Before you spend a lot of time and maybe money doing due diligence on your great business idea, I strongly recommend that you do a quick vetting of potential fatal flaws and big payoffs. Why? Remember when I talked about the Black Swan effect in a previous post, fatal flaws and big payoffs are less likely to occur than other types of events; but, when they do occur, they generally carry a huge impact on your business concept. Fatal flaws are those events or business design issues that will kill your business, things like
1) A business that is illegal (believe it or not some people think they can get away with these);
2) A business that will need an act of Congress, the state legislature, or a local municipality to exist (that’s a very long-term and costly proposition);
3) A “build it and they will come” business that has no identifiable customers (this will be a very expensive undertaking because you will have to create a market from scratch); or
4) A business that has no way to make money (in other words, people are not willing to pay for what you’re offering).
These are just a few examples of business concepts with fatal flaws. Discovering these flaws early on will help you decide if it’s worth trying to do this business or spending your time attempting to figure out a way around the flaw. Some businesses were just not meant to be.
On the positive side of things, you want to figure out if your business has a shot at having a big payoff, usually realized through an IPO (you “sell” your business to the public markets) or an acquisition (your business gets bought). You can probably identify some big payoff ventures--Google, e-Bay, and Pinkberry to name a few. It’s important, however, to understand that the vast majority of new ventures never see this kind of huge payoff. They may do well, but they don’t reach the hundreds of millions or billions of dollars of a MySpace or YouTube. This doesn’t mean that your new business can’t be extremely successful—it can and should be. What you really want to assess is whether your business is going to give you a return on your investment that is substantially greater than what you could achieve by working for someone else. You can get a sense of what the potential for your business is by looking at similar businesses in your industry. Remember, though, If you design your business well, you should be able to exceed the value of businesses like yours. And that’s a big payoff!
