed, will save you time and money. My ideas usually come from problems that I have experienced personally.
In areas where I have significant base knowledge, I can intuitively know where there is an opportunity.
Once you've tested your big idea, you need to back yourself and go. One of the first activities is building a team.
Next up, we'll look at setting up a business with multiple shareholders.
* Rod Drury is CEO and founder of leading NZX-listed accounting software provider Xero (xero.com)
