And so it hits you, you’ve just stumbled on a brilliant idea for a new business or startup, you can’t wait to launch it, you’ve started daydreaming about how it will “settle you for life, “you can’t wait to hammer”. The reality is that starting a business is quite easy when compared with running one.

Financial experts say that about 80 per cent of Small and Medium Enterprises, SMEs, in Nigeria fail within the first five years of their existence and the failure rate for startups in Nigeria has averaged 61 per cent from 2010 – 2018. There is a myriad of reasons why startups and businesses fail. 

It can be an unpleasant experience as an entrepreneur to invest your time, finance and resources into starting a business only to watch it fade into obscurity and eventually shut down after a couple of months or years. 

To reduce the failure rate of businesses, we’ve compiled a list of 10 critical questions that’ll enable you to make an informed decision on if you need to invest your time, finance and resources towards launching that business idea you’ve been thinking about. The goal of this article is to help you improve the overall success rate of your new venture. 

1. Demand:

Is there a real demand?

At the crux of it all, startups and businesses generate revenue by providing solutions to the needs of their customers in exchange for money. To survive a business or startup needs to be addressing a real problem satisfactorily and, there needs to be a group of customers willing to purchase their solution at their proposed asking price. There’s a real risk of a business becoming “just another cool idea” if there is no demand for it. To ensure the long term success, you will need to validate your business idea, by experimenting, to test if there is a demand for your solution, before investing your resources to start that business or startup.

 

There are several ways to conducts these experiments, you can build a Minimum Viable Product like a prototype, conduct interviews and surveys, get pre-orders, conduct a feasibility study etc. the goal of the entire process of demand validation is to gather feedback and data from potential paying customers on if there is a demand for your solution.

2. Total Available Market.  

Is there a high demand for your solution, what is the size of the total available market? 

For a business or startups to be deemed feasible, the demand for its solution must be large enough to justify the necessary investment needed to make it operational. To buttress this, imagine spending N10m (ten million naira) to open a gas filling station in a community, only to realize that there are only 50(fifty) homes that use gas cookers, and, the average amount they spend monthly to fill up their cylinders is N5000 (Five thousand naira) as a result the maximum revenue you can generate per month if they all diligently patronize your business every month, without going to your competitors is N250,000 (two hundred and fifty thousand naira); but, you spend roughly N500,000 (five hundred thousand naira) every month on running expenses. What the above scenario suggests is that, not only will you not recoup you 10million naira investment, you will certainly operate at a loss of not less than N250,000 (two hundred and fifty thousand naira) every month. The reason is that your TAM is not large enough. TAM is an abbreviation for Total addressable market it’s the maximum revenue a product or service can accrue in a given market if there were no competitors.

Having a strong grasp of the TAM size for your business or startup solution before launching is crucial; because it will provide you with clarity on the revenue potential of your business, and enable you to decide if it is worth pursuing; it will also be useful in convincing investors to invest in your business.

3. Timing.

Is the timing right, does your idea meet the moment?

 Idealab’s founder Bill Gross analyzed several hundred startups, from big successes to failures in a bid to figure out the most important keys to startup success. He considered idea, team, business model, funding, and timing; he realized that timing accounted for 42 per cent of the difference between success and failure. To explore the concept of timing a significant reason for the current traction experienced by most fintech companies today can be attributed several factors but most importantly to the fact that in the past 10 years, internet penetration and smartphone adoption has seen an increase. If you had an idea to start a fintech company that needed to run on smartphones 40 years ago during the era of NITEL, your timing, would probably be wrong because the market at that point will not be ready for your product.  

The reality is that, if you put yourself out there too early, the market may not be ready for you and you’ll struggle to gain traction. If you open the business too late, somebody else may beat you to market and steal or render your business dead in the water before it even gets going. 

4. Execution, Experience, Expertise and Team.

What is your level of knowledge and experience in the industry you will be operating in, and do you have the capacity to assemble a competent team?

