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Test Run

Your business idea may look good on paper, but how will it fare in the real world? Run a feasibility test and find out.

In 2002, when Farshad Tafazzoli started Delray Beach, Florida-based Zoli Corp., it was made up of little more than a series of hip-shooting analyses and his willingness to take a chance. "I looked at everything with an open mind and made a gut decision," says Tafazzoli, 35, who projects 2007 revenue of $3.1 million for his high-end plumbing products company.

Entrepreneurs typically take a similar approach to evaluating the feasibility of ideas for new businesses, focusing on developing their product or service instead of assessing the business's feasibility.

Bruce Barringer, a professor at the University of Central Florida and co-author of Entrepreneurship: Successfully Launching New Businesses, says a well-done feasibility analysis not only looks at the technical feasibility of creating the product or service, but also tests the potential of the market and industry, the ability of the entrepreneur to create an organization that can run the business, and the financial prospects of the planned venture. While many entrepreneurs address these issues when writing a business plan, that's not the same as examining the venture's feasibility, he says. "They get an idea and immediately proceed to the stage of writing a business plan," says Barringer. "At that point, they're in the mode of looking for facts that support their idea, rather than testing it." While writing a business plan is a good idea, Barringer says it should be preceded by feasibility testing.

Will It Work?
Feasibility testing can be done quickly and can help entrepreneurs decide whether to go ahead with the business idea, refine it or abandon it and look for something else.

There are many ways to test feasibility, and every entrepreneur does it differently. Jake Rockwell, owner of Rockwell Products LLC in Medford, Oregon, has started several successful online businesses using an informal but highly effective approach.

First, Rockwell tries to think of something he knows a lot about. He started his first online venture, SafePetProducts.com, by offering a single item that he'd used himself: soft vinyl nail caps to prevent cats from scratching furniture. He's also successfully launched other ventures in areas he's had experience with as a consumer, including a billiards site.

Next, Rockwell, 33, looks to see if the product has limited competition. Soft Claws, for instance, wasn't available in many retail stores and had only one significant online seller. Other hurdles include evaluating if the product is something people will purchase repeatedly and determining if he can start the business for less than $20,000. He also examines whether it may require too much management attention. For instance, he prefers products that can be drop-shipped to minimize hiring and warehousing requirements.

If it looks good, he'll make arrangements with suppliers, set up a site and begin pay-per-click advertising. The approach has worked: Rockwell Products will do $3 million in sales this year, Rockwell says, and profits have been strong--another part of testing that occurs after initial startup. "If I'm not making money right away," he says, "I'm not going to continue."

Get People Talking
Experts have created more generic approaches to feasibility testing that can be applied to nearly any venture. For instance, getting feedback from other people--especially prospective customers--is considered an almost essential part of new-idea testing. "People will spend years developing a product without ever talking to anybody who might buy it," says VC expert Sean Wise.

There are a number of ways to gather feedback. Barringer recommends you write a one-page concept sheet describing your business, then show it to several people whose opinions are relevant and respectable, including potential customers, investors, partners and employees. Wise says entrepreneurs can put together focus groups quickly by advertising on Craigslist.

It shouldn't take you more than a few weeks to gather sufficient feedback to tell you what you're sitting on. Analyzing feedback can be confusing because, as Wise notes, "If you get 15 [potential] consumers in the room, you'll end up with 20 opinions." But for initial feasibility purposes, feedback can be very easy to understand--especially if it's extremely negative or positive.

Wise recommends you look for ideas that get a lot of praise and avoid those that don't. "Good enough isn't good enough," he warns. "You need extraordinary feedback. You need customers who don't want to wait for the first iteration. They want to buy the product right now."

If you're the only one who likes your idea, it's probably time to reconsider. Sure, many ideas for new businesses have been viewed with skepticism by experts. But Wise says, "You can't put lipstick on a pig. If you're the only person who thinks it's a good idea, you have to be worried."

Cracking the Code
Venture capitalist David Silver, author of Smart Startups, has boiled feasibility down to a formula: V = P x S x E. In Silver's First Law of Entrepreneurship, as he calls it, V stands for valuation or wealth, P is the problem the business is intended to solve for its customers, S is the elegance of the solution it will offer and E is the skill of the entrepreneurial team.

The maximum value for any P, S or E is 3, Silver explains. For instance, a billion-dollar market opportunity yields a 3 for P, a $250 million to $900 million market opportunity yields a 2, and anything less than $250 million is a 1. A solution that is the first in the market and will be hard to duplicate or replicate would get a 3, while one that could be replicated by other solutions earns a 2, and one that is simply first to market gets a 1. An entrepreneurial team with deep experience in launching new companies would rate a 3, one with a single member possessing such experience rates a 2, and one with no prior startup experience gets a 1.

A zero on any item produces a value of zero, Silver says. On the other extreme, the top score is 27, and a venture rating that highly may be well worth pursuing. However, Silver also subjects ideas to eight additional Demonstrable Economic Justification criteria, evaluating elements from the size and receptivity of the market to marketing and advertising requirements to gross profit margins--which he recommends be above 80 percent. Give yourself one extra point for each of the eight you possess.

Finally, Silver uses a mnemonic, "Float Many Clubs," to describe whether your idea will receive money from customers in advance (float), generate revenue from "many" channels, and let customers--or members in online communities--band together in groups or "clubs." Give yourself six more points if you have exceptional float and two more each for having many revenue channels and opportunities for clubs.

Taking all these criteria into account, the top score is 45, reached by multiplying 3 x 3 x 3 to get 27, and adding 8 for having all the DEJ factors, then adding 10 for a perfect score on the last three. An idea scoring a perfect 45 is one Silver will likely back.

It may seem complex, but Silver says entrepreneurs can analyze their ideas quickly using his formula. In any event, it will get you thinking about the right key factors. "How big is the opportunity, how elegant is your solution, and what kind of person are you?" he says. "That's all there is to this business."

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This article was originally published in the December 2007 print edition of Entrepreneur with the headline: Test Run.

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