This article is part of our “Business Startup Guide” – a curated list of our articles that will get you up and running in no time!

How do you know if you have a good idea for a business?

One of my biggest challenges at Palo Alto Software is figuring out which ideas to pursue and which ideas to put on the back burner. I have the luxury of working with a bunch of really smart people, so new ideas for things that we could do come up all the time. From potential partnerships to new product and marketing ideas, I feel like we’re swimming in opportunity.

But, like every other entrepreneur in the world, my challenge isn’t a lack of new ideas, it’s figuring out which ideas are worth spending time and money on.

This is true whether you’re a bootstrapped startup that’s funded with credit cards and loans from friends and family, or the next darling of Silicon Valley that’s sitting on a war chest of millions in venture capital funding.

No matter who you are or how big you hope to grow your business, figuring out what product to build and what services to offer is a huge challenge.

Of course, you could just rely on your gut. Sometimes that’s not a bad option, but making a good guess at what your company should do can just as often lead to failure. And, since the vast majority of businesses fail within five years of opening, why not take a few extra steps to discover if you really have a great idea before you risk your time and money following your hunch.

Starting any business takes a huge leap of faith. You’re jumping off of a mountain and hoping your parachute will open and lead you and your business to success. Given that you could be doing many, many things with your time, how do you decide what to do and what’s really a great idea?

Here’s my guide to figuring out if your idea is any good and if it’s worth moving to the next level.

1 business idea validation

Start by documenting your key assumptions about your business

When you’re first considering a new business idea, skip the formal business plan and start with a one-page business plan or a simple elevator pitch to jot down the basic components of your idea. At a minimum, you’ll want to cover the following:

  • Why are you doing this? What’s your mission? All new businesses need a sense of purpose. Are you trying to improve people’s lives in some way? What are the core differentiators of your business that set you apart from the next person trying to build a similar business?
  • What problem are you solving? You need to be solving some sort of real problem that exists in the world. If you aren’t solving a problem for potential customers, then how will you get people to buy your product or service?
  • Who are you solving this problem for? As important as having a problem to solve, is having customers that have this problem. Knowing who your ideal customer is and how you can find them is critical to starting a successful business.
  • How are your potential customers solving their problem today? This is where you want to write down a few notes about your competition. What choices do your customers have today? How is your solution better?
  • Do you think you can make money? You don’t need to worry at this early stage about in-depth financial forecasts, but you should do some basic back-of-the-napkin calculations to make sure your idea can be profitable.

The key to this initial step is to write down you key assumptions quickly—30 minutes should be enough to write down your ideas. You don’t need to write a lot (certainly not more than a page). Just get your ideas out there so that you have an idea about your key assumptions because the next steps involve getting out into the real world and seeing if your assumptions are accurate.

2 business idea validation

Talk to your potential customers

Shockingly, talking to potential customers about your new business idea is the step that most entrepreneurs skip. Not talking to your potential customers raises your chances of failure substantially, so head out the door and start talking to people as soon as you can.

When you interview your potential customers, you’re trying to validate your key assumptions that you documented in your business pitch. Do they actually have the problem you assume they have? How do they solve their problem today? What do they think of your idea?

Be sure to talk to as many potential customers as you can so you get multiple points of view. You’ll also gain invaluable insight into what your customers’ offices and workspaces look like, how they work, and how they make buying decisions and shop.

As you learn about your potential customers, you should go back and update your pitch. You might tweak your definition of the customer problem, your solution, and even the competition.

3 business idea validation

Show your prospective customers a prototype of your product, if you have one

If you can, and it makes sense for your business, try and share an example of your solution. If you’re building a product, maybe you can share a prototype or some images of what the product looks like. If you’re offering a service, describe the results of your service and what the deliverables would be if your prospect hired you.

Ideally, you want to get your potential customers on the same page as you and get them to critique your idea. The more real you can make your idea for your potential customers, the higher quality feedback you will get.

