In engagements with startup clients, one of my central goals as a consultant is to identify potential pitfalls in the early stages of business planning. For existing or established small businesses it is often easier to identify and correct existing operational problems than for startups that have yet to implement their model. This is inherently logical- understanding and identifying challenges in the realm of the unknown is a difficult test for even the most omniscient investor. In the first chapter of “The New Business Road Test,” Mullins presents a framework for the initial analysis of any new entrepreneurial venture. The three key elements of this initial framework require a careful understanding of market, industry and management at the macro- and micro-level.
First and foremost, one most carefully discern between what is meant by market and industry, as they are not the same thing. A market is made up of buyers or customers with specific needs and wants. An industry, on the other hand, consists of sellers and their associated distribution channels. In examining any market opportunity, according to Mullins, entrepreneurs should thoroughly understand market and industry attractiveness, as well as perceived customer benefits and sustainable solutions created by their product or service. Macro-level assessment of the market is relatively straightforward and involves the following measures: the number of customers in the market; the aggregate amount of money spent by these customers; and the number of units bought annually by these customers. Entrepreneurs will also study macro trends- “the demographic, sociocultural, economic, technological, and regulatory.” Reaching a clear conclusion about market attractiveness is critical. Micro-targeting involves an analysis of a smaller segment or niche within the overall market. A combination of primary and secondary data can help entrepreneurs to better differentiate product benefits and create a pathway to better growth.
Industry analysis also involves an estimation of profitability. Here, as any B-school grad will tell you, Porter’s Five Forces can shed light on a potentially lucrative opportunity. The five forces include: threat of entry, buyer power, supplier power, threat of substitutes, and competitive rivalry. Entrepreneurs are wise to research where the industry is heading and what factors are affecting it. For example, will regulatory changes block the introduction of a new product or will competitive new technology make customer demand obsolete? Where Porter’s Forces give a great macro-level overview of industry attractiveness, assessing the sustainability of a new firm’s competitive advantage creates the ideal micro-level assessment. So how exactly will the entrepreneur accomplish this sustained advantage? Ideally, the firm will be able to utilize a combination of proprietary elements and superior organizational processes/ capability/ resources. All of this must be incorporated into an economically viable business model. One note of point that Mullins makes is that entrepreneurs should be well aware of a typical business cycle for that industry, especially as it relates to actually closing a sale and receiving payment. Startups routinely run into cashflow problems with accounts receivable being delayed and inevitably having a lack of cash on hand to pay short-term obligations.
Lastly, management must examine their own internal makeup, including experiential strengths, connections across the value chain, personal aspirations and risk propensity. VCs and angels are carefully looking at managements’ experience in terms of CEO, engineering, R&D and development. From personal experience, we have observed that managers who are able to adapt and change proactively tend t have the highest level of success. Management must carefully choose investors, without being so selective that they turn away valuable seed funding. The Board and external funders should be looked at as valuable contributors to the overall mission, including connections across the industry.