Finding Opportunities in the Modern Business World, Pt.3: Evaluating Opportunities and Making Money
This is the third and final installment in my article series on how to find, assess and take advantage of opportunities in the modern business world.
I have based these posts on the excellent presentation by Matt Barrie, CEO of Freelancer.com, titled “Opportunity”. I encourage you to check it online, it is well worth your time.
As a recap, in my first post, I discussed what successful businesses look like and identified what sort of businesses we should be building. In short, scalable and saleable businesses.
A couple of important points also made there are that, we should seek out large markets, which will be able to sustain businesses with revenues in millions or even hundreds of millions, and that we should aim at solving painful problems that our customers can’t afford not to solve.
In the second post, I talked about basing our businesses on “secrets” and inconvenient truths that other people seem to miss or not talk about. This provides a competitive advantage over potential competitors or even established players.
Additionally, we should always make sure that we are aligned with the long-term mega-trends, either those are technological or demographic ones.
In this post, I wrap everything up and provide some insights on how to spot opportunities and market inefficiencies, and how to take advantage of those in order to build sustainable, powerful and profitable businesses.
Let’s dive right into it!
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Spotting opportunity in the marketplace
Although an idea on itself does not mean much and execution is what really matters, it is a fact that there are brilliant ideas and terrible ones. Great business ideas come from a variety of sources and appear in different ways in the marketplace.
One way that opportunities come along is out of personal need. Many times, founders find themselves struggling with a problem that nobody seems to be solving, get frustrated and decide to solve that problem themselves once and for all.
For example, AirBnb founders couldn’t afford to pay rent in San Francisco and famously decided to buy a few airbeds and put up a site called “Air Bed and Breakfast.” The idea was to offer visitors a place to sleep and breakfast in the morning.
While they had to pivot from the original idea and become a “broker” among people who wish to rent out their homes to others and people who wish to find cheap accommodation, the initial seed for the business was solving a problem that the founders themselves were facing.
Another way that opportunities arise is from the development of disruptive technologies, the most prominent one being the internet.
For example, Uber could only exist in a world where the mobile phone had become ubiquitous and was essentially a powerful computer bundled with a GPS device.
Cab hailing then become incredibly easy, convenient and efficient, opening up a whole new market of people that despised using the conventional taxis.
Opportunities also occur by cross-pollination among industries. That means that founders utilize elements from one industry and “transplant” them to others, creating efficiencies, synergies and ultimately, value.
For example, online giant Priceline.com was initially based on the idea of “countdown auctions” which came from the concept of stress inventory that existed in the food retail industry. The Priceline founders brought that concept to the online world and were able to create a great business out of it.
Additionally, opportunities might come out a crisis, out of personal experience, because of changes in regulation, by accident (especially scientific ones), and other ways.
The best problems to solve
Now, opportunity alone is not enough. It needs to be associated with a specific kind of problem that needs solving. Thus, let’s examine what are the best problems to solve.
A valuable problem to solve has certain characteristics. Most importantly, it is a painful one. As we discussed in the first part of the series, we should build products that are “painkillers”, not “vitamins”. Even better if they get the customers “hooked”, in the good sense (“narcotics”).
Another aspect to consider is timing. Products should not be neither too early nor too late. For example, as I mentioned above, Uber launched during the “sweet spot” of technological history where the mobile ecosystem could be used as a platform for the company.
The product should also provide clear value to the user/customer. That could be saving him X hours per month or increasing his revenue Y% per year. Too many startups have failed because it is unclear how they provide value to the end user.
It is also important to build a product that has sufficient differentiation from the competition. Failure to do that makes your product commoditized, prohibiting you from achieving healthy profit margins in the business.
Staying on the topic of margins, the business economics should be viable and sustainable. For example, the Cost of Acquiring a Customer (CAC) should be lower than the customer Lifetime Value (LTV), and actually far lower (LTV/CAC>3).
These are just a few of the characteristics that describe the problems best suited for your time.
Let’s now shift our focus on what this is all about.
How do you make money?
This is the ultimate question that every entrepreneur needs to ask himself.
Even if your purpose is to have a positive contribution helping others, making money is still absolutely critical.
Why? Well, because it allows your business or organization to be sustainable on its own without having to resort to begging for money (via charities, fundraising etc.).
In short, the money making part of the equation can’t be skipped.
Getting more specific about it, every business venture you contemplate upon should have a clear path to making money.
You should ask yourself, how do I make money with this business?
