Show Notes from Episode 2 of the Real Deal…What Matters Live
Smart Ideation: The 5 Step Process for Creating a Winning Business Idea
Hi, everyone. Welcome to Episode 2 of The Real Deal…What Matters Live. Today we’re going to talk about smart ideation. A creative business idea is the foundation for any business success. Knowing how to assess an idea in a very quick way, to screen things out to see if it makes sense as a business proposition, is critically important.
In my book, Plan, Commit, Win: 90 Days to Creating A Fundable Startup, the foundation of the hierarchy of creating a successful business and raising outside capital is ideation. It’s about having a good business idea. The process of how to do that is important.
One of the things that I do as an angel investor is to keep these questions in mind as I’m meeting with entrepreneurs about their businesses. A lot of the things that I look for in an executive summary are these exact questions. I want to screen things out to see if it makes sense to me. It allows me to formulate additional questions for the entrepreneur when I meet with them.
Recap of Episode 1: Experiencing a Failed IPO
If you didn’t get an opportunity to watch our show last week, on Episode 1, we talked about taking a company public during one of the most horrific times, from a financial perspective. It was during the sub-prime mortgage-backed securities market meltdown. That’s when we took Entropic public. It was an extremely challenging time, to say the least. Some of my friends say that the IPO window was closing, and I still have shards of glass in my skin from taking the company public. The window was definitely already closed. We ran through a closed window. Tune into that episode at QuestFusion.com to watch the video and read the show notes.
The Foundation of Business
At the foundation of any business is an idea. What makes one idea good and another idea a business failure? Your idea needs to be smart, from a business perspective. Good business ideas are the basis for products and services that make a lot of money. That’s the key. People are creative beings. Even if you don’t think you’re creative, you’re a creative being. That’s all of us. We have access to a creative intelligence that’s beyond our comprehension.
The most important thing in business is that your business model makes money. As an entrepreneur, most of us want to do something that changes the world in a positive way, and that’s awesome. We want to do something that we’re passionate about. Without that, it would be difficult, if not impossible, to stay with your idea during the inevitable times of adversity. That said, if your business model doesn’t make money, it’s going to be very difficult to attract investors. It becomes more of a hobby versus a real business.
Most Initial Ideas Are Bad Business Ideas
The problem with business plans is that most ideas are initially bad business ideas. They either need refinement or need to be scrapped completely. That’s different than someone saying, “That’s a stupid idea,” or “That idea doesn’t make sense.” As an entrepreneur, you’ll always get naysayers and skeptics. Most people are afraid to try new things. One of my motivations is to prove those naysayers wrong. That’s important to me. But if that’s your only reason for being in business and you’re fooling yourself about the potential to make a lot of money, then you might want to try something else.
The solution to making sure that it’s good is to create a strategy for it with an exceptional business model. Exceptional business models make money. That’s what investors are interested in. They might like you personally. They may think you have a cool idea or technology. If someone is going to put money into your company, especially a more sophisticated investor, they’re doing it because they want a return on investment. That’s the key.
We’re going to go through the following three points:
- Identifying good sources of business ideas
- 5-point test for intelligent ideation
- Idea testing and refinement with real customers
That last point is something that is ongoing. You may have read The Lean Startup by Eric Reis. He goes into this a lot. You want to develop a prototype of minimum viable product that you get into customer’s hands. The feedback that you get when a customer is actually using a product is different than when you describe things in a conceptual way.
Sources of Business Ideas
There are a few key sources of business ideas. This information came from different things that I found on the internet as well as my own experience.
The first is brainstorming. You get a group of people together that have some experience and expertise around what’s going on. They come without judgement. You throw ideas on a whiteboard or notepad and be creative. Then you have a session after that to screen things out, see what makes sense and what doesn’t make sense.
