You don’t want to start a new business in an existing industry without having a pretty good idea how things work in that industry. I realize this feels like a catch 22, as in how can you have experience in these things before you start, but I’m saying it’s hard to start without experience.
There are ways. I suggested one way in “The Telephone Tree in Reverse” and another in “It Doesn’t Hurt to Ask.” Both of those posts are about phoning people, finding people and just asking.
At the very least, you should have a sense of what the competition’s like, how many people are out there and what the standard financials are like.
There is plenty of information available–too much, in fact. Your hardest task is sifting through it all. There are websites for business analysis, financial statistics, demographics, trade associations and so on. The main web searchers are your best friend. There are also some of the old-fashioned reference works, just in case you really need them. Remember, though, that websites are always changing. Your most effective tools are good search techniques.
Multiple vendors offer standard financial profiles of thousands of different industries. So at the very least, you ought to know what the standard composite company in some industry close to yours does as a gross margin (sales less cost of sales divided by sales, usually stated as a percent. A 34 percent gross margin means you’re spending 66 cents of every dollar on cost of goods, or direct costs of some sort) and profit before interest and taxes, as a percent of sales.
Don’t worry too much about finding your exact industry. The financial profiles available are based on one or both of two main classification systems, the older SIC codes and the more modern NAICS. Both of them depend on large databases and standard classifications, so your Web 2.0 business won’t be there. Nobody’s business really fits the standard profiles. Find the one that’s closest to you and be ready to think through why you’re different from all the others.
Some of the vendors of financial profiles–and this is just a quick list, by no means thoroughly researched–include Integra Information Systems, JJ Hill Research, Oxxford Information Technology, Bizstats, Bizminer and–the oldest and most respected by bankers–Risk Management Association. There are lots of others, too. Don’t forget trade associations, trade magazines and the knowledgeable journalists who write for trade magazines.
Starting a business is hard enough without having a fairly good idea of how things work. And this information is available, for the most case; you don’t have to just guess numbers out of the air.
Tim Berry is the founder and chairman of Palo Alto Software and Bplans.com. Follow him on Twitter @Timberry.
