Analyze New Business Ideas
Opportunity Scorecard for Business Feasibility
How do you assess the quality of an opportunity relative to a new or existing business?
Here is a simple, yet thorough ‘Opportunity Scorecard’ that covers all the bases (including competition), as will be elaborated on below.
The most common mistake for any new company or product is the tendency to attempt near perfection before launching or even beta testing.
‘Product’ can be defined by services, products, or productized services. The basic paradigm is the following:
- if a product is perfect A+ then it will be easy to sell, but only if it is exactly the right product for the moment in a given market
- if a product is good (B – C) then it will take some work to sell, but it can be pivoted towards the needs or demands in a given market
- if a product is not good or bad (D – F) then even if the demand is there, it is likely unsellable for any period outside of the short-term
The most common problem is to obsess over intimate details (logo, small-potato stuff) before getting to market, with the belief that the logo or branding will likely sway the customer more than the ability of the product/service to solve their problem.
You would be better off developing something to the B to C level and then testing it with real customers rather than getting something to the A level and seeing nobody wants it.
Often times, in markets like SaaS or other B2B verticals, we will see founders pre-sell a product vision and get revenue before anything is built in order to ensure the ‘wrong’ product isn’t built.
Often times, when raising capital, the most important slide will be to do with Unit Economics. ‘Margin’ can generally confuse a lot of people because you have ‘gross margin,’ ‘contribution margin,’ and ‘net margin.’
The lexicon will change relative to the market, with something like ‘contribution margin’ being the most popular in eCommerce as one example. Net margin is most synonymous with ‘profitability,’ while “margin” generally refers to gross margin.
To calculate the gross margin, you generally use the following formula:
- [Price of the Product-Service (minus -) Cost of Goods Sold] (divided by /) Price of the Product-Service
- [$100 – $60]/$100 = 40 %
Whether a margin is good or not is relative to the industry. Generally, software products have the highest margins and retail goods like food and groceries have the lowest.
The lower the margin, the more volume you need to sell to become profitable. The higher the margin, the better the multiple for valuing a company (for the purposes of fundraising or selling a company).
Since margins are relative to the industry, there is no black and white, but obviously something like 80%+ will be A+ and <5% will be trending towards F.
Businesses that have higher margins will be much easier to turn profitable and raise money for, in general, but in the case where a company can exploit an underserved niche with high margins, they should expect high competition in return.
If you want to play in a low margin market, then your volume needs to be huge and in all likelihood you will need to be very well capitalized.
After Margins are calculated, we can look at CAC in a few different ways to determine efficiency:
- Payback Period is very common for SaaS and even some Fintech businesses (18 month target range for Revolut for example)
- LTV (Lifetime Value) is common in B2B but we also see it in B2C with companies like Farfetch (3X or better target)
The gist is that if it costs, theoretically, $100 to acquire a customer, and gross profit is $10 per month in a SaaS, then the Payback Period would be 10 months. LTV is a slightly different calculation based on ARPU (Average Revenue Per User) as a ratio of CAC based on how much revenue the average customer is expected to earn over their ‘lifetime’ with the business.
Either way, it is extraordinarily important to understand CAC and its impact on a business model.
An example of why, is the DTC (Direct-to-Consumer)/eCommerce business model that caught fire in 2020 and 2021 and started imploding in 2022/23 due to rising CAC costs on Meta and Google.
Strategies to acquire customers across different channels can be divergent, but it will only affect CAC over the mid-term to a certain extent. An example would be a DTC operator either:
- pivoting to more organic social channels or SEO
- business model innovation by adding a retail ‘omni-channel’ arm
Actions can be leveraged to change a CAC within a certain range, but not so far as to change the mechanics of an entire business model relative to peers in a vertical. That means you can’t take anecdotal data about a ‘growth hack’ that leads to a $5 CAC when everyone else is paying $20; in the highest probability, it won’t scale out.
CAC is directly proportional to the amount of competition in the market. That’s why understanding CACs goes hand-in-hand with understanding competition.
