I have a great idea, but how do I know it’s a business?

By Rod Drury, CEO Xero.

People pitch business ideas at me all the time.

Unfortunately, almost all are fundamentally flawed, and almost all in obvious ways.

With a few exceptions, there are basic laws of technology businesses that you should take note of, so you don’t find yourself repeating the mistakes made in previous start-up businesses. There are a number of business ideas that are just too hard and not worth putting your energy into.

Here are some of the main contenders:

• Any business without a business plan will not work.
• Any business where the founder is not happy to step aside and let another person be the CEO will not work.
• Any business that only wants to give up 10 per cent for $1 million in its first investment round will not get funded and will not work.
• Taking on dominant market makers (like eBay) will not work. They already have the customers and therefore, they own the market, and only one player wins.
• Anything aimed at taking a bricks and mortar retailer online will not work. History tells us that.
• Anything that involves text messaging or mobile data is unlikely to be a success. That’s because mobile carriers just don’t leave enough on the table to make a buck from. It’s hard to think of anyone who has built a successful business based on text messaging.
• Anything to do with document or content management will not work because that has been done 10,000 times before.
• A start-up involving retail point of sale will not work because the cost of sales and support will be too high.
• An export-focused business where the founders are not willing to travel abroad will not work because you need to be in the market to understand it.
• Any business depending on low-cost Google AdWords will not work, because the price of those AdWords becomes valuable, and then it blows your business model.
• Any software business where the software development is outsourced to a consulting company will not work because you need to be nimble to close the feedback loop between your customers and your product strategy.

You only need to look at the small amount of angel or venture capital deals done in New Zealand over the last few years to see that very few ideas are actually valid business ideas.

As a first step before presenting your idea, you need to be able to write a high-level summary of what the business is and why it will be successful, in no more than three pages.

Then you need to test your idea. Trying out your idea on friends first is a good start.

Make sure you check with someone who will be honest and not just say what you want to hear.

Make sure you check with someone with industry expertise. A “fast fail”, where you quickly discover that your idea is flawed, will save you time and money.

Once you’ve tested your big idea, you need to back yourself and go for it.

My ideas usually come from problems that I have experienced personally. In areas where I have significant base knowledge, I can intuitively know where there is an opportunity.

One of the first activities is building a team. Next up, we’ll look at setting up a business with multiple shareholders.

This information is provided by Xero.