Axiom CPA, P.A. - Axiom CPA Blog

A couple of years ago I broke down and bought an iPod. However, if your looking for a cool playlist for your next party you're better off grabbing my wife's gadget than mine. That's because most of the 4GB of audio on my iPod is podcasts. I'm a podcast junkie and use the media in my car to stay up on various trends and speakers. This morning I listened to a podcast from the Stanford Technology Ventures program (which I highly recommend) where Andrew Frame talked about 10 rules for starting a company. The most interesting thing he said was that you should focus on markets before products.

I think this is brilliant! Mostly because I've been telling clients this in one form or another for a long time. We do business with a lot of startups. Most of them have new, innovative products or a different take on service delivery that really is unique. However, they almost always fail to validate their concept with the market. A few months ago I was watching the TV show American Inventor and the judges repeatedly ripped folks who never asked the question "How big is the potential market for this product." Frame, a successful entrepreneur, started his most recent venture in the middle of one of the fattest markets on the planet, residential phone service (a $100 billion industry).

Don't get me wrong. I'm not suggesting you go out and spend tens of thousands of dollars on a market research firm to validate your concept. You don't have to. I will give you an example. I was recently asked to help develop a business plan for a type of medical diagnostic clinic. The client had done research on build out costs, pricing, insurance reimbursement, salaries and wages, and equipment costs. He had also selected a market to start the practice. We sketched out the makings of a proforma financial and the underlying assumptions in a few hours. Then I spent 2 hours on the web doing some market research. Here's what I found.

There's a national accreditation body with a web site that lists all of its members by state.

By cross referencing the state list with county demographic data I determined that it takes a population of about 200,000 to support one accredited facility.

The selected market has a population of 123,000.

Non accredited facilities exist, but appear to have very different operational models from the one outlined with the client.

So the lesson learned, again, is that a little time spent focusing on the market data (rather than market anecdotes such as "nobody else is doing this in the area") is time well spent. In this case we will need to revisit the choice of market or change the operational model before proceeding. While it would have been nice to know this before the financial research was done it's still better than sinking 400,000 into an enterprise that is doomed to fail from day one.

Ideally, you should focus on large markets or small markets that are completely unserviced. Get some hard data or hire someone who can help guide you in the right direction. CPA's and business consultants who specialize in startups are worth their weight in gold when it comes to keeping you from throwing money away. Your new venture will have a much better chance of getting off the ground if you know the size of your market and the potential impact you can have on it.