The second area is the media. Media includes radio, television, newspapers, magazines, periodicals, trade journals and the internet. It can be fun. To use the internet and Google search randomly on the internet as a source of ideas is a way to do creative brainstorming by yourself. You can come up with a range of opinions and solutions. You can also use social media groups as a source of ideas. It can be very helpful for fleshing things out.
The third area is your work experience. In talking with dozens of entrepreneurs and company founders about where they got their business ideas, I think this is the most commonly sourced way. They’re trying to solve a frustrating problem that they have with a customer or user. This is where being curious, inquisitive, having an open mind and not accepting the status quo are very important.
The next area is attending tradeshows and exhibitions. If you’re with a business and going to tradeshows, you’re busy doing booth duty. Try to take a half-day to walk around, ask questions, look at what people are doing and how your potential customers are reacting to the solutions that are available in the market. Be curious. Find out what they like and don’t like. That can be a great source of ideas.
The next area is customer complaints. As Bill Gates said, “Your unhappiest customers are your greatest source of learning.” If a customer is complaining about something, there’s a good chance that other customers also have that same problem. If it’s a big enough and important enough problem for all of the customers, then there could be a business opportunity there.
The next area is creatively thinking on your own. Unleashing the creative juices of your mind can be one of the best places for solutions to key problems. I go through this process of clearing my mind. Some people call it meditation. Some people call it having some quiet time. I like to do this in the morning. I clear my mind and come up with ideas for solving some of my biggest problems. Then you screen those ideas based on viability.
When talking with a lot of entrepreneurs, I’ve discovered that they have hobbies. These are things that they do in their spare time that they really enjoy. This becomes a source of business ideas as well. There are people who have done things in all sorts of crazy areas. There are hobbies ranging from shopping, reading, gaming, napping, swimming, film, yoga, photography, snorkeling, flying, diving, cycling, painting, music and picnicking. There are a variety of different businesses that have been developed by people that make quite a bit of money based on things that started as a hobby, and then it ended up being their full-time job.
Another more formal way to collect feedback on an idea to start a company or create a new product is to have customer surveys. Even a simple set of questions for your target customers can be a real eye opener. You need to keep it simple and target real potential customers so that there is something in it for them. There should be value to them in providing this feedback to you. I get surveys all the time through email that I don’t answer because I don’t see what’s in it for me. Sometimes I’ll do it. If I buy a new car or house and they’ve done a great job, then I might answer those surveys. That’s a customer satisfaction survey. What we’re talking about here is understanding the big problems that your potential customers are trying to solve. Then come up with creative ideas around how to solve those things.
Understanding Domain Expertise and Technical Product Knowledge
Another key part of this is that the best business ideas are typically derived by a combination of your domain expertise and your technical product knowledge.
Domain experience is an expertise in a particular industry. In my career, I worked in the aerospace defense industry. I worked in the specialty chemical industry. I worked in the semiconductor chip business. I’ve been in the software business. Some of my customers have been in the paid TV industry, such as cable and satellite companies. Understanding the particular set of problems that are unique within an industry is what’s called domain expertise.
Technical product knowledge are things that deal with web design, online marketing, semiconductor mixed signal design, analog design or software development. Those are areas where you have some technical expertise. You know how to solve a problem better and more efficiently than someone else is solving that problem.
It’s really important to have a discipline to systematize the creative process. Some creative types think, “I can’t be creative if I have to be systematic. I have to be free thinking and free forming.” If you look at the most creative geniuses in the world, whether it’s in music, sports, art or technology, they typically have a discipline about how they do these things. They dedicate time to thinking about these things. At Sun Microsystems, they had four company founders. All of them are billionaires, by the way. One of them was an early investor in Google, so he’s the biggest billionaire. I had the opportunity to meet Vinod Khosla and Scott McNealy. They were two of the co-founders of Sun Microsystems. The third founder was a guy named Bill Joy. In meeting Vinod and Scott, they both said that Bill Joy had a business idea every day that you could start a business on. He is truly a creative genius. He’s a scientist. He’s an engineer. You can be very creative and come up with great ideas if you allow yourself to be free forming and free thinking.
