9 Business Selection Criteria

As I am entering a new stage of my life, the time has come to pull from my shelf my trusty old 9 business selection criteria.

The traditional cliché of entrepreneurs is that they have an idea and vision. They build companies to fulfill that vision. I am not this type of entrepreneur.

I realized long ago I lacked the creativity to come up with brilliant new ideas. Frankly I lack creative skills in general including the ability to paint, dance or sing ?

To cover up for that deficiency, I use a rational thought process in evaluating business ideas to decide which business I will create, invest in, buy or join. These are my 9 criterias:

1. At least a $1 billion addressable market
This criteria is inherently personal and depends on the entrepreneur’s ambition, but there are good reasons to target larger markets:

  • It’s easier to obtain funding
  • Many Internet businesses have a certain amont of fixed costs but limited variable costs, therefore the larger the business, the higher the net margin
  • I find it more interesting to build larger companies

This does not mean that the market must be a $1 billion market at the launch of the company, but that it must have the potential.

When I created Aucland, the online auction market was small, but the offline used goods markets were multi-billion dollar markets in their own right suggesting that the online market would be large enough if a certain percentage of the trading went online.

2. A valid business model understood from the get go

There is only a 5% chance that a company created today will still be around in 5 years. I have not seen official statistics, but many VCs seem to believe that only 0.1% of the company started without a valid business model succeed.

It’s so risky to create a company to begin with, I would rather have all the odds in my favor… I realize that Google is a counter example, but in an upcoming post I will describe how they got lucky.

For clarification purposes, by having a valid business model I mean understanding how you are going to generate money and having a good sense of the gross and net margins at the creation of the company.

3. Does not require more than $2 million in seed or $15 million in first round VC money

If it requires much more, the business might be too capital intensive which could lead to too much dillution and suggest that this is an idea that is easier for a large incumbent to fund rather than a new startup.

4. A business where you have a real shot at being one of the top players – at least in the region you are targeting

Avoid entering businesses where many players are well funded or where the incumbents have a sustainable advantage. That is not to say not to enter businesses where there are incumbents – just make you have a hard to replicate edge on them – after all Skype did extremely well because it entered the telephony market with a radically lower cost structure than the traditional telcos and used it to its advantage.

5. A scalable idea
This is again a very personal criteria. Walmart and Starbucks are great businesses, but I would rather not be in a business where I need to open a new store to increase my sales as it leads to slower growth and greater capital requirements. Internet businesses are magical as they give you the ability to build and grow global companies in record times – just look at what Google, eBay, Skype and many others accomplished in less than 10 years – in some cases in less than 5 years!

6. A business with little or no risk of disintermediation and/or margin compression by suppliers and/or customers

You are in a much safer position if you are much larger than your customers and/or suppliers. Walmart exerts tremendous pressure on its suppliers which are much smaller than it is and depend on its sales. eBay can also continuously increase prices on its sellers – none of which is in a meaningful position to fight back on its own. Zingy violated this criteria and this is one of the main reasons I sold the company as I hated having so much of the revenues coming from the top 3 carriers in the US and so much of the costs generated by the top music labels.

7. A business that is in a rapidly growing market

A rising tide raises all boats. Growing markets generate more interest from the press, consumers, customers and suppliers. Moreover, if you are gaining share in a rapidly growing market, this can create exponential growth.

8. An idea that I know how to execute on or can learn how to execute on

For now I will probably focus on technology ideas as I have a clear comparative advantage in the field as I understand technology and know how to manage technology organizations. This probably excludes biotechnology for me – if five teams present me their cure for prostate cancer I can tell you which presents the best and has the slickest Powerpoint presentation, but I can’t really say which is best positioned to win.

9. An idea that I like and want to do!

One of the keys to happiness and success in life is to do things you love and are passionate about…

A few things to note:
As you can see, I did not mention barriers to entry as a business selection criteria. While it would be nice to be in a position to have strong barriers to entry from the get go – it’s relatively rare to be in a position to have a sustainable barriers to entry from the start especially as it is becoming easier to duplicate technology or even get around many patents. I prefer to focus on building the barriers to entry with the business – the very fact of operating a business – having customers, suppliers, press attention, creating a brand – creates barriers to entry.

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  • Extremely sensible. Well done Fabrice.

    Nothing to say, nothing to add, you have combined both the analytical/rational approach of a consultant and the pramatism of a true hands on manager.

  • Great start for the blog .. Very interesting 9 points .. I would add 2 points personnaly:
    1. The people who make the business ( how you get along with them)
    2. the utility ( needness) of the business, does it really solves a need or problem that you or somepeople you know had or might have .

  • All 9 points are sensible.

    I guess these are the answers why big guys have Entrepreneur-in-Residence like Nivi.

    Thanks for sharing the ideas Fabrice.

  • inspiring… and down-to-earth… also heard your interview with Venture Voice podcast… forced everyone in our tiny team in Jordan to listen to it!… really inspiring…

    definitely will use your 9 business selection criteria when brainstoring business models we’re working on in the realm of web 2.0, content and voip for middle east…… they seem to work with you… why shouldn’t they work with us… 🙂

    good luck in your next multi-million business idea!

  • “7. A business that is in a rapidly growing market”. Makes me wonder how my start-up with a consumer product in a new business segment of the financial market will work out. I think we’re ok on the other points.

    Time will tell…

  • […] Fabrice Grinda explains his criteria for selecting a business: The traditional cliché of entrepreneurs is that they have an idea and vision. They build companies to fulfill that vision. I am not this type of entrepreneur. I realized long ago I lacked the creativity to come up with brilliant new ideas. Frankly I lack creative skills in general including the ability to paint, dance or sing. […]

  • I think this is good, but if entrepreneurs go through from busincess cycle this will help entrepreneus in planning and feasibility.

  • […] the smart and successful young entrepreneur, Fabrice Grinda will tell you also as his criteria #2 for selecting a business, it helps to stick with a business model that is well understood and proven (not that you cannot […]

  • […] recently stumbled across a post of Fabrice Grinda (Founder of Aucland and Zingy) outlining his 9 Business Selection Criteria. As someone who is constantly evaluating new business ideas I found the list to be both insighful […]

  • […] 9 business selection criteria Le fondateur d’Aucland explique sur quels critères il se base pour monter un nouveau business ou investir dans une startup. Et si vous voulez savoir comment Fabrice Grinda a réellement commencé, jetez donc un oeil à cet article. […]

  • Probably one of the most inspiring Entrepreneurs i have come across.

    awesome overview of what to filter out in new business concepts.

    thanks Fabrice

  • […] Here’s a summary of what Fabrice looks for in a business (he explains his rules in more detail here): […]

  • I really like this post.
    I casually discovered this blog but you’ve just become one of my role models.
    Congratulations for what you have achieved.

  • What are the most important criteria to consider when deciding to pursue an idea as an entrepreneur?…

    I like this list: http://www.fabricegrinda.com/entrepreneurship/9-business-selection-criteria…