Business plan or feasibility? To me they’re part of the same process. Essentially, the beginning stages of business planning involve testing the concept, kicking tires and realizing that you might hit an abandonment point fairly quickly. It’s like looking at the maps and websites and maybe even a guidebook or two before you take the whole journey.
There’s an interesting article about this in this month’s Entrepreneur magazine: Test Run, by Mark Henricks. I like this quote from Bruce Barringer, who is a true expert in this field:
Bruce Barringer, a professor at the University of Central Florida and co-author of Entrepreneurship: Successfully Launching New Businesses, says a well-done feasibility analysis not only looks at the technical feasibility of creating the product or service, but also tests the potential of the market and industry, the ability of the entrepreneur to create an organization that can run the business, and the financial prospects of the planned venture. While many entrepreneurs address these issues when writing a business plan, that’s not the same as examining the venture’s feasibility, he says. “They get an idea and immediately proceed to the stage of writing a business plan,” says Barringer. “At that point, they’re in the mode of looking for facts that support their idea, rather than testing it.” While writing a business plan is a good idea, Barringer says it should be preceded by feasibility testing.
And then there’s this formula idea, also in that story:
Venture capitalist David Silver, author of Smart Startups, has boiled feasibility down to a formula: V = P x S x E. In Silver’s First Law of Entrepreneurship, as he calls it, V stands for valuation or wealth, P is the problem the business is intended to solve for its customers, S is the elegance of the solution it will offer and E is the skill of the entrepreneurial team.
The maximum value for any P, S or E is 3, Silver explains. For instance, a billion-dollar market opportunity yields a 3 for P, a $250 million to $900 million market opportunity yields a 2, and anything less than $250 million is a 1. A solution that is the first in the market and will be hard to duplicate or replicate would get a 3, while one that could be replicated by other solutions earns a 2, and one that is simply first to market gets a 1. An entrepreneurial team with deep experience in launching new companies would rate a 3, one with a single member possessing such experience rates a 2, and one with no prior startup experience gets a 1.
A zero on any item produces a value of zero, Silver says. On the other extreme, the top score is 27, and a venture rating that high may be well worth pursuing. However, Silver also subjects ideas to eight additional Demonstrable Economic Justification criteria, evaluating elements from the size and receptivity of the market to marketing and advertising requirements to gross profit margins–which he recommends be above 80 percent. Give yourself one extra point for each of the eight you possess.
Finally, Silver uses a mnemonic, “Float Many Clubs,” to describe whether your idea will receive money from customers in advance (float), generate revenue from “many” channels, and let customers–or members in online communities–band together in groups or “clubs.” Give yourself six more points if you have exceptional float and two more each for having many revenue channels and opportunities for clubs.
Taking all these criteria into account, the top score is 45, reached by multiplying 3 x 3 x 3 to get 27, and adding 8 for having all the DEJ factors, then adding 10 for a perfect score on the last three. An idea scoring a perfect 45 is one Silver will likely back.
Are you looking for a venture-backed startup? Think about the significance of that one sentence: “A zero on any item produces a value of zero.” The lesson to take from that isn’t that you can’t make it if you haven’t made it before–the supposed catch 22 of VC money–but rather that you have to keep your financing plan realistic. This idea can help.
Tim Berry is the founder and chairman of Palo Alto Software and Bplans.com. Follow him on Twitter @Timberry.
