4 Crucial Questions to Ask
Before You Start a Business
We all have those million-dollar ideas—the brilliant flashes of genius that convince us we might just be the next Sara Blakely or Ariana Huffington. But more often than not, those sparks seem to fizzle out and die. It’s not that we don’t believe in ourselves—or the idea! It’s just that starting a company seems…well, where would you even begin?
Well, according to investor and entrepreneur Amanda Eilian, you begin with four very specific questions.
Eilian is a founding partner of _able, an investment vehicle that funds consumer businesses. (She’s invested in The Wing, Daily Harvest, Juice Beauty, Moon Juice, and goop to name a few.) Eilian’s most recent endeavor, Wingable, is an accelerator for female-run companies that launched with marketing support from The Wing. She and her partner, Lisa Blau, recently heard a round of pitches and saw a glaring issue: a lack of “basic knowledge and best practices that could help them avoid failure,” says Eilian.
Which brings us back to Eilian’s solution for would-be entrepreneurs: the four crucial questions that could mean the difference between a successful, thriving [fill in your own blank] and wishing you’d never quit your day job.
Want to Start a Business? Ask These 4 Questions First
Anyone with solid Wi-Fi and a social media account can start a business. But starting does not always equal succeeding. More than 50 percent of new businesses fail within the first five years. If your company survives, the rewards are well worth the tough journey to success. But before you register that domain name, there are four very important questions to ask yourself.
1. What type of business are you building?
It’s important to define the type of business you’re growing, as that will determine the type of funding—if any—that you need. There are three general types of businesses:
A Lifestyle Business. This is the most common type. The goal of a lifestyle business is to make enough money to live comfortably while doing what you enjoy. Many lifestyle businesses are started based on a hobby or talent (a bakery, say, or a flower shop). While the growth plan is gradual in this type of business, you want to become profitable as soon as possible. So savings, small business loans, and the help of friends and family are all good choices to get you financially functional.
A Growth-Minded Business. This is the typical Silicon Valley–style start-up. The goal of this type of business is to grow quickly, attract funding, and then sell it (or do an IPO) in a few years. Here, growth is the priority over profitability, so venture capitalists, angel investors, and professional investors usually help with funding.
A Side Hustle. This type of business is simply a way to earn extra money without quitting your day job. It can be anything from driving an Uber or a Lyft to selling jewelry on Etsy or blogging. The goal is often to build new skill sets, supplement income, or experiment with new business ideas. Because it’s a part-time endeavor, the financial investment here should be limited, covered by your own savings. Ideally the only major cost of starting a side hustle should be your time.
2. How big is your opportunity?
One of the most important factors when evaluating a business is market size. Do your research. It’s important to know how many of your potential customers exist, which allows you to figure out whether you really have a viable business. If you are starting a taco stand next to the post office, you need to figure out how many people live and work around the post office and then estimate how many of those people eat out every day. That’s your potential market: the maximum number of customers you could ever get. Obviously not 100 percent of those people will buy from your stand. Do 2 percent, 5 percent, or 10 percent of them come every week? And what is their average purchase? Do they buy one taco or two tacos? Do they buy a drink?
Your actual sales are translated by some percentage of your potential market multiplied by an average purchase size. While a taco stand is a relatively straightforward example, I see many businesses targeting niche interests that will be hard to truly scale. We all surround ourselves with like-minded friends and associates, which can skew our perception of what the rest of the world wants. And that brings me to the next question.
3. Can you prove that customers want your product?
You’re sure the world is ready for CBD-infused breakfast cereal, and you’re ready to print the boxes. Hang on a second. Before doing anything, it is absolutely critical to validate that there is a demand for your product or service—and at what price.
Do your research. At the earliest stages, this can be as simple as interviewing people by sending out surveys. (You need to poll beyond your friends and family in order for this to work.)
Even if everyone claims to be enthusiastic about your CBD cereal, the next step is getting them to prove it. Put up a simple website to see whether people will give you their email for a newsletter sign-up or to be notified when you launch.
The ultimate proof is money. Crowdfunding platforms allow you to presell your product to raise the money to actually produce it (iFundWomen, Kickstarter, and Indiegogo are all great options). So before you start your business, you’ll know how many people are actually willing to put down their credit cards, and at what price, for your cereal.
4. Can you make money?
Obviously, this is the single most important question. If you’ve done steps one through three, you have enough information to build a business model. Now it’s time to think of your profit. This concept intimidates a lot of people, but it can be very simple: revenues minus expenses.
Revenues: This is how much you realistically think you can sell each month. If you’ve calculated your market size and tested demand, you have enough information to estimate this. Just remember that your sales should grow over time, as people learn about you and your product.
Expenses: There are two types of expenses—fixed and variable. Fixed expenses are what you have to pay no matter how much you sell, like rent, employees, insurance, legal, product development costs. Variable expenses are what it costs you every time you make a sale. For example, what does it cost you to make one box of cereal? Or to serve one taco? Your total variable costs should come from this calculation multiplied by the number of monthly items you’re planning to sell.
When you subtract your expenses from your revenue, are you making money? Will you ever be able to make money? Many businesses lose money in their early days, when they are building up their customer base and covering their initial start-up costs. If that’s the case, figure out how long it will take you to build it back up and break even—and then add a healthy cushion for unexpected costs and delay. Running out of money is one of the most common reasons for business failure, so figure out up front where you are getting that money from.
Amanda Eilian has worked in finance and investing most of her career, with jobs in investment banking, in private equity, and as a founding partner in a $265 million IPO. Together with Lisa Blau, she is a founding partner of _able, an investment vehicle focused on funding early-stage start-ups in the healthy living and lifestyle space, with a focus on female founders. Some of her investments include Juice Beauty, Daily Harvest, The Wing, Maven, Primary Kids, Moon Juice, and goop. In late 2018, _able launched the Wingable Challenge, an accelerator program that offers female founders capital and access to industry mentoring and feedback. Eilian and Matt Singer are the founders of Videolicious, a video automation platform used to increase sales and engagement by Fortune 500 companies and more than 4 million people around the world.