If you’re going to start businesses for a living, you’re going to fail occasionally. Hopefully, if you follow my vetting process you won’t fail as much. When I have an idea for a business-I notice that there’s a need for something and I think it could be profitable-I need to then vet this idea. I want to confirm to myself that this is a good idea and that there is data to prove it.
Look at the Competition
The first thing I do in this vetting process is look at my competition and look at them thoroughly. First of all, have they left me an opening in the marketplace? I look to see whether they’ve got it covered from top to bottom or if there are weaknesses and therefore the opportunity to establish myself as something different. I want to have an area of difference with my competition. I want to evaluate the competition and make sure there’s something lacking. Then I want to determine where I would be ranked if everything goes well.
Jack Welts, the legendary CEO of GE, said “If I’m not number one or two in the world then I don’t want to get into it.” CEOs who are getting paid twenty million dollars a year have no problem making statements like that. But you know what? The guy who started Little Caesar’s Pizza and is probably number three or four happens to own the Detroit Tigers. The third best pizza company didn’t do so badly. I don’t mind being number three. I want to see where this business will fall in my competition and my market place.
Determine the Cost
I need to find out what’s it going to cost to engage this business. Sometimes I have an initial cost to get into the business and then through the vetting process, I learn that it’s much higher than I thought. There have been times where I found out machines that I needed to do something were significantly more expensive than I anticipated. Maybe I thought getting a lease in a certain location would be easier but the real estate in that market turned out to be much higher. This is where I want to confirm that the costs are in line with what I thought.
I want to do research and I want to have someone do research for me. Maybe I hire a digital marketing firm or whatever it takes. I want to find out if there are searches on the internet concluding that there are a lot of buyers out there. I need to do some initial research to confirm that there are buyers. Sometimes I’ll create an offering within one of my companies and see if I get any calls for it. We’ll do some initial marketing within the company to confirm this research. Again, I need to to make sure that the research is out there to confirm that there are the buyers.
Test Advertising and Marketing
Next, we have to do some test advertising and marketing to see if we can attract customers and confirm that there are people who are searching for this type of business. We need to find a test market and create a test advertising campaign to see if we have a message or a hook that will attract these buyers. We have to make sure that the hook that we’re going to be using is going to actually catch people.
There have been times when I’ve done this and what I thought would work did not work at all. Because of this test marketing, I found that my cost to acquire a customer was significantly higher and there was no way I could go forward with the business. Again, during the test marketing phrase you want to ask yourself, who are my potential customers, how am I going to reach them, and did I reach them for the anticipated cost.
When I was first starting businesses I never thought to do this step and as a consequence I got burnt quite a few times. It’s called “hiring easiness.” Essentially, I run ads online to see if I can attract the key positions within this business that I need. I start businesses and do not put all of my time into any one business, so I need to bring on partners. I need to bring on extremely talented people who have a great understanding of the industry. I need to run adds and confirm the price to acquire the necessary talent.
This is more of an in-depth vetting process. I’m actually running the ads and beginning to interview people on that team to make sure that I can get people on board. I have gone to start companies and found that trying to hire the people I needed was like trying to find a one-eyed unicorn. At that point I knew that the company was never going to work.
Finally, in my vetting process I prepare an exit strategy. I want to know, if for some reason everything doesn’t work out the way I thought it would, can I get out of this business alive? What will it take? What are the costs and what are the collateral damages to getting out of the business?
When you get out of a business, one domino hits another domino which hits another. It is never as simple as you think. If you’ve ever had to close up a business you know what I’m talking about and if you haven’t listen carefully to this: I start a business with this idea that I am going camping. It’s not my dream house. I’m popping up a tent and I want it to be able to withstand a decent rainstorm but this isn’t my home forever. I do that because it keeps my start-up costs down but it also allows me to get out of this business alive. I don’t want me or my investors to lose a house.
If you have ever gone to an investor and said to them, “We have to close it up. It’s just not working,” then you know what I’m talking about. If you’re going to require investors to start this business, and those investors may be your family and friends probably family and friends, you need to decide if you could go to these people and tell them that they lost their money.
I don’t ever take money from somebody who can’t afford to lose it. We need to look at collateral damage, determine if we can get out of everything and make as few personal guarantees as possible. This is where you say I can get out of business in under 60 days and if I get out this is what it’s going to cost. This is who I’m going to have to talk to and who’s going to get hurt. Again, evaluate what it will take to exit the business.
Recap: The Vetting Process
- I want to know my competition and figure out where I’m going to rank. I want to make sure there’s an opening in the marketplace.
- I want to find out what it’s going to cost to engage this business and that it is in line with what I thought.
- I want to make sure that there is research confirming that there are people who are looking for the product or service that I’m offering.
- I want to have a test market and do test marketing and advertising to make sure I can attract these buyers for the cost of acquisition that I thought was out there.
- I want to make sure there is hiring easiness. I want to make sure I can get the people on my team as fast as I need to and I want to make sure I’m paying enough to keep them.
- Finally, I want to review my exit strategy: how long, what will the collateral damage be, and what will the cost be if I have to close this business up.
I encourage you to go through all these steps when you are vetting a business. They will dramatically change your approach and they will talk you out of starting quite a few of them. I know that now I probably go through one out of every five businesses, not just ideas. Even when I think it’s going to be a business this process eliminates four out of five.