How to find a good business idea

When I talk to people about generating a business idea, most of them tell me that they find it hard to come up with a good business idea.

Business idea

I want to show you two approaches that improve your chances to come up with a business idea worth executing. The bottom-up approach finds a good business idea by looking at individual business models while the top-down approach first finds interesting industries to enter and then identifies promising business models in that specific industry.

THE BOTTOM-UP APPROACH

This is the most often used method for generating a business idea and works by looking at individual ideas that can be found via the following channels.

1. STARTUP RELATED WEBSITES AND BLOGS – there are tons of websites out there that cover startup stories, innovative business models or funding news. Here is a short list that might be helpful for you.

  • Techcrunch – international startup news and interviews
  • Venturebeat – international news on startups and venture capital
  • Gruenderszene – German startup monitor
  • Deutsche Startups – German startups
  • Mashable – international startup news
  • Tech in Asia – focus on Asian tech startups
  • The Next Web – international startup news
  • Arctic Startup – Startup news from Finland, Sweden and Norway
  • ventureburn – Startups in emerging markets
  • avc - thoughts on startups and venture capital
  • If you have further suggestions for websites or blogs that identify new and upcoming startups, then please share them in the facebook comment box at the bottom of this post

2. TALK TO INDUSTRY INSIDERS – by talking to people about what business models and companies are disrupting their industry or at least which of them have a very non-standard go-to-market approach you can come up with a business idea.

THE TOP-DOWN APPROACH

Most people don’t know about this method, except when they are working in venture capital or private equity. :-) Basically, you look at BROAD INDUSTRY SEGMENTS and define distinct industry segments and their sub-segments. See the following examples:

  • Classifieds (e.g. cars, real estate, jobs)
  • Dating (e.g. young people, people older than 45, academics)
  • SaaS (e.g. customer relationship management, HR, accounting, online marketing)
  • Advertising (e.g. mobile advertising, banner advertising, in-game advertising
  • Restaurants (e.g. Mexican food, Italien food, Chinese food)

1 INDUSTRY SEGMENT ECONOMICS – the next step is looking at each sub-segments economics.

  • Market size (e.g. €1 billion); this means how much money is spent by businesses and consumers in this specific sub-segment this year
  • Market growth (e.g. 5% per year); by how much are the purchases expected to increase over the next years
  • Profit margins (e.g. gross margin of 60%, total contribution margin of 20%); how much profit are you making with every sale, what is the total contribution margin, or what is the net income margin
  • Fixed asset structure; here you need to check whether operating in this sub-segment required you to heavily invest in fixed assets (machinery, buildings)
  • Required investment to enter the market; you need to ask yourself how much money you will need for entering the sub-segment successfully. The amount is determined by your fixed asset structure and by other required investments (e.g. inventory, excessive advertising, sales force) to create a value proposition

2 INDUSTRY SEGMENT DRIVING FORCES – in addition you need to understand what is basically driving each sub-segment, so you know which factors are important for building successful companies.

  • Legal requirements; some industries like insurance, pharmaceuticals and banking require compliance with many laws which also apply to you as an entrepreneur.
  • Business relationships; some industries like mergers & acquisitions, private equity and consulting require extensive relationships with key industry players which makes it harder for new businesses to enter.
  • R&D and Intellectual property; some industries like pharmaceuticals are heavily driven by intellectual property meaning that they won’t sell their products without intellectual property which requires spending a lot on research and development of new products.

Once you are done with understanding the economics and driving forces of each sub-segment you know which markets look promising. The next step then is to identify unique business models within the choosen sub-segment that have a promising comparative advantage over existing competitors.

NO MATTER WHICH APPROACH YOU CHOOSE; NEXT STEP FOR FINDING A GOOD BUSINESS IDEA

Congratulations! Whether you followed the bottom-up or top-down approach, now you should have a list of promising startup ideas.

In order to further enhance these business models, I strongly recommend using a technique that I call “COMBINATORICS” and works like this.

1. IDENTIFYING MODULES IN THE VALUE CHAIN – you need to deconstruct the current value chain of the promising business idea including the associated costs and value to the customer which might look like this.

  • Sourcing (Costs: $25, Value: $40)
  • Manufacturing (Costs: $70, Value: $75)
  • Storage (Costs: $5, Value: $3)
  • Advertising (Costs: $20, Value: $25)
  • Customer service (Costs: $40, Value: $70)
  • TOTAL COSTS $160 – TOTAL VALUE $213 = PROFIT $53

2. EXCHANGING MODULES – now the creative part of finding a good business idea starts. Let’s have some fun :-) Now, you want to find options for exchanging modules in the current value chain. Let’s assume you found the following modul options via brain storming, exchanging ideas with industry experts and doing research.

  1. Just-in-time delivery with associated costs of $1 and value to the customer of $3 might dominate our storage module.
  2. Online customer service would cost us only $10 while the perceived value to the customer would decrease to $60.

When we exchange the related modules from the current value chain, we will have a unique business model with the corresponding value chain and improved profitability.

  • Sourcing (Costs: $25, Value: $40)
  • Manufacturing (Costs: $70, Value: $75)
  • Just-in-time delivery (Costs: $1, Value: $3)
  • Advertising (Costs: $20, Value: $25)
  • Online customer service (Costs: $10, Value: $60)
  • TOTAL COSTS $126 – TOTAL VALUE $203 = PROFIT $77

Short summary:

The bottom-up and top-down approaches helped you to identify a promising business idea while COMBINATORICS helped you to create an unique business model that has a competitive advantage. Yiehaa!

Your thoughts

How did you come up with your business idea? Please tell us on our facebook fan page or on linkedin.

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ENTREPRENEURIAL INSIGHTS

Heiko Hubertz 3

Heiko Hubertz, founder of BigPoint

(1) How I found my business idea?

I’m a huge football fan, so when I was still at university, I started coding a small football management game to play with my friends. Since we needed to cover server costs, I came up with the idea that every player transfer would cost a small amount of money for a famous football player. This was how the idea of virtual item selling started. To my own surprise, this made the whole game very compelling and soon we had more and more friends joining us. It was obvious to me that this is a concept that could work in a much broader scale, and with many different games and genres. A couple of years later, I’m very happy to say that the success I had with Bigpoint proved me right!

(2) My advice for people interested in finding a good business idea?

On the one hand, I believe you really need to have a strong passion for something. This is crucial to know the in and outs of your future product or service and to cope with the long work hours, the setbacks and challenges you might face on your road to success. On the other hand it is important to be able to reflect on your work and make your decisions with a down-to-earth approach so you don’t invest in something you personally love when there is no market. So, in a nutshell: Be passionate about something! Be willing to take risks! Always reflect yourself. And don’t surrender easily.

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    2 Comments How to find a good business idea

    1. Gaurav Panwar

      I want to start up an IT Company, but the problem is, that i don’t have funds and resources. I am a good software engineer having skills. How can i find an investor/partner?

    Now, we would love to learn about your experience