Do your homework before starting a small business

"If you build it, they will come."

In the movie "Field of Dreams", Kevin Costner hears a voice that utters these words, prompting him to plow down his cornfield and build a baseball field. Ignoring common sense, he builds the baseball field and everything works out in the end. Too bad that is just a fantasy. In the business world, you can't take that many chances and still be successful.

A friend of mine recently came up with an idea for what he thought would be a great topic for an instructional video. He wants to be the talent and subject matter expert in the video, and have somebody else finance, produce, and market it.

When I sat down with him to discuss his business plan, all he could see was $$$$ before his eyes, and an estimate that he would be a multimillionaire if even a small fraction of the general population purchased his video. He had alot of ideas about what to put in his video and how to market it, but was missing some of the key elements of a business strategy.

His first mistake was to begin work on the product before doing some market research to determine whether there is even a market for it. Or if there is, whether the market is already flooded with competing products. My friend had already designed a cover for the video box and put together an agreement with a video producer, but had not invested any of his time to see whether there is interest in the product.

What could he have done? He could have visited some of the local video stores to look for similar type products. He could have talked to video distributors and wholesalers or looked through their catalogs to see what else is available. He could have talked with some of the specialized retailers to see whether they think the product might be of interest to their customers. These are the people he would eventually sell to. If they don't like his idea now, would having a finished product really make that much of a difference?

The second mistake was not having a realistic financial and marketing plan. My friend's financial plan consisted of an unsubstantiated estimate of the number of videos that could be sold based on a percentage of the population compared with some vague cost estimates resulting in enormous profits. The marketing plan was made up of a number of promotional ideas that he assumed would be funded out of the revenue generated. He left out any possibility that any additional working capital was required or how the venture would deal with a situation in which his sales were lower than expected. Financial and marketing plans that are based more on guesswork than homework are almost entirely useless.

I don't know whether my friend's venture will be successful. He seems to have a reasonable idea, enthusiasm to work on it, and some startup capital to get it going. My point is that before engaging in a venture that will turn out to be potentially rewarding but definitely time consuming and costly, you want to do whatever you can to increase your odds of success and minimize risk. It is far better to spend a little up front to find out if there is a market for a product and develop it properly than to produce something that is unmarketable.

Before you buy a house, you have it inspected. Before you buy a car, you test-drive it. It's fair to assume you should do the same kind of homework before starting a new business venture.