This is where the concept of the business model comes in. A business model is essentially how the company captures value from the opportunity that is addressing.
Similarly, a revenue model is how the company generates revenue from its operations. A business model is more holistic and incorporates the concept of revenue model in it.
The way you build a revenue (and business) model and make money is by providing a succinct and strong value proposition to get customers in the marketplace to choose you and buy your products or services.
According to Matt, there are three ingredients in a powerful value proposition:
- A quantified value (Value = Benefits – Cost)
- Relevant to the customer and target audience
- Uniquely differentiated (to avoid commoditization)
Performing a Venture Sanity Check
Assuming that you have spotted an interesting opportunity that addresses a serious problem in the marketplace and that you can devise a solution (product) that provides a unique value proposition, you then need to get down to the nitty-gritty details of performing a sanity check on the concept.
What you are trying to achieve is to ensure that there is a large market opportunity and you can build a product for that in a sustainable and profitable way. This is something that many newbie entrepreneurs fail to do, resulting into comical outcomes.
Here are some of the questions that Matt suggests you should ask yourself:
How do you make $1 Million in revenue?
This is the first stepping stone towards a great business. While $1 Million might look very high to some of you, it really isn’t, provided that you have selected a scalable concept. There are several ventures and business models that can take you to six and seven figures in revenue per year.
How many customers do you need and what is your Average Selling Point (ASP)?
This expands on the previous question and breaks down the revenue figure to number of customers and average price. This is just basic math that you need to calculate before you even embark on launching your business.
What are your fixed and variable costs?
Some of the calculations and projections that need to be done are those of your fixed (rent, equipment, etc.) and variable (cost of goods, employees, freelancers, marketing etc.) costs.
How do you make $1 Million in profit?
After generating revenue, turning a profit is the next major milestone. To get from revenues to profits, you need to deduct all kinds of expenses (operations, Cost of Goods, etc.).
This is where profit margins play a role. You need to build a business that can command healthy levels of margins so that you are in position to reinvest the surplus and grow it quickly.
How are you going to acquire customers and at what cost?
This is another typical rookie mistake. I have had several people describe their idea to me while failing to elaborate on their customer acquisition strategy.
Um, alright. You are going to build this solution, but how on earth are customers going to find you in this crowded marketplace?
These are just a few of the basic questions that you need to have a solid answer for before you even think of spending your precious time launching a business.
Building a lasting company
Starting a company is obviously not enough. What you should aim for is building strong, resilient and enduring companies.
This is only possible if you are able to develop core competencies that no other companies can replicate and provide a competitive advantage.
Those might include building an extraordinary product, developing strong intellectual property, recruiting a world-class team of people, growing a burgeoning community of advocates and so on.
In short, it does not pay to try capitalizing on short-term fads that are going to die out after a few years (or even months). Build solid, lasting companies that are going to live for years or decades, or even might outlive you.
Next actionable steps
All this content would be in vain if there were no actionable steps to take after consuming it.
Actually, this is a good lesson to remember. If what you are reading provides only theoretical and/or emotional value with zero actionable information, then you are probably losing time on it.
So, here are some of the next steps you could take, courtesy of Matt Barie:
1) Find a painful problem in the market
Problems are all around us in today’s society. Open your eyes and ears and learn to spot problems and inefficiencies in the marketplace.
2) Describe how you are going to solve this problem
Your solution should be succinct, unique, cost effective and provide a clear value proposition to prospective customers.
3) Refine your business model and describe how you are going to make money
Remember the Holy Grail of running a business: making money. This is going to come as a result of building the proper business model around your solution.
4) Maintain a sustainable competitive advantage
Devise ways that you can build a competitive advantage for your business. Consider this a business moat that prevents competitors from attacking your business and profits.
5) Do some basic financial modelling
Make sure to prepare a basic, bare-bones financial model and perform a sanity check around revenues, costs and profits.
6) Build a team and launch!
Finally, recruit the people that you believe that the business needs (it might only be you in the beginning) and go out and actually build something.
In this post, I discussed many fundamental aspects of building a great business: how to spot opportunities in the marketplace, how to ensure that you are actually building important problems, how to actually make money by capturing part of the value of the opportunity, how to perform a sanity check of your venture, how to build a lasting company and what you next steps should be.
Hopefully, combining the takeaways of this post with the two previous one (here and here), you will be in a position to spot, evaluate and pounce on opportunities.
Now, go out and build a great company!
Loved it once more 🙂