I keep post-it notes all over the house and in the car. I try not to write in the car. I have voice recognition. I can make a voice notation. I keep something by my bedside. You never know when you’ll wake up in the middle of the night and write something down that could be important.
In his famous audio podcast called Lead the Field, Earl Nightingale talks about being creative. He says to get a yellow pad early in the morning and write your biggest problem at the top. Then randomly write down as many solutions as you possibly can. Most of those ideas will be bad, but you might come up with some really good ones.
Another resources that’s been very helpful for me is Steven Covey’s The 7 Habits of Highly Effective People. This gets to the systematic part of it. He asks the question, “How do you spend your time?” There are four quadrants. There is an important and unimportant axis. There is an urgent and not urgent axis. People need to spend more time in the quadrant where it’s important but not urgent. Those are strategic activities. Creatively thinking of ideas is a strategic activity.
Characteristics of Successful Ideation
The first thing is that these people are very observant and curious within their environments. The founding CEO of Entropic, the last public company that I ran, was Itzhak Gurantz. He was one of these types of people. He was a Bill Joy type of guy. He came up with ideas all the time. But he was a tinkerer. He was very curious. If there was a new gadget that came out, he would buy it to try it, test it and see if he liked it. He is a very curious person.
Search for existing problems. Ask questions about where people are having problems. Can you come up with creative solutions for that? Challenge your assumptions. Be self-aware. A lot of people get stuck in this status quo mode. Running big engineering teams and a variety of companies, I would get into these situations with my teams. They would say, “This is impossible. You’re asking for the impossible.” I would say, “Is it really impossible or is it just really difficult?” They would say, “Well, it’s really difficult.” I would say, “That’s a good thing. By the time we get that solved, it’s going to be almost impossible for anyone else to solve it.” Dealing with difficult problems, challenging your assumptions and finding creative ways to solve problems is very important.
There are rules for brainstorming. A lot of people get into brainstorming sessions, and they’re being critical too early. You have to reserve your judgment and allow for free thinking before you get into the critical refinement stage of a brainstorming session.
I like to use what’s called “the five whys.” This is like being a four-year-old kid. Your son or daughter asks you a question. You answer it, and they say, “Why?” You answer that, and they say, “Why?” They’re trying to get to the root of things. Sometimes, you can’t get to five whys with your kids. After three, you say, “That’s just the way it is.” The more you can continue to be curious and understand the real problems, the more helpful it is.
There is a great example of this when Amanda and I went to Social Media Marketing World this year. We were in a session. She asked one of the keynote speakers a question about a problem with her business. He kept digging in and digging in. By the end of that conversation, Amanda had new awareness around the problem that she was dealing with. The surface problem was very different than the deeper root cause problem. That can be extremely effective.
5-Step Process for Intelligent Ideation
Here are the components of the 5-step process for intelligent ideation:
- The customer-problem solution test
- The sustainable competitive advantage test
- The intersection test
- The market size and growth test
- The idea refinement test
Anytime I meet with an entrepreneur about making an investment, I will ask specific questions related to the first four to see if this is something that makes sense as an investment for me. Many other VCs and angel investors do the same thing.
The Customer-Problem Solution Test
The customer-problem solution test is to see if there are real customers interested in the solution. This gets to the key point of dealing with customers that have a lot of problems. Maybe they have 10 or 15 issues that they’re trying to work through, and they’re overwhelmed. The best solutions are the solutions that solve their biggest problems; the ones that are causing them to lose sleep at night, that have tremendous headaches associated with them. Sometimes you can’t tell that’s the case until you go through refinement. You can ask questions and get a good understanding of this by seeing how people react to those questions.
There are three basic questions that you need to ask yourself, not questions you’d ask the customer. These are the three important questions:
- Is the problem big and important enough for the customer that they’re actually going to do something?
- Is the customer desperate to solve this problem?
- Is my idea vastly superior to the alternatives?
