1. Genuine need
True business opportunities meet needs or solve pain points people have in their lives. The best way to discover these needs and pain points is by being intimately involved in a particular field or industry. Most successful entrepreneurs have worked in the industry they start their business in, in a related industry, or are very familiar with the products, services, and problems through personal experience. They discover a need and verify it through firsthand observation. You generally don’t discover pressing needs by joining a think tank, learning how to brainstorm, or sitting in a university class.
I can’t tell you how many aspiring entrepreneurs I’ve met who have fallen in love with an idea; it’s clever, cute, and even fun. The only problem is, no one needs it, wants it, or is willing to pay for it. I tell them, “You have a great solution—now you need to find a problem it solves.” It’s far easier to do it the other way around: Find the problem first, and then create the solution. If you need the product personally, that’s great. If all your friends, family members, colleagues, and work associates need it, that’s even better.
2. Credible experience
Knowing the products, services, and problems in an industry not only helps you avoid the pitfalls of trial-and-error learning, but it also gives interested parties the confidence that you’re the right person to build this business. Your experience and credibility are very important to potential team members, investors, customers, suppliers, and strategic partners. If you don’t have the skills and experience to build your business, you’ll be fighting an uphill battle. When this is the case, it’s best to find advisors, partners, and team members who can fill in the gaps in your skill set. In the end, you and your team will need to have the experience and credibility necessary to build your business.
3. Adequate Resources
Many would-be entrepreneurs think they need money to start their new venture — no money, no business. Actually, successful entrepreneurs use a host of other resources to get started; they work from home, find mentors and advisors, use free software, acquire used equipment, barter and trade, partner with their first customers, obtain credit from suppliers, and borrow before they rent or buy. The important thing is to determine what your new venture requires, then go out and find the resources you need to get started. You don’t necessarily need funding, but you do need resources.
4. Buying Customers
Smart entrepreneurs have customers committed to buying their products or services as soon as they launch their ventures. For instance, Dave Twombly had customers waiting for him to launch his garbage company. Patrick Hayden already had customers buying his firearms and accessories. And Joanne McCall sold her first contract to her employer prior to launching her marketing agency. When you have specific customers who are willing to buy your product as soon as you launch your venture, you have the ultimate validation of your solution, immediate sales, and early cash flow from which to grow. Selling your products or services prior to your launch is always a great strategy. If you can’t do it, you may not be ready to go.
5. Sound Business Model
Your business model is the way you’ll make money in your venture. It includes your sources of revenue, pricing, costs of goods sold, gross margin, operating costs, and profit margin — essentially the elements of an income statement. It answers the following questions:
- Who are my various customer groups? (revenue sources)
- How much will they pay for my products? (revenue)
- What will it cost me to make these products? (cost of goods)
- How much money do I make from each sale? (gross margin)
- What are my expenses for running this business? (operating costs)
- After all costs, how much does the business make? (profit margin)
The best businesses have multiple sources of revenue, competitive pricing, a 50 percent or better gross margin, and a 10 to 20 percent profit margin. If your numbers aren’t this attractive, it will be difficult to survive. So make sure all the numbers work before launching your venture.
I call these five components for identifying true business opportunities the NERCM model (pronounced ner-come):
N = Need
E = Experience
R = Resources
C = Customers
M = Model
When people come to me with business ideas and ask what to do next, I tell them to “NERCM.” In other words: 1) gather tangible evidence that people really need your product, 2) evaluate your experience and credibility, and fill in the missing pieces, 3) cobble together the resources you will need to get started, 4) find customers who are willing to buy your product as soon as you launch, and 5) make sure all the numbers in your business model work. When these factors fall into place, it is time to go. If these factors aren’t in place, starting your business would be premature.
The failure rate for new businesses is very high: 50 percent fail within five years and 70 percent fail within ten years. I strongly believe this is because people launch ideas, not opportunities. When you launch an idea, you burn through all of your resources before you can figure things out, gain traction, and produce profit.