AD. Even if you think you've had a great business idea, it's often worth going through the discipline of working out how much it's actually worth a priori. Some understanding of the size of the opportunity in front of you can be both motivating and help you adjust your expectations. What does this process look like, and how should you go about it effectively to give yourself the best chance of a realistic projection?
Map Out The Mechanics
Start by calculating the structural value of the business via the mechanics. One of the best ways to do this is to use the Lean Canvas model. Ideally, you want to populate your mechanics template with:
- a problem
- a solution
- key metrics that you measure
- your unique value proposition
- your unfair advantage
For example, let's say that animators are currently wasting hundreds of hours key-framing standard movements. A solution might be a piece of software that animates fully rigged puppets automatically, or a plug-in for an existing piece of software. The unfair advantage might be that you have a proprietary layer structure that other vendors can't access or can't reproduce. In this case, you have a good starting position for a business that is likely to generate higher-than-average profitability for the sector.
Use A Business Value Simulator
The second step is to use a business value simulator. This is a time series of the company's profit margins that have been adjusted for your personal time and the financial overhead.
If you have an existing enterprise or are looking at a new opportunity, then FP&A integrated financial planning software can work well for you. If not, you can use one of the many business value simulators available online, allowing you to adjust factors like:
- the average price per client acquisition
- monthly costs
- month-over-month percentage growth
Test For Product-Market Fit
Product-market fit is also another helpful checkpoint to add to your a priori business valuation.
- One of the best ways to do this cheaply is to avoid building the whole thing first. Instead, you could offer a manual, stripped-down version of your final product to see where the market acceptance is.
- Sometimes you may have to take a loss on this in terms of your time, but it provides you with valuable information that you can take forward to building a larger and more capital-intensive system.
- If you are constantly having to pull people in, that's also a sign that you might have a good product-market fit. If the product really is suitable for the market, then it will often sell itself, especially after an initial pitch.
- Lastly, look at churn. If customers start using your product and then never stop using it, then it's a good indication that it's offering them real value for their particular niche. Your job is to figure out why it is so valuable for a specific segment of your customer base.
So there you have it: how to figure out what your idea is worth before investing significant capital into your enterprise.