4 business idea validation

Figure out what people are willing to pay

As you talk to your potential customers, try and figure out what they might be willing to pay for your solution. This can be pretty tricky, because ideally everyone wants everything for free!

But, there are some tricks you can employ instead of just asking outright. First, if there are competitors in your market, you can look at their pricing and then decide how you want to differentiate your company. You can also look at the value you are providing to your customer and create a price based on that.

When you have a price in mind, ask your prospective customer if they would order your product or service right now for your price. You might find that people will say yes right away, or they will tell you what they think the price should be. If you pay close attention, you’ll also be able to tell if the customer thinks they are getting a good deal or if your price is a bit of a stretch.

5 business idea validation

Find people who think your idea sucks

As you bounce your business idea of off friends and family, it’s easy to end up only hearing positive feedback. Even potential customers might not want to hurt your feelings and not give you their completely honest opinion.

This is where finding a few naysayers is important. Find people who don’t like your idea and get them to poke holes in it. Why do they think it’s going to fail? What do they see as your weak points?

You don’t necessarily have to address all of the weak points that these detractors find, but you need to gather feedback from people who think you can improve. Not everyone is going to be your customer, but it’s better to head into a new business endeavor with open eyes. Are there potential pit-falls that you haven’t thought of yet? If you encounter a prospective customer that doesn’t like your product, how will you respond?

Getting feedback from people who don’t like your business idea can help you figure out how you will address these issues and what your answers will be as you build your business.

6 business idea validation

Find out how much money it is going to take to launch your business

As you gather customer feedback and refine your pitch, you’re hopefully honing in on a great business idea.

Vetting and refining your idea before you start your business will greatly enhance your chances of success and ensure that you have a solid idea.

At this stage, you should know if you have a winning idea on your hands. But, now you need to figure out if the business can be financially viable and what you need to get it off the ground.

This is the stage where you’ll move beyond your initial business pitch and start building out some more detailed financial projections to figure out how much money you’ll need to get up and running. At a minimum, at this stage you’ll want to create a sales forecast, an expense budget, and a cash flow forecast. These three forecasts will help you figure out what it’s going to take to start your business and keep the doors open as you get your first customers.

7 business idea validation

Start as small as possible

It’s tempting to dive in at the deep end and build your complete business the way you imagine it will be. After all, you want to realize your vision that you’ve been working so hard on. You’ve been talking to potential customers and selling them on your dream, and now it’s time to make it real.

Try and resist this urge, if possible. Starting small and continuing to gather feedback from customers is a key component to growth. With a smaller start, you’ll be able to change direction faster and react to customer feedback quicker.

Starting small also gets your solution (at least the bare-bones version of it) out into the market quicker. The faster you can get to market, the faster you’ll gather feedback.

When you open your doors for business with a “start small” approach, you’ll feel like you’re not “ready.” But, more often than not, you’ll find that customers might not even notice. And, the ability to pivot and change directions quickly is much more valuable to your long-term success than trying to get everything right the first time.

8 business idea validation

 Stay flexible

The final key to making sure you have a good idea that will grow into a successful business is to stay flexible. The best business owners check their ego at the door and are able to listen to customer feedback. But, this doesn’t mean that the customer is “always right.” Far from it.

Instead, listening and being flexible enables you to adapt as you go and change directions as needed. You don’t want to react to one customer’s opinion, but you do want to look for broader trends in the opinions of as many customers as possible.

You may even decide that certain types of potential customers aren’t part of your target market. You may decide that you only want to sell to bigger businesses, for example, and you can adjust your pricing and marketing to reflect that.

Conclusion:

This approach to figuring out if you have a good business idea means starting much smaller than you might have originally thought. It also means that you don’t sit behind your desk building a business plan without getting out and actually talking to your customers.

This is lean planning at its core: Start with just the fundamentals of a plan and then verify that your idea is good before moving on to the next step.

How have you vetted business ideas in the past? What tips do you have for other entrepreneurs to figure out if an idea is worth pursuing?

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