How Do You Analyse Business Ideas?
When i was the CEO of the REA Group, i was frequently approached with new business ideas. In fact, since leaving the REA Group, i have been inundated with new business ideas. Each day i receive an email from someone with the next best thing since sliced bread. Often i receive just an email or even they find me on linked in or face book. More often then not, they are looking for finance and sometime just free advice.
Now i don’t mind helping these guys out. I think it is fun to look at new business ideas and to think through what they could become. However, when looking at businesses to invest in, well i need a lot more than i often receive.
When I am looking at new business ideas, i tend to look at two things – the first is the underlying business concept and the second are the financials – both existing and projected. I tend not to look too seriously at anything else.
When looking at the underlying business idea, the first thing i do is see how fast do i get the business idea. If the person pitching the idea cant articulate it fast or it is just too complicated to understand easily, then it probably is not a great idea. I also look for reference points to the existing world. Is the idea improving on something that already exists and will the people who currently pay for a product or service transfer that spend to the new idea. More often then not i am bamboozled by an idea or the pitch … that makes my decision easy.
Secondly i look at the financials. First i look at the current performance. Does the business have any revenues and what are the costs? How are those revenues growing and so on. If there are no revenues or the costs look high, i then tend to not look at the forecast. If i do look at the forecast and i see some “amazing” growth, i then tend to have doubts on the business – there are very few businesses that deliver a true hockey stick in growth.
Finally, i like to invest in people. How passionate are they and how much are they putting in themselves – either sweat equity or through cash. Often i come across people that are just not that passionate.
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