Knowing the difference between passion and profitability

Plenty of profitable businesses owe their success to a personal passion. A baker who starts a successful bakery, a musician who opens a recording studio, a teacher who starts a nonprofit tutoring service all have passion in common. That’s great. Excitement and confidence are crucial to making a business a success.

So is a good dose of reality.

Being excited about what you want to do is no guarantee of success. Businesses that begin with passionate optimism sometimes go belly-up. Personal passion can carry you away, blinding you to the hard realities that any business faces in making it in today’s highly competitive world. The bottom line of all for-profit businesses is ultimately — you guessed it — profit. If you’re hoping to turn a personal passion into a successful business, you need to ask yourself a simple question: Can it make a profit?

The question may be simple. Answering it isn’t always so easy.

If you’re sitting down to write a business plan because you already have a knock-’em-dead idea, now’s the good time to give it a test run. Use the following questions:

• Does the idea meet a real need or desire?
• What’s new or different about the idea?
• Who are your customers likely to be?
• What do you offer your customers that no one else does?
• How much are they willing to pay?
• Who are your competitors?
• What’s the best thing about the idea?
• What’s the biggest weakness?
• What will be the biggest challenge you face in turning your idea into a reality?
• How long will it take to get a business up and running?
• Is this idea scalable, meaning can you provide more to meet demand, and if so, how?
• Is this something you really want to do?

Turning a side gig into a business

Lots of people have their day jobs — you know, the work that pays the rent — and then they have the thing they really like to do, whether it’s making pottery, volunteering at the animal shelter, or collecting dolls. And most of them would love nothing more than turning their side interests into a profit-making business.

Good for them, but it takes more than passion to start a successful business. Most successful entrepreneurs will tell you that they were surprised to discover what goes into making a business work. Often, the surprise is how little they knew about the nuts and bolts of operating a business. Consider the example of a woman who developed her baking skills at home and then started a highly successful northern California bakery. She knew the craft of baking. She knew the equipment she needed to go from home baking to commercial baking. What she wasn’t prepared for was managing a staff. In the first year, personnel problems plagued her bakery and almost scuttled her business.

If you’re thinking of turning something you love to do into a business, take time to ask yourself some basic but important questions. You can use the following questions to begin the process of exploring what you need to turn passion into profitability:

• What is your product or service? (Be as specific as possible.)
• How will you make money? (Be as specific and creative as possible.)
• How will you reach your customers or clients?
• Where will you conduct your business?
• Will you need employees? How many? What jobs will they do?
• What kinds of equipment will you need to get started?
• How much money will you need to get up and running?
• What are your monthly operating expenses likely to be?
• How much money will you need to earn each month to be successful?
• What are your biggest strengths to start this business?
• What are your greatest weaknesses?
• What can you do to turn those weaknesses into strengths (or at least work around them)?
• Who are your competitors? What are their strengths and weaknesses?
• What are the potential risks a business like this faces? How can you minimize the risks?

Planning ahead: Great ideas take time

Most ideas require time to take off. A musician who decides to go professional needs to find gigs (and probably music students). An accountant who decides to leave her company and start her own business needs to set up an office and line up clients. An inventor with the next big thing needs to arrange for manufacturing, distribution, and marketing. They all take time. And while the clock ticks, cash goes out — but no or few revenues come in.

The more realistic you are about how much time your idea will take and how much you’ll need to spend before revenue kicks in, the better prepared you’ll be. Looking ahead, especially with a new venture, requires a fair amount of guesswork, but be as realistic as possible. Detail what you’re working to achieve and all the major steps you’ll need to take, often referred to as mileposts you’ll need to pass, in order to succeed. Then establish a timeline for when you’ll be able to reach each one. The result? A diagram of the runway for your business or business idea.

