Launching a new business

Researching a business to start. A finding I have come to recently is that understanding how to correctly research an opportunity before trying to launch is one of the more important skillsets to continue to develop.

Why?

Well, we live in a time now where there are so many spytools, we have fully transparent advertising libraries, tools to examine web traffic and the list goes on. This means the barrier to entry for most businesses (especially in the online space becomes lower), this means more competition. It can very tempting to see a business with 100 active ads in the FB library and want to launch a competitor.

This approach is fine when you are a complete beginner, because you just want to shoot shots, get feedback and quickly iterate. It’s better to think less, shoot shots, learn fast and try not to bankrupt yourself.

When you are a little bit more experienced? You should still run small tests and experiments, but I believe you should be more selective with what you pursue. This is because after a certain level, it isn’t worth it to test a brand or offer idea that is going to cap out at 100-200k/month, and then be an uphill battle to try and grow beyond that. You’re much better pursuing ideas that have a large upper limit, otherwise the juice isn’t really worth the squeeze.

You want to start businesses where there is a large margin of opportunity.

Here is an example to make things easier.

Business #1:

You heard on the grapevine they are turning over 30m/year They have lots of active ads in the library They are quite sophisticated in their marketing (using aggressive DR, long form funnels, maximising CR and AOV with good execution) They are four years old They have 6-8 front end SKUs What you can't see behind the surface (unless you do thorough research) It is underneath a "group" of eCommerce brands started by four founders who all have had previous exits, with a large bankroll. Amazon is 60% of their sales across 10 SKUs They have around 300-400k MRR from their subscriber base. It's run by a well dialled in US-based team. Their internal day 1 roas targets are 0.6-0.7 They are happy to run at 5% net margin (yes - this is a thing)

Now, why is this example so specific? Because I am living proof of this example. We launched a competing business to something very similar to this, and there were a few issues with our approach.

#1 = Our research process wasn’t thorough enough, we made a lot of assumptions about their sales mix and net margin, and when we saw this business listed on a brokerage website later and got access to their P/L the real numbers were very different.

#2 = The margin of opportunity was so small - they sophisticated marketers, had a strong team, a heavy bankroll, were multi-channel.

#3 = Their growth was actually flat.

#4 = sales driven by 6-8 front end SKUs (which means 6-8x the creative output, funnels, CRO changes, etc.).

Compare this to business #2:

6 months old. Growing rapidly. 1-2 SKUs Unsophisticated marketing. Category as a whole is growing. No amazon.

Solo founder who is bootstrapped and hasn’t had any previous wins.

Very different proposition. The margin for opportunity for business #2 is huge compared to business #1. So you should probably test this idea.

Now, these are quite random examples but you can see the difference. As I get more experienced I am seeing that even the best operators can't polish a turd. I have friends who are dumber than me, but much richer because they just understood this better. On the flipside I have friends smarter/more skilled than me that are poorer than me because of the wrong opportunities being chosen.

Don't play ego games - you don't get a reward for building a harder business (now there is a caveat of this for when the difficulty lies in building out proprietary tech, operational complexity, regulatory compliance or other challenges that end up becoming moats later on).

But the real point of this is you need to go beyond the surface level when you research an idea - don't just assume because a business has a lot of active ads they are crushing it.

That is all for now.