GUIDE TO ASSESSING START-UP SUCCESS

Today’s business environment is full of eager people looking for or trying to be the next Mark Zuckerberg, Bill Gates, or Steve Jobs. With TV shows like the Shark Tank plus both State and Federal Government announcing significant

investment in measures to promote business start-ups the sector is becoming very fashionable.

As with all things that become fashionable more people are taking the next step from having an idea to pursuing a business start-up. The positive side of this is that there is a flood of new ideas which could lead to successful innovative

businesses that solve a consumer need. However, before investing precious time and capital into the next great idea we should put some rigour around selecting the one that

has a best chance of being successful.

Entrepreneurs are naturally very excited about a new idea and their passion can be quite infectious. If we

are assessing ideas it is essential to balance that initial enthusiasm with a structured process to determine if the right underlying factors are present to form a potentially

great business.

Based on many years of experience with start up businesses Hanrick Curran have developed a

seven step assessment guide to help you find those

diamonds in the rough.

STEP7 guide to assessing START-UP SUCCESS

What problem is being solved?1Does your problem

create value?2

Will the business be financially

viable?

5Is the go

to market strategy feasible?

6

Do you have the right team?7

Define the market & its size

Assess the competition4

3

1.What problem

is being solved?

?If you are old enough think back to the nineties you will remember that Sony reined supreme in the portable music player market. If you wanted to listen to your music on the go the market leader was a Sony Discman. It was reasonably portable with very good sound quality, however it also had restrictions. The key ones were:

• they were prone to skipping when bumped• you had to carry CDs with you if you wanted a variety of or lots of music

to listen to• you had to change over those CDs to access more music• you had to buy the CDs from stores when you wanted new music

Then in the early 2000s along came Apple with their combination of the iPod and iTunes to solve these issues for the music loving public. Although they were not the first to market with a portable digital music player their overall package was a solution that the public were looking for, even if they didn’t realise they needed some elements of it yet. Apple had clearly identified and forecast the problems their product solved and reaped the rewards when they went to market.

The first step therefore to assessing that next great idea is to identify and clearly articulate what problem is being solved. If we don’t understand the problem in detail then the decisions made and the actions taken next may be flawed which could lead the business down the wrong path. The work here will also form a part of the basis of the communication material used in the go to market strategy.

Once the problem is defined in a way that is easily and clearly explainable then the next step is to identify if your target market realise that they have this problem. If they do then your job to sell the solution is easier.

If the market does not know that they have this problem then you will need to have a marketing strategy that includes educating your target market on their problem before you can then begin to sell them your solution.

“Forecast the problems the product solves and reape the rewards”

2.Does solving that problem create value?

You have defined your target market’s problem and you have a solution for them.

The key question though is whether or not your solution actually creates value for your target market.

You may have in front of you the best solution in the world to a particular problem but if that solution does not create value for the customer then the solution is worthless to your target market. .

Have you ever heard of the Plain Lazy Self Stirring Mug? It solved the problem for its customers that were too lazy to stir their own tea or coffee. Whether or not you think it is a great idea, I am sure that you will agree that a massive majority of the market will place no or little value on saving a few seconds and a little of bit effort that it takes to stir their own drink.

Here are just a few more examples of solutions that create little or no value for the customer:

• Perfect Pancake – double sided frying pan that allows you to flip your pancakes with no mess

• Bed Books – the words are printed sideways to allow for easier reading whilst lying on your side in bed

• The Privacy Scarf – we tried numerous ways to describe this one and in the end words could not do it justice, pictured below.

So how can you tell if your solution will create value for your customers? Generally common sense is a

great first start. Beyond that answer the following questions and then ask some independent people including a sample from the target market.

• Do people care if the problem is solved?

• Will it save time or money, or will it help people to make money?

• Will people pay to have their problem solved?

The answer to all three questions above must be a yes before you proceed further. If they are not, work to determine what changes (if any) can be made to the situation that will result in three yes responses.

3.Defining the

market and its size.

With the problem clearly defined and a consensus that there is value created with the solution, you can progress to defining the market. The third

step in your assessment is to analyse the potential market for this solution as

the existence of a suitably sized market is vital to the feasibility of any venture.

So why is the size of the market so important? The size of the potential market will directly influence the ability to monetise the solution.

If the market size was 10 individuals from the around world it is extremely

unlikely that the business would be financially viable. Alternatively if the size

of the market was a billion people the financial viability would be much more

likely.

We cover financial viability in more detail when we explore step 5. There we

address the interaction between market size, pricing of the solution, and the

cost structures to deliver the solution. In circumstances of small market size

it is important to understand that it is still possible for the business to be

financially viable if the price is high and the costs are proportionally lower. On

the flip side it is also possible for a very large potential market size to not be

financially viable if the price is low and the costs are proportionally higher.

Determining the size of a target market can often be a difficult proposition. At this stage it is not essential to spend copious amounts of time and resources to determine the market size with precise accuracy. The objective is to determine whether or not the market size is sufficient enough to support a business of appropriate size to deliver the solution.