Checking out the competition

The saying goes that there’s nothing new under the sun. It also applies to most new businesses. Unless it’s a totally new and disruptive innovation, chances are a similar business to the one you’re planning to launch already exists. One easy way to test your new idea is to check out how other people doing roughly the same thing are faring. In some cases, all you have to do is ask. Unless people perceive you as a competitive threat, they’re usually willing to share details about their businesses. If not, you can uncover information in other ways, such as the following:

• Check websites of similar businesses for information about products and services, including pricing. If appropriate, peruse online customer reviews of your competitors, which can provide invaluable tips on how you can do better.
• Search the web for business articles about the kind of business you’re planning. Be sure to check publication dates, because business reports can go quickly out of date. If you don’t find what you need online, head to your local library to browse the periodical shelves.
• Investigate how similar businesses present and market their goods or services. If you’re starting a local business, check out your competitors’ presence in local media and online. If you’re going after a national or international market, analyze how other businesses in your arena use major media, their own websites, social media, business partnerships, and collaborations to present their offerings.
• Check out local business organizations. Most cities and even small towns have Chambers of Commerce and economic development organizations with websites you can study. If you don’t find what you need there, make a visit to the bricks-and-mortar office to talk to a representative about your business sector, its major players, its current conditions, and its untapped opportunities.
• Talk to prospective customers. If you’re starting a local business, ask friends and family what they consider important as prospective customers and what wants or needs aren’t being addressed. If you’re planning a retail business, visit similar stores and observe how customers move through the aisles and what they do and don’t buy.

Reimagining your business environment

A survey of 500 of the fastest-growing companies in the United States showed that nearly half grew directly out of the founders’ previous work environments. In other words, the founders created these companies after looking around at what they were doing and thinking, “There has to be a better way to do this.” Solutions to challenges also often come from within. After all, who knows your business and your customers’ wants and needs better than you and your employees? With that knowledge, ask: What would you do, what products and services would you offer, and how would you produce and present your products if you were starting from scratch to address the problems and fulfill the desires that your business addresses?

As you dream up new business ideas, be aware of potential roadblocks. For example, many companies require employees to sign noncompete agreements. These agreements usually prohibit former employees from engaging in competitive businesses for a set period of time. If you’ve signed one, make sure your new venture doesn’t violate its terms.

Also, watch out for tunnel vision. Although people inside the company are an invaluable source of new ideas, there are many examples of companies that recognized the challenges they faced but were unable to come up with effective strategies to meet them. The reason: People inside a company who are used to the way things work often have trouble thinking outside the box. Even sole proprietors and small business people run into the same problem. They’re so close to the company and its way of doing business that they can’t see the forest for the trees.

One way around the problem of tunnel vision is to invest in the talents of an outside consultant — someone who sees your business and its challenges with fresh, unbiased eyes. Another approach, if you have employees in a variety of positions, is to ask someone from an unrelated part of the business to look at the problem and suggest solutions.

When considering new business possibilities, keep in mind that 99 percent of all businesses (both old and new) fall into one of three broad categories:

• Products for sale: Consider the range of products that your industry offers.
  • Can you think of innovative ways to make them better?
  • Can you imagine a product that completely replaces them?
  • What new product would knock you out of business if the competition offered it first?
• Services for hire: Consider the services that your industry offers.
  • Do you notice problems with consistency?
  • What isn’t being done that should be?
  • What do customers complain about?
  • What new services would threaten your business if the competition offered them first?
• Distribution and delivery: Ask yourself similar questions about your distribution and delivery systems.
  • What are the most serious bottlenecks?
  • Can you think of clever ways to improve distribution?
  • Can you envision a radically new delivery system? (Think Amazon and its proposed drone delivery program.)

Inspiring team creativity (with or without donuts or bagels)

The best creative thinking isn’t necessarily done alone. Put a few heads together, and you may whip up a mental hurricane. The outcome depends on the nature of the group of individuals you assemble (the more dynamic, inspired, freewheeling, and innovative, the better) and the communication skills that the session leader brings into the room.

The quickest way to kill an idea is to say anything akin to any of the following:

• It won’t work.
• We’re not ready for that.
• It isn’t practical.
• It’s already been done.
• That’s just plain stupid.

The group you assemble needs to remain open to all ideas presented in order to develop a healthy idea-generating environment.