People don’t want to take risks. They’re willing to stick with the status quo, unless there are huge benefits for making the change. If the answer to these questions is “yes” then you might be on to something really good.
The Competitive Advantage Test
The next thing is looking at the competitive landscape. What are the alternatives out there? Do you have something that can maintain a competitive advantage over time versus the other solutions? Almost any idea can be copied over time, even if it’s reverse engineered and patented. Product differentiators diminish over time.
It’s important to build the layers of competitive advantage. Have a product roadmap. Add new features. Build strong relationships with customers. Build in switching costs.
Great ideas attract competition. If you have something that’s very niche and focused on a very small market that’s not interesting for attracting competition, and you’re building a lifestyle business around that, that’s one way to be modestly successful. Some small business owners with niche businesses can make a very good living doing that. If you’re trying to build a growth company where you attract outside capital to get into the big leagues of going public or having a huge acquisition strategy, you’re going to be in a business that will eventually attract other people. You need to continue to build layers of competitive advantage.
The Intersection Test
The next area is what I call the intersection test. Oprah has a version of this with four or five things. If you find something that intersects with your passion, your domain expertise or technical knowledge, a big customer problem, and you can form a team of passionate people around that who can execute on that idea, you potentially have a real winner.
The Market Size & Growth Test
The next area is about market size and market growth. When I talk to entrepreneurs that are trying to build growth companies, they always say, “I’m addressing this multi-billion-dollar market.” That is great. You need to address a very big market to attract venture capital investment. But the key question is, where is your beachhead? Where do you start? How do you build from there?
If you look at nearly every successful company, they started with a beachhead. They didn’t go after the entire market for everything. Everyone and everything is not a market. It’s a way to spend a lot of money and not make very much money. Look at Amazon for example. They sold books online before they did anything else. They really mastered books before they got into electronics and all the other things that they do now. Look at Facebook. They started with just Harvard University. Then they moved to other universities. If you didn’t have a “.edu” email, you couldn’t get on Facebook. Then they expanded from there.
Understanding your beachhead and also understanding and being able to describe the bigger picture vision and how that builds into a multi-billion-dollar market is an important thing. Venture capitalists typically have MBAs. They’ve been educated at the top universities. They’ve read this stuff from McKinsey & Company with Grow Fast or Die Slow. If you’re not growing really fast even after you reach scale, which is a minimum of $100 million in revenue, then you’re not going to be successful in terms of return on investment. To grow to those large numbers, you have to address a big market opportunity.
The Idea Refinement Test
Now we get into the idea refinement testing stage. This is about refining your idea. A good way to do this before you have a minimum viable product is to have a technical business advisory board. These are industry insiders. They’re dealing with the problems. Even though they may not currently be with your target customers, they’ve come out of an industry. They can provide essential non-biased feedback. If you compensate and motivate them correctly, they can play devil’s advocate with you in terms of potential customers. Why is this thing good or not good?
My Free Gift to You
I also want to share something really exciting that we’ve been working on for several months now. It is the launch of PLAN COMMIT WIN Mastery. This is our new online course, which will be launching within the next week or two. It’s based on my book, Plan, Commit, Win: 90 Days to Creating A Fundable Startup. I’ve turned that into an online course. Many people have read the book. It’s gotten a lot of critical acclaim. It has won some independent book awards and has sold very well.
People have said, “I want more. I want a workbook or guide book.” I thought, “Why do a workbook when we can do a course?” You have the opportunity to interact with me on a Slack group. You have the opportunity to get workbook materials but have a guide and a set of peers to help you work through that. If you download the Guide to Smart Ideation, you’ll automatically be on my list to hear more about PLAN COMMIT WIN Mastery.
If you’re an entrepreneur trying to build a successful growth company that needs outside capital in order to grow, PLAN COMMIT WIN Mastery is for you.
This is Patrick Henry, the CEO of QuestFusion, with The Real Deal…What Matters Live.