Looking at keywords and competition on Google Ads, for example, helps to begin understanding CAC. Beyond the actual cost of Advertising is the cost of the team to either manage the Ads or convert the prospects.
CAC represents the entire ‘demand generation expense’ to reel in prospects, not just the cost to run Paid Ads.
Where a business model really gets hurt is if there is a high degree of churn and a low degree of loyalty. Some business models can still thrive with high(ish) CACs if the LTVs are high, which is typically the case with B2B businesses.
The major point is that while CAC is a good measure of competition in a market, competition is not always bad. A+ CAC dynamics are those that can be measured and scaled on at least one major marketing channel in order to generate good profit margins, whereas F CAC dynamics are those that cause low/negative net margins and no possibility for payback period (low LTV).
While a lot of first-time operators obsess over product, a lot of experienced operators obsess over distribution.
While proportional to CAC in some ways, ‘Distribution’ is often more indicative of partnerships or other relationship-based strategies to get the product or service in front of customers.
It’s why a lot of the best ways that money is made without access to huge capital is through the ‘unsexy’ and boring B2B methods.
Distribution channels typically take time to create. Relationships must be forged and there is an element of trial and error. Each and every ‘distribution channel’ is typically a business itself, so these are often times the “middlemen.”
A lot of the platform internet models have sought to ‘cut out the middleman’ and yet in almost any major market, the middlemen remain. We can think of estate agents as one example where platforms have tried to ‘cut the middleman’ and failed. Agents are still the distribution hub for home sales.
Another example is neobanks trying to take on the big banks and offer lower fees on an array of financial services products. Most have failed, meanwhile a whole crop of more traditional financial services firms have thrived simply by using incumbents as distribution channels for their products.
Recruitment … the list goes on.
A+ distribution solves a lot of the problems to do with CAC and competition, creating a moat that is hard to erode and a steady flow of profitable business. F distribution is where a company builds no scale via distributors or partners and is stuck on the merry-go-round of constant customer acquisition.
Some bootstrap a business and others raise millions. There are also a lot somewhere in the middle.
Ultimately, assessing ‘capital required’ involves some kind of financial model and a bit of research. It can be the biggest hangup factor for any entrepreneur or operator.
That’s because while capital is available in near infinite supply, hypothetically, the competition for that capital is fierce. To assume that one can simply ‘raise capital’ is naîve.
There are different types of capital (debt vs. equity) and different strings attached to each category (SAFE vs. Venture). Different investors have different expectations for returns and different time horizons.
Ultimately, no investor likes losing money.
VCs will place a portfolio of bets across multiple categories and plan to generate multi-X return on the portfolio via a few major winners. They don’t “lose” on the portfolio, typically.
Friends, family, and to a certain extent angels are different. They usually back what they feel good about but these types of investments always come with the potential for frayed long-term relationships. Angels should be more sophisticated, but that’s not always the case.
Debt is no different. There are different types of lenders, different interest rates, and different loan covenants. Funding any sort of early-stage business with debt (especially secured debt) is typically like ‘betting the farm.’
A lot of times people ‘follow their dreams’ and just go for it, only to end up losing big or being forced back to work other jobs to pay the bills. To understand the capital required means to understand:
- how much other similar companies raised?
- where the money flows in the business? (most founders can’t take a salary for months)
- will there need to be follow-up rounds?
- And many more
Bootstrapping is a strategy that is becoming more common, especially in SaaS where operators attempt to get to ramen profitability (MRR of personal monthly expenses) and then scale-up. It is typically reserved more for niche B2B situations, occasionally we see it in more B2C-centric businesses but that can be tough.
The majority of businesses require some type of capital.
A+ for capital required means understanding capital requirements to create a sustainable business model, in detail. F for capital required means no model, just YOLO.
Understanding capital requirements enables one to assess their ability to raise X capital in their geography. The problem with ‘winging it’ is that you can’t go back . That’s fine for low-cost endeavors, but can be catastrophic for high-cost endeavors.
There are always alt strategies such as equity crowdfunding and other community-based ways for those with a loyal following. But in few circumstances does capital come easy.