The hack's guide to evaluating business opportunities

Tony Featherstone

An ability to spot goldmines and avoid landmines when business opportunities emerge – without wasting time and money – is critical.

When your business takes off, ideas seem to come from everywhere. Half the battle is knowing which ones not to pursue, and detecting and rejecting bad ideas in a blink.

Here are ShortPress’ four top tips to help you evaluate business opportunities.

Show me the (hurt) money

Entrepreneurship is a game of people, not projects, at least at the start. A dud team will kill a great idea, just as a hot team can lift average opportunities.

Most entrepreneurial teams look good on paper, so dig deeper to unearth their true incentive. Start with their level of ‘hurt money’ or ‘skin in the game’ – how much they stand to make or loss on the idea.

Beware partners who want guaranteed salaries, do not invest in a venture, and have little to lose if it fails.

Real entrepreneurs are hungry: they take less upfront and seek the big long-term pay-off; invest their hard-earned cash; stake their reputation on ideas; and usually have a lot to lose if it fails (e.g. they can’t pay the mortgage or feed the kids).

Beware partners who want guaranteed salaries, do not invest in a venture, and have little to lose if it fails.

Leverage tailwinds, not headwinds

Some entrepreneurs make their fortune in dying industries. But it’s usually easier when industry winds – preferably gale force – are at your back.

For example, entrepreneurs invest in digital media over print media; in online retailing over bricks and mortar retailing; in financial-tech companies rather than traditional financial service organisations, and so on. They aim to disrupt lazy industries and companies.

When evaluating opportunities, ask: How big is the market now and in five years? Are there powerful trends driving its growth? How competitive is the industry and how sustainable it is growth? What are the main industry risks?

Focus on identifying ‘capital-light’ business models

You need to know the opportunity translates into stacks of cash -- year in, year out.

That means analysing the company’s business model, or ‘blueprint for making money’. The best models are often ‘capital-light’ – think star businesses, such as SEEK or REA Group, which are essentially websites and don’t need huge investment to grow.

Fat profit margins, recurring revenue and, high customer ‘switching’ costs and are other attractions. Software is a great example: the best providers enjoy super-high profit margins, repeat sales when software is upgraded, and make it harder for customers to switch to a rival’s product once they are used to the software.

Beware business models that offer low profit margins, need high sales volume, and offer little repeat business. They typically suit big companies with deep pockets, not entrepreneurs.

Beware business models that offer low profit margins, need high sales volume, and offer little repeat business.

Look for ‘economic moats’

Even the best teams come unstuck if a rival can blow them out of the water.

Make sure the idea has an ‘economic moat’ or ‘sustainable competitive advantage’ – something that is hard for a rival to copy and defends the idea from invaders. Opportunities with stronger ‘moats’ are more valuable and likelier to be bought out.

The advantage might be speed: the entrepreneur has a headstart and can get to the top of the hill faster than competitors. Perhaps they have an invaluable network of contacts.

Or the ‘moat’ might come from intellectual property, brand or reputation, supplier and distribution arrangements, store locations or natural resources.

Tony Featherstone

Tony Featherstone is a former managing editor of BRW and Shares magazines.

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