As a startup or business, your ability to execute your business idea can make the difference between successfully getting your product to market and running out of money before you gain traction. The experience and expertise of the founder and the founding team is a crucial component in deciding the ability to execute on a brilliant idea. To provide context, a former bank or tech lead in a bank trying to start a fin-tech company will probably do better in that industry than if they decided to start a healthcare company because they have significant experience in finance than in healthcare. A brilliant idea executed poorly will fail.  It is advisable to launch a business in a sector you are familiar with and have adequate experience in, with a team with the necessary expertise to execute the idea

5. Passion & Motivation.

What’s the main motivation guiding your decision to launch this business idea?

Are you setting out to solve a problem you are passionate about or is your new venture a means of survival? A good way to know if you are passionate is by asking the question, “is this business something I will gladly work on for free?” The reason you will need to be passionate about your business is because, entrepreneurship is hard and it entails delaying gratification, the returns might take years to accrue, the only fuel capable of keeping you going during tough times is passion. Without passion you will not be able to inspire others to believe in your ideas, passion drives you forward, it will give you the courage to leave your comfort zone and give the business everything you’ve got. Passion will play a critical role in deciding the success of your business.

6. Government Policy & Regulation.

Do you have the necessary certifications to run your business and is the current government policy in your advantage? 

The effect of government policies on business and startups cannot be understated, for example if the government impose more taxes & duties or adverse polices on a particular sector then the profit margin of this sector will go down, this in turn will have adverse effect on business operating in that sector and vice versa. A very good example is the ban of motorcycle hailing companies in Lagos in 2019 and the adverse effect it had on motorcycle hailing companies, another is the shutting down of Nigeria’s land borders in other to curb smuggling and the adverse effect it had on importers. To operate in some sectors you may need certain permits, certificates or licenses. Some sectors are currently receiving a lot of attention from the government compared to others. It is very crucial for to you analyze the current government policy and regulatory requirement in your target industry before you launch to avoid swimming against the tide.   

7. Competitive Positioning and Advantage.

Will you be launching in a crowded market, if yes do you have a unique selling point and strategic positioning that differentiates your business or startup from other players in the market?

Launching just another generic business is a sure route to bankruptcy in the long term, you might succeed depending on the industry you operate in and forces at play, but gain traction and become a market leader, in a crowded marketplace you will need to have an advantage over competitors by offering consumers greater value, you’ll also need to “differentiate” your offering and win mindshare in the marketplace – you need to be known for a certain “something.” Figuring out your competitive positioning and advantage before you launch is critical.

8. The threat of Substitute, Competitors and ease of copying.

How easily can your unique selling point be replicated by competitors are there better substitutes for your solution?

Is your business solution a direct copy of an already existing business idea that has proven successful and even if it is, is it a 50x improvement of what is already existing? Can the unique differentiating factor of your business be easily copied by competitors? The fact is that if your unique value proposition is very easy to duplicate what that means is that, it will be a lot more difficult to stand out in a crowded marketplace.  You also need to factor the threat of substitutes in your industry, as you design your value proposition.  The availability of a substitution threat affects the profitability of an industry because consumers can choose to purchase the substitute instead of the industry’s product. The availability of close substitute products can make an industry more competitive and decrease profit potential for the firms in the industry.

9. Business model.

How will you generate revenue?

A business model is a company’s plan for making a profit. It identifies the products or services the business will sell, the target market it has identified, and the expenses it anticipates. You will need a proper business model to figure out elements such as: Your business concept – what problem are you solving for whom; how you will create customer value; how your product or service will get to customers; how your business will stay competitive; and all revenue and costs you can anticipate.

The business model canvas is a very useful tool to help you figure out your business model.

 

10. Funding strategy.

How much do you need and how do you intend to raise money to fund the business?

A primary reason why businesses fail is a lack of funding or working capital. … When the costs of production, marketing, and delivery outweigh the revenue generated from new sales, the business has little choice but to close down. Before you launch it is critical to have a plan that factors in the financial requirements your business will need over time and how you are going to raise money and resources in order to carry out the objectives of your business. There several ways to raise money, from bootstrapping, angel and venture capital, loans, convertible credit, grants and many more.

 

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