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Six Questions To Determine If Your New Idea Is A Real Business

We've all been there, drinking our morning coffee, reading the business section, when--Bam!--the idea comes crashing home: that new gizmo or service that's going to change the world, or at least make us rich. But before you liquidate your 401(k) for startup capital, step back and figure out whether your "great idea" truly translates into a money-making venture. Here are six questions worth asking.

Do You Have A Compelling Value Proposition?

It's forever worth repeating: Great ideas are only great business ideas if you can convince people to pay for your product or service at a price above what it costs you to deliver it. Just because you think your idea is great doesn't mean anyone else does--or if they do, it doesn't mean they would be willing to pay enough to cover your electric bill.

Is There A Viable Market For Your Product Or Service?

It's not enough to find a few people who are willing to pay for your new product or service--you have to find more than enough of them to support a vibrant commercial enterprise. Professional investors (like venture capitalists) are especially interested in this question. They don't want to write checks to launch companies with limited growth potential, even if they'll likely be profitable. On the flip side, beware the lure of big numbers--just because there are 50 million U.S. dog owners who spend some $43 billion on their pooches annually doesn't mean enough would be interested in your new canine cologne. Finally, never count on creating markets from scratch--there may well be a reason they don't exist.

Can you Cover YourHonest-To-Goodness) Development Costs?

"Most companies that fail do so because they are lacking capital." We didn't say it; venture capital maven John De Puy, chief executive of Oaktree Ventures, did. While investors won't wave blank checks at you, they don't want you to fail either. The key here is honesty: However much you think you need to bring your product to market, tack on a healthy cushion; add more for tech-heavy products that may (read: will) need extra months of tweaking. Can't scare up enough scratch to get out of the garage? The market may be telling you something. "You won't really know whether you have a business opportunity until you try to get funding," says Charles Holloway, director of the Center for Entrepreneurial Studies at the Stanford Graduate School of Business.

Can You Reach Your Target Market In A Cost-Efficient Way?

Even if you have an attractive product, enough capital to build a working prototype and a potentially large customer base, you still might go broke reaching those consumers. Post cards, press releases and grand openings require cash, after all. A decade ago, a young America Online spent so much money flooding the world with free trial software that it tried to mask the outlays by capitalizing those expenses on its balance sheet. Even established businesses have to keep spending to attract customers. In 2007, for instance, online retailer Amazon.com spent $344 million--2.3% of its $14.8 billion in revenue--on marketing. Other businesses, such as social-networking sites Facebook and News Corp.'s MySpace, keep expenses down by relying on viral marketing--but that may not work when it comes to peddling dog cologne. (For more on smart marketing, check out "Six Marketing Strategies Worth Paying For.")

Can You Sustain A Competitive Advantage?

Great ideas attract competitors and substitutes. Having a real business means being able to survive the fight. Being the first to market may work to your advantage in the short term, but sustaining that advantage could require additional steps. The question beneath the question here is simply: What is your competitive advantage? If it's technology, can you patent it? (Check the United States Patent and Trademark Office database first.) If it's a commodity item, can you brand it? (Think Kleenex.) This question also requires identifying potential weaknesses and finding ways to shore them up--say, through outsourcing and partnerships. Great business ideas require great execution; wasting resources just to be mediocre is small-business suicide.

Are You Committed Enough?

Just as you probably will underestimate the amount of startup capital you'll need, so too will you misjudge the amount of effort launching a successful business will take. Fair warning: This is hard work. If you're not ready to give everything--and then some--it doesn't matter how great your great idea is.

from: Forbes