Tuning in to what customers have to say

The Internet — and specifically online review sites — can be an excellent source of inspiration for new business opportunities. Customers, it turns out, have very strong opinions about what they’ve bought or what they want, and they’re not afraid to voice them. Just look at the reviews on Amazon, Yelp, HomeAway, and other consumer sites. Those reviews, good and bad, can tell you exactly what customers like, what they don’t like, and what they’d like to see in products and services. Their input is a gold mine of information.

Say that you’re interested in designing and producing a computer program that will make it easier for people to compose their own songs. Several such programs already exist. Go onto the sites that sell them, such as Musician’s Friend, and you’ll find plenty of chatter from satisfied and unsatisfied customers. Their likes and dislikes can help you decide what your product needs to offer in order to compete with products already in the marketplace.

The people who write online reviews of products and services are often outliers. Either they loved what they bought or they hated it, which is why they’re motivated to take the time to write a review. The bulk of customers falls somewhere in between. Online reviews can give you a good sense of the two ends of the spectrum. Most of your potential customers are likely to lie somewhere in between.

Pursuing changes that open up new opportunities

Many fledgling businesses succeed by jumping on new opportunities that arise through technological, social, policy, or other changes. Change can be scary, but it can also open new doors. Spotting that door — and being the first to open it — requires skill and a little daring. For example, when Apple launched the iPad, a whole new industry of apps and accessories sprang into existence, created by designers and developers perceptive and daring enough to plunge into a new technology and a new marketplace.

As Internet bandwidth increased and the potential for streaming video appeared on the horizon, companies like Amazon, Netflix, and Hulu seized the opportunity, establishing themselves as leaders and leaving some competitors — remember Blockbuster Video? — in the dust. Today, with baby boomers retiring, a host of companies are looking for ways to strike gold by opening high-end retirement communities, providing healthcare consulting services, or offering products and services that promise to keep people youthful even as they age.

Any time the government breaks up a monopoly, new arenas for competition arise. Regulatory changes and new tax incentives also open the door to opportunity, if you’re smart and agile enough to take advantage. As part of your brainstorming (covered earlier in this chapter), ask your team to consider ongoing or likely changes that could open up new opportunities.

There are many ways to spell business success. True, many companies succeed by creating a brand-new product or service. But opportunities also materialize for selling existing products or services to new customers or by creating a new business model that makes an existing product or service more appealing to established or new customers.

These days, many companies prosper by finding clever ways to make people’s personal or working lives easier or more efficient. Think no-iron shirts. Think parking garages that offer car washes. Think dictation software that does away with the need to type. Think apps for making restaurant reservations. Evaluate your promising business idea to see whether you can take advantage of new opportunities to improve the efficiency or effectiveness of your customers’ lives.

Narrowing your choices

After some combination of brainstorming, market analysis, and a few random flashes of brilliance, you may accumulate a drawerful of promising business ideas. Following are two guidelines to help you separate the real opportunities from the fluff:

• Focus on the ideas that you’re really excited about. Your passion is what will keep you motivated on the road to success.
• Pursue ideas that you can follow through on. If you feel you don’t have the means or the drive to take an idea from the drawing board to the real world, scrap it.

To help you choose among your ideas, use the following questions for each possibility you’re considering. Tally your answers and consider any idea with a score of 24 or higher worthy of serious consideration. The one exception to the scoring: If your promising idea scores high on every question except for number 3 (Is this the kind of business you really want to pursue?), it may be a great idea for someone else — but not for you.

1. Describe your promising idea in two sentences.
2. Being as honest as you can, rate the idea on a scale of 1 to 10 with 1 being “the only thing we could come up with in a pinch” and 10 being “the best thing since sliced bread.”

3. Think seriously about what you would have to do to turn your idea into reality.

   Is this the kind of idea — and the kind of business — you really want to pursue? Rate your interest on a scale of 1 to 10 with 1 for “so-so” and 10 for “very high.”

4. Imagine sitting down and persuading an investor to put down hard-earned cash to help turn your idea into a real business.

   How easy would it be to convince a skeptical outsider that your idea has the potential to make money? Choose your answer from 1, meaning “very difficult,” to 10, meaning “a breeze.”

5. Being as objective as you can, ask yourself what odds your idea has of becoming a real business venture.

   Rate your chances from 1, meaning “it’s a long shot,” to 10, meaning “it’s a guaranteed overnight success.”

