Small Business Ideas

How to Create a Simple Small Business [Case Study Part 2] Idea Validation

This case study series looks at how to create a simple small business. It provides a direct example of the principles in my latest book, The Book on Small Business Ideas. After completing the editing cycles, I became inspired to begin immediate work on this new business idea, which serves as a great illustration of my concepts of “simple small business” and “money machine.”

To summarize, the business we’ll be looking at in this case study is Crypto-ML.com. It provides buy and sell signals for cryptocurrency training. These signals are generated by machine learning.

Apart from being a service we use ourselves, membership access to these signals can be sold as well.

Part 1 of this case study looked at idea creation. This was the fun part! Just by reading my post, you can see I was brimming with enthusiasm. We generally love the creation phase and coming up with ideas.

The next phase though…idea validation…is not very exciting. In fact, I’ve been procrastinating writing this article because it’s just not that exciting to me. However, it’s an extremely critical step. You need to ensure the thing you’re excited about has legs. So consider it dull but necessary. And in fact, this is where most people go wrong with their business. So it’s highly important. Let me walk you through my validation.

Alright, a quick recap first…

Crypto-ML case study parts 1 through 7

This case study will be broken out into a few different posts, looking at how each step plays out:

  1. Part 1: Idea Generation 
  2. Part 2: Idea Validation
  3. Part 3: Monetization (coming soon)
  4. Part 4: Tools and Technology (coming soon)
  5. Part 5: Vendors and Partners (coming soon)
  6. Part 6: Legal Framework (coming soon)
  7. Part 7: Launch (coming soon)

What is business idea validation?

As you can tell by Part 1: Idea Generation, I am both extremely excited and extremely interested in the idea behind Crypto-ML.com. That’s an important start and ensures I’ll have the energy and enthusiasm to actually see the project to completion. This is important because creating a new small business, of course, has its challenges.

Now that we know I’m “sold” on the idea of Crypto-ML.com, it’s time to see if other people are excited about the project too. And if they’d actually pay for it.

This step is all about market validation of my business idea.

In The Book on Small Business Ideas, you’ll see an entire evaluation framework in chapter 9. I’ll cover those principles here.

The Book on Small Business Ideas Release Announcment

In fact…let me start with a brief section from the book…

Business-idea analysis is a joke

This one pains me. I have an MBA. I spent a lot of time and effort dissecting businesses and learning theories on what it takes to have a successful company. Professionally, I’ve been at the table for countless business and product launches, with analysts and executives spending months pouring over data, diving into complex calculations, going through cumbersome governance meetings, and perfecting multi-year financial projections.

Smart people, countless hours of research and planning, and flawless market research invariably culminate in an idea that hits the market, immediately takes a left turn, and goes somewhere entirely unexpected.

While I’m not saying this type of analysis is worthless—we all need to understand our numbers, our levers, and how we’ll make money—I will say the factors that cause a business to succeed or fail are much more basic and fundamental than most people think.

“In preparing for battle I have always found that plans are useless, but planning is indispensable.” ~Dwight D. Eisenhower~

I am now in an environment steeped in people launching small-business ideas. The factors I see that determine success have much more to do with the owner, their environment, and the idea’s ability to generate cash quickly. After all…the only reason businesses fail is because they don’t make money fast enough.

This is good news for you. Your drive, hustle, and ability to get obsessed will make more of a difference than anything else. You have the tools within to beat the competition. If you do more, press harder, and drive faster, you will rise to the top. People and companies become complacent all the time. There’s always opportunity for you to win.

With all of this in mind, I have put together an idea-evaluation framework that brings in the best from classical business analysis, but more importantly, also focuses on bigger-picture aspects. It will chug through your ideas in four phases. Once you’ve gone through the evaluation, you will have much better insight into your ideas and a real concept of whether or not they will succeed in your environment. So let’s get started and look at the factors that really matter.

Crypt-ML License Plate Cover

Four areas of business idea validation

Here are the four areas I look at in general and also the four I used for Crypto-ML.com:

  1. Offer evaluation: how complete is your idea?
  2. Customer evaluation: who are your target customers and will they buy your product/service?
  3. Competitor evaluation: who are your competitors and are there any red flags to the business model?
  4. Money evaluation: how will you make money from the start?

In the book, you’ll find a detailed breakdown of each of these four areas along with worksheets to analyze your ideas.

For the purposes of this article, I’ll just dive into that first area (Offer Evaluation). Additional scrutiny should be applied after passing the “offer evaluation” stage, but you’ll get a pretty good sense of what we looked at in the breakdown here.

Business idea offer evaluation

Here are some questions to ask yourself:

  1. Have you specifically defined what you will be offering?
  2. How well does this idea align with your skills?
  3. How interested in this idea are you?
  4. Do you have proven expertise in this area?
  5. Can this offer be turned into a scalable business?
  6. Can you offer it locally?
  7. What’s the competition like?
  8. Do people want what you’re offering?
  9. How fast can you start netting a profit?
  10. Can you ultimately sell this business (can it make you rich)?

I already nailed questions 1-4 in Part 1 of this business case.

Question 5: Is the business scalable?

Question 5 is interesting. This is getting at the concept of can you grow the income and customer base of the business without fundamentally changing the cost structure. Can you have 10 customers or 1,000 customers with approximately the same effort?

This is something that could be fully automated. I would only need to work on sales and marketing, but ultimately, this has enough strength that those functions could be hired out. This can be scaled.

The answer on this platform is yes, and that’s a great sign. Of course, customer service requests will go up the more customers we have, but the platform itself is highly scalable.

Question 6: Can you offer it locally?

