How to determine the business potential of an idea?


7

I am an IT engineer, I am familiar with programming and website development (not a complete expert though), I am also good with servers, OS, security and networking etc (whole 9 yards of IT).
What I never did before in my life is creating a business model, putting it to work and managing that business. The positive side of me is, I have potential, intelligence with creativity, quick learner, dedication and passion.
In last few years I have been working on 3 different ideas of inventions, I already invested my time on these ideas and now I have a decent map of these three ideas that can be very much successful as a business, considering that I haven't seen them anywhere else.

I want to build an authentic service as a business (mostly internet based) but only as my part time responsibility. I am not interested in sneaky/scam network marketing or internet marketing as the business itself.

My three ideas are in stock market trading, online dating/social networking and cognitive science.

My questions are:

  1. How can I determine what business potential these ideas have in current date? How do I model these ideas into a business? Map and calculate initial investment, size & cost of required infrastructure for a medium to large user base, investment to return ratio. And MOST importantly the income has to be passive income with no liability to anyone.
  2. What are the legal requirements or obligations in US for running an online service/product? Is formation of an organization necessary to receive any service/subscription fee from users?

Ideas Business Plan

asked Jun 12 '12 at 17:46
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Kapish M
134 points

2 Answers


4

It looks like you'll be able to build whatever you want, so that's a positive. As for evaluating the business potential of your ideas, you seem to focus a lot of your thinking on the revenue: "how much money could idea X or Y make?" I think you should think not in terms of how much revenue each idea could generate. Instead, fast-forward to the point where you finished building your product and it's ready to launch, and think in terms of how much it would cost to distribute each idea. Suppose you have idea X that has addresses a huge need, for which there's a demand, in a growing market, and that each sale could generate high revenues with high margins. However, to get the product to your customers, you need to hire a team of 10 experienced sales people and the sales cycle from the time of initial contact to the close is about 6-12 months. This would mean that you'd need to raise capital to fund this: 10 sales people at roughly 6K per month that's 60K per month, or 720K for a year; and that's just for salaries! So the real question I think you should be asking yourself, is if you go with idea X, would you be able to raise the capital and build the organization that could get your product to market? Now compare that with idea Y. It serves a smaller market and clearly the revenue potential is lower than idea X. However, you estimate that with 5K-10K per month, you could buy some Google ads, buy some PR, and find a way to get your product scaled out to the point where 6-9 months after launch, you could go to a VC with a market-proven distribution strategy. That wouldn't be a bad spot to be in?

So instead of thinking in terms of the financial potential of your ideas (projections, revenue, market size...), think in terms of feasibility: since this is your first step in starting a business, which idea would you be most likely able to successfully get to market with whatever resources are available to you now and in the near future (your skills, your network, your personal cash...) and I recommend you start generating traction with that idea and see how things go. You'll learn a ton!

If you really want to dig into modeling (and it'll be worth spending some time doing that!) then search Google for The Lean Startup and grab a book called The Art of the Start by Guy Kawasaki.

Good luck.

answered Jun 13 '12 at 01:48
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Frenchie
4,166 points
  • Thanks a lot for this answer. You made it clear in my mind that feasibility is important than revenue or margin at the beginning. I updated my question with an additional item that I missed earlier. – Kapish M 7 years ago
  • Ok, great!. As for your additional question, if you're going to charge people for a paid-service, then you'll be much better off incorporating into a separate entity! It'll protect you personally. Initially, you might not need to do a full-fledged C-corporation but at a minimum, an LLC would be something to look into. Talk to a lawyer, the first hour is usually free. – Frenchie 7 years ago
  • Thanks a lot for this! – Kapish M 7 years ago

1

For informational sources I would recommend looking at industry analyst reports. They can be quite expensive so if you have a brokerage account with any major firm you should have access to industry and company-specific reports that will give you financial analyst opinions on the market size, competition and viability of public companies in the industry sections you are thinking of going into. Also, for companies that have filed with the SEC to do an initial public offering, the pre-IPO filings present a wealth of information on number of subscribers, financial data and growth rates. Since it is public information it can be found on the SEC website.

As for passive income, the only thing I am aware of that the IRS would allow to be classified as passive income is rental property holdings but there are specific rules for the income to be considered passive. Even with income being passive or non-passive there will always be a tax liability of some sort but the business entity that you choose can help mitigate the tax liability. In addition to an attorney, you should discuss your legal entity options with a tax accountant that is knowledgeable about start-ups. Both a S corporation and a LLC may be the way to go but you should get expert advice before making a decision.

One final item of note, for stock trading there are a lot of regulations around it so you may want to talk to people already in the industry to make sure this is even a viable business. Stock trading for third-party individuals has a lot of licensing requirements as well as marketing restrictions set by the federal government.

Hope this helps.

answered Jun 16 '12 at 04:25
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Kimberly Loftis
39 points
  • Thank you Kim ! – Kapish M 7 years ago

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