Use the preceding questions as a first test for any business idea. If the idea scores high, it still has to pass other hurdles, but at least you know that it’s an idea worth pursuing.

After you answer the preceding questions, separating the promising ideas from all the others, it’s a good idea to answer some basic questions that reveal pretty quickly whether or not an idea has what it takes to become a real, live business.

Use the following questions to fill in details and to flesh out some of the issues around your preliminary business propositions. If you give your answers some careful thought, they’ll reveal to you the likelihood of an idea breaking through as your winning business concept.

• Describe your business opportunity in two sentences.
• List the three most important features of the product or service you propose.
• What basic customer needs does your product or service fill?
• Briefly describe who is likely to buy your product or service.
• List two or three existing products or services that already meet a similar need.
• Why would customers choose your product or service over others?
• How will you reach your customers?
• How do you plan to make money?

If you find yourself struggling to come up with answers to the preceding questions, your idea may be too sketchy to evaluate. That doesn’t mean you have to abandon the idea, but you should take the time to understand the opportunity more fully before taking it to the next stage in the business development process. For example, if you can’t easily describe the customer need you’re filling or how you plan to make money, you still have homework to do.

Doing your first reality check

After you settle on the idea that can power your business plan, take time out to conduct an honest evaluation. If that sounds easy, think again. Most would-be entrepreneurs are excited by their ideas. Excitement and a can-do spirit help drive success. But a dose of skepticism and honesty are also essential.

Ask these basic questions:

• Is the idea that will power your business plan clearly stated? (If not, spend a little time refining it. Writing your idea down, and revising what you’ve written, is one way to get clarity.)
• Is it doable? (If you have any doubts, rethink the scale of your undertaking, or make a list of what you’ll need to make it doable.)
• What excites you most about the idea?
• What worries you about the idea?
• What are the biggest hurdles to implementing your business idea? (A realistic list should probably include at least three items.)
• How is your idea different from other great ideas out there in the marketplace?
• Can you tweak the idea to make it even more powerful?

Anticipating disruptive innovations: Opportunities and cautions

Today’s blockbuster idea may be next year’s bankruptcy if new and unforeseen innovations or business models suddenly disrupt its business arena. Want an example? Remember the Flip video camera? Relatively inexpensive and a snap to use, it gobbled market share from established camcorder companies and soared in valuation. Then suddenly an altogether unanticipated competitor, the smartphone, disrupted the Flip camera. Smartphone cameras came installed, at no additional price, with video capability. As obituaries for Flip put it, the once-popular camera ended up “eating iPhone’s dust.”

Disruptive innovations can be a source of both trouble (if you’re not prepared) and opportunity (if you know how to seize the moment). The rise of the Internet, for example, spelled the demise of money-making classified ad sections in newspapers; however, it gave birth to Craigslist, eBay, and a host of other online services.

To begin to think about how the idea that will power your business plan could be affected by innovations coming through the pipeline:

• Make a list of all the technologies involved in the industry you’re in or hope to enter. Among them, identify the technologies that are undergoing — or are likely to undergo — innovative changes. How could those changes affect your business, either as a threat or an opportunity?
• Give some thought to your industry or business arena. Has it undergone sweeping changes in the past? What drove those changes? Are there signs that it could be transformed again? In what ways? How would these scenarios of change affect the idea behind your business?
• Make a list of the assumptions that your business idea is founded on. Question each of these assumptions. What if the founding assumptions behind your idea aren’t as solid as you think? What could change? Take the car insurance business, for example. A big underlying assumption is that people like the convenience of owning their own car. But what if they don’t? What if more and more people decide that getting a Zipcar or car2go is easier than hassling with car ownership? What happens when self-driving cars are a reality and you can hail one via app?

Don’t expect to come up with definitive answers here. The idea is to recognize that disruptive changes can come along in almost any industry and marketplace. The more you question your assumptions and assess the implications of technological changes coming along, the better prepared you’ll be.