The potential market size will be determined by the number of people and/or organisations experiencing the problem. It can be very valuable at this time to try and define these people/organisations as precisely as possible. The effort put in here will increase the likelihood of success for future tasks and planning.

Once the potential market size is assessed with a degree of confidence, a market share percentage needs to be applied. As much as every entrepreneur would like to think that everyone in their target market will fall over themselves to buy the solution, the reality is that only a small percentage will ever engage as a customer. Work out your initial thoughts about the market share here and then reassess it once you complete the next step on assessing the competition.

Who are they? An individual, family, small or

large business, community group, charity, or government? What do they do?

What is their industry/profession/cause?

Where are they located

geographically?Do they have one location or many?

Who is the individual/group that will make a

decision about whether to buy our solution?

4.Assessing the competition.

At this point of the assessment process the problem being solved by your idea has been defined, there is value in the solution and there is a market for that solution. So what about the existing and emerging competition in the market? The competition can take many forms and they can be classified in three broad groups:

1. Solving the problem in the same way

2. Solving the problem in a different way

3. Solving a similar problem that could readily adapt to solve this problem

The first group of competition to address is someone else solving the same problem in the same way. An example of this would be Taxis versus Uber. Although Uber have shaken up the way this service is managed and delivered the underlying solution of providing transport to small numbers of people in motor vehicles and charging rates per kilometre are the same. For the competitors in this group you need to assess the following:

• How long have they been servicing this market?• How much market share do they have in our target market?• Where are they located?• How effective is their solution and service delivery?• What is it about your solution that will differentiate it from

their solution and why will the target market care about this differentiation?

The second group is someone else solving the same problem in a different way. This is often referred to as a product substitute. Following on from our last example of Taxis and Uber, an example of this would be public transport. It solves the same problem of transport services from one point to another but addresses it in a substitute format. You need to assess the competitors from this group asking the same questions as you did for the first group.

The third group is someone else solving a similar problem with the capability that their solution could be adapted to the problem that you are solving. Further exploring the theme from above let’s look at Uber and the courier industry. The problem the couriers are solving is transport for goods rather than people. Could Uber adapt their platform to disrupt the local courier industry? To assess this group of competition brainstorm the following:

• Are there problems being solved that are similar in nature to the one you are solving?

• How easily could any of the solutions to those problems be adapted to your problem?

• For the providers of those solutions that could be adapted:o Are they big enough to have the resources to adapt their solution?o Do they have history of diversifying?

If you identify a competitor in this third group that meets the conditions above it might be useful to consider them for a partnership or strategic alliance.

Now that you have assessed the potential competition you should circle back to step 3 and re-assess your potential market share considering the competitive environment. During that re-assessment it would be useful to consider why an existing customer of a direct or indirect competitor would switch to your solution, are those reason enough to motivate a behaviour change?

5.Will the

business be financially

viable?

If you have reached step 5 you have defined the problem clearly, determined that there is value in the solution, identified a market for that solution, and you have assessed the competition to identify an achievable market share.

The next step is to analyse the finances to determine whether the business will be financially viable. This is done by building a financial model of the business. By building a functional model with calculations based on the variables and drivers of the business, analysis of the financial outcomes of different scenarios can be performed by tweaking the different variables and drivers.

Building a model can be quite complex and it will evolve during the planning and analysis of the business and subsequently over the life of the business. The model is usually put together on a yearly basis. A good starting point is to follow these steps:

• Determine a price that you can charge for the solution and the frequency of the charge. For example is it a one off or recurring charge and

if recurring how often. If there are different levels to the solution then you will need to

determine the price for each level.

• Apply the market size and market share determined earlier to the price

above to calculate an annual revenue figure.

• Determine the costs to sell the solution. This can include:

o Employment costs for sales people and administration support

o Commissions – either employee bonuses or payments to non-employees

o Travel costs to attend sales calls and marketing events

o Advertising and promotion expenses

o Transaction costs – for example merchant and transaction fees on sales

• Determine the costs to deliver the solution. This can include:

o Solution is a physical product:

• Manufacturing costs

• Shipping costs

• Warehousing expenses

• Warranty claims

o Solution is a service or non-physical product:

• Software development and maintenance costs

• IT infrastructure costs

• Employment costs for people delivering the solution

o Employment costs for providing after sales service

• Determine the costs to administer the business. This can include:

o Employment costs for administration including management, finance, internal support services

o Premises costs including rent, electricity, communication, IT infrastructure

o Outsourced professional costs including Accounting, Legal, Employment relations

o Insurance costs

Once you have the revenue from sales and added up the total expenses you can determine the anticipated profit to ascertain feasibility.

Further analysis can be done with the model by playing with the variables to stress test the strength of the financials. For example what would happen if you had to discount the sales price by 10% or employment costs were 20% higher than anticipated?

If the model does not result in a financially viable business use the model to determine what changes would need to happen to the business to make it viable. For example increase the sales price, or reduce the employment costs by reducing the head count. Once you get to a point that the business is viable you need to determine if the changes made to make it viable are realistically achievable.

Further analysis can be done by extending this financial model into a 3 way forecast that will estimate the cash flow of the business and project a Balance Sheet showing the Assets, Liabilities and Equity.

