Posts Tagged ‘Jeff Maglin’

Being a business planning professional, I continually am reading articles and blogs on the subject.

These articles and blogs often have polarizing titles that range from business plans are essential to business plans are a waste of time. My take away from reading many of these articles is that the authors mainly agree that business planning should be an integral part of any startup or ongoing concern. Where they disagree is what should be the tangible output of this business planning exercise. The answer of this question depends upon what you are trying to accomplish.

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This is the last in a series of three on how to build and use economic models to determine the viability of your business idea. In the previous two entries, I discussed how market sizing and segmentation and competitive market research can help you, the entrepreneur, validate initial revenue and cost assumptions and build a more robust model that can be used to feed into the financial projections of your business plan. In this post we’ll explore how “reference businesses” can contribute to the economic modeling process.

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In my last blog entry, I posed one of the first questions an entrepreneur should ask themselves before moving forward with their endeavor, “Is my good idea a good business?”

I proposed that building an economic model can be a helpful tool in answering that question. Start simple using your existing knowledge of revenues and costs. Next, validate your initial assumptions through market research. I discussed how market sizing and segmentation can help forecast demand, which is used to calculate both revenue and variable costs. Below, I will discuss how researching your competition can contribute in building and/or supporting the economic model.

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Every business starts with an idea but not every idea is a viable business.

Whether you write a formal business plan or not, you, the entrepreneur, should look to answer the good idea vs. good business question as soon as possible. To begin, model the economics of your proposed business. Initially, this can be a back of the envelope calculation using revenue and cost assumptions to get an idea of potential returns. If the results of this exercise show promise, validate your initial assumptions through market research. Much of this research will focus on market sizing and segmentation, competition and reference businesses (i.e. businesses inside or outside the industry that employ a similar business model).

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As a second follow-up to my original piece two weeks back on “Funding for the Rest of Us Entrepreneurs”, I would like to discuss a second area of alternative funding, that being the Community Development Financial Institution (CDFI). CDFIs provide financial products and services to people and communities underserved by traditional financial institutions. They normally work in low wealth areas and can take many forms (ex. banks, credit unions, micro-lenders, etc.).

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I received a comment to last week’s blog, “Funding for the Rest of Us Entrepreneurs“, asking for specific alternative lending sources that start-ups could access. I had mentioned peer-to-peer financing as a potential funding growth area. Peer-to-peer financing or crowd financing are financial transactions between individuals without the intermediation or participation of a traditional financial institution. Peer-to-peer financing can take the form of debt, equity or grants.

Peer-to-peer lending sites registered with the SEC, such as Prosper and Lending Club, have become viable funding sources for debt capital, with $196 million and $113 million funded loans to date. This past week’s announcement that Diaspora.com, a proposed Facebook alternative, had raised more than $100K in pledges in less than 12 days on Kickstarter.com increased awareness and greater hope for peer-to-peer pledged capital.

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One of the first items that an entrepreneur considers when starting their business is funding. Commercial banks, venture capital firms and angel investors are the most recognized sources of debt and equity financing. They also are the least likely to fund start-ups.

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