Getting a second opinion

To help determine whether or not you’re on solid ground, discuss your business idea and preliminary plans with someone outside your company. What you’re really seeking is a mentor with most or all of the following characteristics:

• Someone who has experience in the business area you’re considering, or at least experience in a similar business
• Someone with the courage to tell you the truth, whether it’s “That’s a great idea. Go for it!” or “If I were you, I’d take a little more time to think this over”
• Someone you respect and admire and from whom you can take candid criticism without feeling defensive

Consider turning to colleagues you’ve worked with in the past, teachers or professors, friends from college, or other associates.

Friends and family members sometimes can offer the advice and perspective you need, but emotional ties can get in the way of absolute honesty and objectivity. If you go this route, set some ground rules in advance. Be specific with your requests. Then, ask for suggestions, comments, and constructive criticism and be prepared to hear both the good and the bad without taking what you hear personally.

In addition to a mentor, consider designating someone to act as the devil’s advocate to guarantee that you address the flip side of every issue that you’re considering. This person’s task is to be critical of each idea on the table — not in a destructive way, but in a skeptical, show-me-the-money, I’ll-believe-it-when-I-see-it, how-is-this-new-or-better kind of way. In larger companies, you can accomplish this goal by creating two teams — one to defend the idea and the second to critique it. Ask the opposing team members to think of themselves as a competing firm looking to find weaknesses in the new venture.

Conducting a self-appraisal

Whether your idea will be the genesis for launching or growing a one-person business, a small business, or a business that aspires to be the next Google or Facebook, you still have one very important question to answer: Do you have what it takes to turn this opportunity into a success story?

The CEOs who became multimillionaires before they turned 25 and the entrepreneurs cruising around in sports cars issuing orders on their cellphones while the value of their stock values soar share some common traits: talent and hard work. To succeed, you must exhibit both, and to be a high-flyer or, for that matter, to be self-employed, you need discipline, confidence, and the capacity to live with the uncertainty that’s part and parcel of being out on your own.

As a first step toward appraising your strengths and weaknesses, respond to the following 20 statements as candidly as you possibly can, rating yourself either poor, fair, good, or excellent for each one. There’s no such thing as a perfect score. The point of the exercise is to identify your strongest and weakest areas so that you can capitalize and compensate accordingly.

• Setting goals and pushing yourself to achieve them on time
• Making decisions and completing tasks
• Organizing a complex schedule and getting things done efficiently
• Staying focused on the specific task at hand
• Juggling several tasks at one time
• Judging a person’s character
• Getting along with other people and bringing out the best in them
• Listening to several sides of an issue and then making a decision
• Leading a team, even when there is disagreement among the members
• Understanding what motivates other people
• Resolving disputes among people
• Saying what you mean and meaning what you say
• Keeping your cool even when everyone else is losing his or hers
• Telling someone no
• Tending to the details of a project
• Looking at the big picture
• Acting decisively under pressure
• Adapting to changing circumstances
• Taking risks
• Taking responsibility, even when things go wrong

As you review your responses, watch for the following:

• Areas that receive “poor” ratings represent your weakest areas. Be alert for the need to compensate for these personal shortcomings.
• Areas that receive “excellent” ratings represent your greatest strengths and the personal resources you can call upon when you start your business venture.

Not all personal strengths and weaknesses will contribute equally as you turn your idea into a business success. For example, if you’re planning to be a sole proprietor who works mostly alone, the ability to manage a staff doesn’t matter much, but self-motivation is absolutely essential. Or, if your success will depend on face-to-face presentations and individualized service, interpersonal skills will be indispensable.

As you respond to the preceding statements, place a star next to the six traits that you think are most important for turning your idea into a business success. For the moment, ignore how you rate yourself in each of those areas. Focus clearly on what it will take to propel your idea into a reality. Next, see how your personal strengths and weaknesses apply to the needs of your proposed business idea. Take the top six traits and align them with your personal abilities.

Just because you’re personally weak in an important area doesn’t mean you don’t have what it takes to turn your idea into a business. But it does unveil areas in which you’ll either want to develop certain traits or enlist others to add necessary strengths. For example, if you aren’t good with details, but details are important to the success of your business idea, this exercise alerts you to the fact that you may need to hire a personal assistant or cajole a colleague into tying up all the loose ends.