6.Is the go to

market strategy feasible?

By the time you reach step 6, the problem has been defined, there is value in the solution, there is a market for that solution, you have assessed the competition to identify an achievable market share, and the business is projected to be financially viable.

How are you going to get to that financially viable point?

How are you going to take this new business to the market place?

Business is never as simple as bringing a new product or service to the market place and all of your target customers start knocking down your door to buy from you. You must have strategies and action plans on how you will break into the market place to let your potential customers learn about you and then subsequently start buying from you.

There is never a one size fits all strategy and almost always the first strategy never works out like we expect. Therefore there should be multiple strategies in the kit bag to ensure success in breaking into the market place. Assess the strategies and the actions documented to ascertain the likelihood that one or more will work out and the timeframe anticipated to achieve sales volumes.

So if there are one or more strategies that are likely to get the business to the point of financial viability the next step is to determine how much money it is going to take to get to the point where the business is at least self-sufficient and reaches that break even point.

This is important as even though the financial model demonstrates that the business can be financially viable those results are not going to be achieved right from day one. It will take time to build the business up to this level and you will need to determine how long it will take to do this.

It is important to figure this duration of time out as you will need to build a 3 way financial forecast that predicts the results and cash flow of the business from the start date to the point where the business breaks even. This will quantify the total cash spend incurred in this period that must be funded from start-up equity capital or financed through debt.

7.Is the right

team in place?

The final hurdle in the idea assessment process will commence now that the problem has been defined, there is value in the solution, there is a market for that solution, you have assessed the competition to identify an achievable market share, the business is projected to be financially viable and there is a financially viable plan to go to market.

Now it all comes down to execution. Does the business have in place a passionate team that are capable of implementing the plans and strategies covered in the first 6 steps to drive the idea into a successful business?

A good way to determine if everyone who is likely to form part of your team is right for your business is to ask them a few questions:

• Do they believe in and have a passion for the business and it’s vision?

• Are they willing and capable of putting the regular and then the extra effort required?

• Can and will they effectively communicate what they are doing and the progress they are making?

• Do they have the confidence to make a decision when required?

• Will they stick it out when the business encounters those inevitable setbacks?

• Do they possess exceptional skills in their area of expertise?

Then collectively determine whether the group can work effectively together as a team.

Next assess whether the team has the right skills mix. The team collectively should cover at least the following skills:

• Technical – someone needs to deeply understand and be able to deliver the product or service on offer.

• Sales – without sales there is no business and someone needs to sell it, the greatest technical skills and knowledge don’t necessarily translate into an ability to sell.

• Customer Support – quite often people think that the sales people can handle the customer service, however we contend that often the skills required to sell are different to the skills required for ongoing after sales customer service. Of course happy customers will result in referrals and repeat business.

• Administration – methodical, boring and the bane of every entrepreneur. Without a solid administration platform in place things can fall apart quickly. Often overlooked and undervalued by entrepreneurs it is just as important as the other skills.

• Finance – without money the business will not survive. Having the ability to monitor the results, manage and project the cash flow, and provide regular reporting to assist other team members make decisions is an essential part of any business.

It is quite a journey to implement this assessment step by step but by upon completion you will have:

1. Clearly defined the problem being solved.

2. Determined that the solution creates value.

3. Quantified the size of the market.

4. Assessed the competitors and determined a target market share.

5. Assessed the financial model and viability of the business.

6. Determined that there is a financially viable plan to go to market and achieve a break

even point with a defined value of start-up capital.

7. Assessed whether the business has access to the right team to be successful.

When going through this process it is important that you have done so with a realistic, impartial and honest mindset. This will give you the best insight to assess the commerciality of the business concept.

If you have read this as a team member of a start-up business and have not ticked all of these boxes then don’t despair. Assess what progress you have made in each step and put the remaining elements into a road map for what needs to included in your business planning to give it the best chance to succeed.

4

5

STEP7 guide to assessing START-UP SUCCESS

?Clearly articulate the problem your idea is solving and consider if your target market even knows they have such a problem.

What’s the problem?1

Will your solution save time or money or help people make money? Will people pay to have their problem solved. $

Describe your target market. Are they individuals, families, business, Not-for-profits, government? What do they do? Where are they located? How many are there and what % of market share can you achieve? Re-assess again after step 4.

Consider the 3 types of competitor groups to your business idea and assess their impact on your ability to secure the market share determined in step 3.

Does your solution create value?2Define the market & its size3

Assess the competition4

Analyse the finances. Follow our guide to determine the inputs into your financial model that will need to be used to assess the commercial viability of the business.

Will the business be financially viable?5

Determine the strategies, action plans and associated timelines you would implement to reach your potential customers. Overlay these with step 5 to determine how long it will take to break even and the start-up capital required.

Is the go to market strategy feasible?6

Assess if the team are passionate about the business and its vision and that the 6 core skill sets required by a successful business are addressed.

Do you have the right team?7Approach these steps with a realistic, impartial and honest mindset and you will

obtain the best insight to assessing the commerciality of a business concept.

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