As I mentioned in the prior post, I’d like to cover some of the questions you should be considering as you plan your start-up company. One of the most important is “What will your new company sell?” You’d be surprised at the number of would-be entrepreneurs that don’t have a good answer to that question. Don’t be one of them.
In general, there are only two answers, your company can sell products or services. There’s no one right answer—there is an enormous range of products and services that can be sold. But the follow-up is equally important: what advantages will your new company’s products or services have in the marketplace? In a sense, this question is the first in a critical series of questions, a “flowchart” that can help you refine your business plan. Let’s take a look at some representative questions in this flowchart. For the purpose of this exercise, I’ll abbreviate “products/services” to just “products” for the sake of simplicity.
Does your product address a new market?
If yes, you will eventually need to convince people that they need your product and must buy it. You don’t necessarily need to convince anyone right away, but your thoughts on how you will meet this requirement should inform your business planning process.
If no, what features does your product have that will convince customers to buy it? For example, you want to enter the cell phone market with a new entry. The market is well-established—why will someone buy your cell phone? What is the size of your target market, and what is the competition?
What unmet need does your product fill? Since, by definition, you are creating a new market, you need to think about your product’s verticals—the specific customer groups and applications into which you will sell. You’ll need to decide if a single product can cover multiple verticals and determine the potential size and relative value of each vertical. For example, if you’ve developed a magical cream that will take 20 years off of someone’s appearance and will work for astronauts in orbit and Eskimos over 7 feet tall, your product is clearly wonderful and fulfilling an unmet need. But those markets are unlikely to allow you to build a successful company. It is important to devote plenty of mental energy to defining your verticals and matching them to specific markets. In biotech start-ups, one of the major flaws is not matching good science to a good business.
Is your product novel?
If yes, what is your intellectual property strategy? You’ll need to think about the difference between filing for patents and maintaining trade secrets. It may be that your technique for making a new medicine (or better yet, the new medicine itself) is patentable. But it may be better to keep your secret recipe for fried chicken batter a trade secret. In either case, you’ll have plenty of work in creating non-disclosure agreements, employment contracts, and a host of other documents to protect your IP. If you believe your product is novel and fills a major unmet need and you do not yet have an IP attorney, find a good IP attorney as fast as possible (run, do not walk). Talking to people about your unique ideas without a strong IP strategy is like walking through the streets of Manhattan holding up a winning lottery ticket.
If no, what is your competitive advantage? A lower cost of goods (and lower sales price), a better approach to distribution, a better brand (a cool product name or celebrity endorsement) are all examples of significant advantages. But you must keep in mind that the barriers to entry may be quite low in these instances. Your idea for a ski hat with a hole in the top to allow ponytails to pass through may sound good on paper, but if you create that market, almost any clothing company can jump in and take market share. As with all of your deliberations, it is critical to be honest with yourself. Don’t hide from the truth—you may waste months or years of your life (to say nothing of your financial investment or those of your partners) on your start-up, only to be stopped short because of an issue you hid from yourself on day one.
Is your product developed?
If no, how long will it take and what are the key milestones you’ll need to demonstrate? Do not skimp on this analysis! The answers will have an enormous impact on your business plan—the amount of space, number of employees, the types of equipment, and the number of R&D dollars you’ll need. Think about go/no go decision points—if you cannot achieve a certain milestone, will it mean that you need to abandon your nascent company? Also, think about risks and remediations—what is your backup plan if certain milestones cannot be met in the way you had anticipated? How risky is the program and does the risk justify the reward?
If yes, can it be manufactured at the right scale and at a reasonable cost? Will your company do the manufacturing or will you find a partner to do the manufacturing on a contract (or some other) basis? It may be that you need to redesign the product or subject it to further engineering to ensure that it will be viable in the marketplace. Coming up with manufacturing and quality control plans, emphasizing, timeline, costs, and risks and remediations (as in the paragraph above) will be key elements of your business plan.
Is your product subjected to regulation?
If yes, what is the regulatory authority? Your new pizza parlor is regulated by the Board of Health and several other agencies (even the size of your shop’s sign and operating hours are likely regulated). Your consumer product, industrial product, medical product, and financial product are all regulated. It is important to identify the regulators—becoming compliant with all relevant regulations must be a part of your business plan from Day 1. Do not think that your product is so fantastic that regulators will exempt you from their requirements—in fact, the more impactful the product, the more important to ensure that it meets established regulatory requirements.
If no, think again! Essentially all products are subjected to regulation. You’ll hopefully have customers and may well have investors. Even the most straightforward product will be subjected to some local, state, federal, or international regulation.
How will you make a profit/finance your company/stay in business?
There is no one right way to answer these questions, but a financing strategy is a critical element of the success of your start-up. But the reason I placed these questions at the end of this entry is that they are much easier to answer if you’ve thought about how you’ll answer the above questions first. More on this topic in a later post.
There are many more questions that the entrepreneur must consider before launching a start-up. My advice is to think through all these issues extensively. Don’t rush to write a business plan until you’ve had time to think about your business. Having a business plan is only as valuable as the output of your evaluation of your product/service and commercial opportunity. Don’t be daunted by the complexity of your business or the enormity of the tasks in front of you—face these questions directly and take a major step forward in the pursuit of your new company!