This is often a question that is low down on a start-up’s radar, there are apparently too many other things to think about. However, it is crucial to understand. If the business doesn’t have a chance of being viable, at some point, then why are we bothering? A business after all must make money, if it doesn’t it’s not a business, it’s a hobby! So, what do we mean by viable? Well, there are a sufficiently large number of customers that have the problem you solve to generate enough revenue to support the cost of running the business plus some profit. For example, a business is not viable if it needs multiple employees to deliver, but there is only enough revenue to support one!
Start-ups often convince themselves that their business is viable because, in the beginning, the founders don’t pay themselves, but this is not a situation that can persist. At some point they need to get paid, so they are left hoping some magic is going to happen to make this possible. It doesn’t happen. Of course, a start-up might not be able to do this from day one, but we must have a route to viability, or the business will end up in a death spiral and will eventually result in failure. We don’t want to waste our time on a product that’s ultimately doomed.
So, how do we make sure we’re building a viable business?
The most important thing to understand is what revenue can we expect? Revenue is made up of two components: volume (how many can we sell?) and price (what can we charge?). Given we have identified a problem that we solve, we should know how many people or businesses have that problem and how many of our products or services will they buy, per month or year, at a date in the future when the business is up and running. In the beginning this might be reasonably constrained, so the main driver of revenue will, in most cases, will be price. This is where most start-ups go wrong, they don’t charge enough for what they do. Once we understand the revenue we can expect then the next question is what resources do we need to deliver the product or service and what do they cost? If this cost is less than the revenue, and allowing for some profit too, then the business can be viable in the future and we know it’s worth pursuing.
What can we do if it’s not viable? The thing to look at is revenue. We only have two levers here: sell more or charge more, so is there a way we can increase the number of customers/sales or charge a higher price that could make it viable. We could, of course, also look at reducing cost, but in most cases, this is a tool that’s more useful for increasing profit than viability. Either way we must answer the business viability question early in the business’s life, otherwise we may be “flogging a dead horse”. Don’t do that. If it can’t work change something or find something that will work, starting a business is difficult enough as it is without creating problems that can be avoided.