Once we had the pleasure of listening to a successful entrepreneur give a talk about how he made it, and how some of his friends who also started companies were faring. Long story short we got to talking about two good friends of his who had started companies years ago. One was now a very successful energy mogul, whereas the other one was still trying to get the idea he had all those years back off the ground, kept on funneling resources into it, he was undeniably unforgiving to his idea. How could his idea not work, after all he had thrown so much time money heart passion and soul into it? Simple answer, it just didn’t.
And when your entrepreneurial idea doesn’t work, the only thing to do is kill it, bury it and move onto the next one. If it doesn’t work, no big deal, the next one will, and if not that one, the one after that, and if not that one…. well… eventually something should hit. But people – they get overly attached to their ideas, they think that the one idea they have and devote resources to will change the world or something here, something there.
Most wont, and the best thing to do is to test it, launch it, if it doesn’t take off. Kill it. Your time is more valuable than the resources you’ll invest into bringing something inherently broken to market.
But how can you identify if your idea is a good idea other than that your friends, and family tell you it is? Follow these simple rules.
1. Does it satisfy a market need? 2. Is it scalable? 3. Who is my market? 4. What are my competitive competencies? Where do I excel? 6. Is my idea really that amazing? If not, it’s no big – more money gets thrown at mediocre ideas with great people than vice versa.
So before jumping into the fire, ask yourselves those few simple questions.
Scalability should be at the very heart of your business model. But what it is? In the formal definition it’s the ability for a business to accept increased volume without impacting the contribution margin (Contribution margin= revenue – variable costs).
Simply meaning that your variable costs should not have a negative affect on your contribution margin, or ideally no effect at all.
The problem with scalability however is not whether or not the business is scalable in itself, you see most businesses will have a scalability range. This is the area where as your revenues increase & your costs shrink, however, no business is infinitely scalable and here’s where you need to start thinking about your business model and your scalable range.
The scalable range, is the level of scalability, meaning that the cost of each incremental dollar must be going down. For the above example, the company’s scalable range is 11.000, another company however may have a scalable range of 20.000, or 4.000.000.
The higher your scalable range, the happier the investor will be in your product, and the quicker you’ll in all likelihood be able to get funding. However, it’s important to remember that there is no such thing as an infinitely scalable business.
However, that does not mean that after a business passes the scalable range threshold it is doomed to fail. At this point it’s important for the founders, board, directors, etc… to sit and analyze the business model.
– Why is it that we are not scalable? What is causing our costs to increase for each additional euro earned?
A good method of identifying this it to follow the KISS (Keep it Simple Stupid) method, meaning that is anyone in the value chain cannot simply explain what it is their job entails you’ve identified your problem, the same can go for what it is that the business does. If someone on the value chain cannot easily explain what the business does, you’ve identified your problem.
Now KISS is not ideal, scalability issues may arise from anything as trivial as paying overtime to your employees to running additional maintenance on your machines, but it is a good place to start. All the same, if you do encounter problems with scalability, try to step out of the circle and see where the problem lies, and ask colleagues, friends, etc… to see if they can’t identify the root of the problem.
With that good luck, and remember the more scalable a business is the more it will appeal to investors. In the end it all comes down to Ockham’s Razor