When you start a business, you really want to rely on local feedback and marketing. Even for an online company like Crypto-ML.com, it’s important that my beta users and the first set of customers can be local. I can go get face-to-face feedback.

I know local people in my network who would benefit from this offering.

And importantly, I can get my first set of loyal customers without the heavy marketing expense associated with gaining cold customers.

In my case, the answer is yes. I have a solid network of people in the cryptocurrency space who are local. There are also local networking groups. So as I lay the foundation of the business, my preference is to build a local following.

Putting the license plate cover on my Tesla doesn’t hurt either.

Question 7: What’s the competition like?

One of the easiest steps you can take here is to Google what you’re offering. So you need a clearly-defined offer for this step.

If a bunch of big national companies dominate the first and maybe second pages, you’re going to struggle.

If local companies dominate, you might also have trouble.

But if you see some openings on the first page, things might be looking up. I actually prefer to find some competition. This means someone has already taken the first step and begun creating the market and ideas. If you have to market yourself into a niche that you also have to create and define, you’re going to have a very hard time.

Electric cars have been interesting for a long time, but it took Tesla creating a luxury, high-performance niche for the space to really launch. Unless you have a Musk-sized wallet, you probably don’t want to be the market creator.

In the case of Crypto-ML.com, I really didn’t find any direct (machine learning) competitive services, but there are plenty of similar services that provide trading alerts and advice for a monthly fee. People do pay for services like this already. In short, there is already a market for this type of service, but there isn’t much in the way of direct competition. This is a bit of a mixed bag and may require some market education on machine learning from our part.

Question 8: Do people want what you’re offering?

This may seem like an obvious question, but you need to go validate it. Here’s what you should be able to tell yourself before investing in your idea:

I’ve talked to many people in my network. I’ve also talked to several target-business people. They seem very interested in this, have said it fills a gap, and are willing to pay for it—they see the return on investment. There is also a proven track record of people spending money in this area.

My book is also heavy on the idea of generating income (and profit) immediately. One of the ways you can do this is to have your beta customers pay for the service. This accomplishes two things: you get feedback on the platform and you validate whether or not people will actually pay for your service.

Just asking people is generally not sufficient…people are more likely to say they’ll pay than actually pay.

In the case of Crypto-ML.com, I have plenty of connections and people within my network I was able to validate this idea with. In general, people were extremely interested. It did solve a need and they literally couldn’t wait to pay and hop on board.

Plus, it seems to hit the nexus of two very “sexy” terms. Both “cryptocurrency” and “machine learning” are very hot, trendy topics.

Question 9: How fast can you start netting a profit?

One of the biggest mistakes I see companies make is they have huge upfront investment periods with income project years out into the future. Projections are done years out because they don’t net a profit literally for years.

Minimal startup capital is required. This is self-funding and can cash flow as soon as my first customer (from within my network) signs.

We need companies willing to spend massive amounts of R&D and I’m glad those companies exist, but that’s not the sort of company I want you to build. I want you to build a simple, profitable, money machine. In order to do this, we want profit baked in from the start…not projected out into the future.

So many unknowns exist. If your profit is years in the future, are you really controlling the variables? What if the market changes? What if the technology changes or another disrupter beats you? Huge multi-year business cases almost never pan out as planned.

For Crypto-ML.com subscription business, this means we needed to keep costs low. The good news is there are no manual processes (more on that in an upcoming case study post) and the technology is all inexpensive off-the-shelf stuff. The secret sauce is in the machine-learning algorithm. The delivery is simple.

There will be support costs as it scales, but that will readily be covered by the platform’s subscription fees.

With low operational costs, we will really just need to monitor marketing costs. That entails monitoring two items:

  • What is the lifetime value of a customer? How long do customers subscribe on average?
  • How much does it cost to acquire a customer?

These will be fairly easy to track, but we need to be deliberate about doing so.

Question 10: Can you ultimately sell the business (can it make your rich)?

The last question of this section is can you sell the business? This is about making a windfall of cash and often how business owners become rich.

Intellectual property will be created, ideally covered by patents. The business can operate and grow without me.

For Crypto-ML.com, this certainly seems like a possibility. Though the greatest risk to this is that other people could attempt to create their own machine-learning models. In this case, our advantage would be in having a large customer base. This is an area we will also continue to monitor, but I do suspect that if the platform grows, we would receive offers to buy it.

Other areas of business idea evaluation

In The Book on Small Business Ideas, I walk through each of these steps and questions. I also provide a worksheet that allows you to score your business ideas. That includes dedicated sections and questions on each these three other areas:

Customer evaluation: who are your target customers and will they buy your product/service?

People are going to buy your product or service. Businesses fail because money doesn’t come to them fast enough. People are the lubricant. When businesses fail, their owners talk about all sorts of technical reasons and causes. But what I see time and again is the right people were not in place: people were not adequately considered when the business idea was being formulated. When a business takes off, it’s because of deep relationships in the right area.

Competitor evaluation: who are your competitors and are there any red flags to the business model?

Competition is good. But look for red flags in the following three areas: price (instead of value) competition, revenue secondary, and bad customers.

Money evaluation: how will you make money from the start?

“Businesses fail first and foremost because their ideas weren’t sold quickly enough and in quantities great enough, and therefore they ran out of money.” ~Grant Cardone~

But that would be too much for this post. Hopefully, though, you can see the necessity of putting your business ideas through a rigorous set of questions to really test it out.

Ultimately, you’re trying to answer the question: will this be a reliable, simple, money-generating machine?

For Crypto-ML.com, it seems to consistently check off the right boxes and seems like a natural winner.

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