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This article, the first of a series, answers the most important question an investor tries to answer: “Is this a good business idea to invest in?” But what is the yardstick to figure out whether a business idea is great or not? Let me start with what a great business idea is not. It isn’t:

* A business plan
* A profitable 1-2 year financial statement
* An ROI of more than 25 percent in the next three years to the investor
* A guarantee that a known capital investment will get the business to break even

This might sound blasphemous to you, since it’s definitely not what you hear at every angel meeting and every presentation you make to a potential investor.

So, what makes a great business idea? Rather than just giving you a list, let me give you some analogies.

Let’s say you find a 3-year-old girl who can read the newspaper, do mental math up to the 17 times tables, play the piano, and beat you on the Wii. Does this excite you? Most people (and I am firmly in that camp) would say it does. Why? Is it because we realize the potential she has? What we don’t know—and cannot know—is what, when and how.

Let’s continue with this train of thought. Let’s say we meet another 3-year-old girl who is nice and friendly, very obedient, doesn’t fight with her 5-year-old brother, and always sleeps on time. What would we say about this girl? Well, as a parent, this could be a relief; as a parent, I know what a handful it is to cope with a growing child. But my strong opinion is that a normal person might say, “Utterly and completely boring! Nothing to write home about­, nothing to get excited about.”

Now, let’s draw a third analogy. There’s a 3-year-old with no extraordinary talents, who loves to dance and sing, enjoys playing with her friends, stands up for herself, and is adamant about getting her way. What’s your reaction to this picture? Obviously, it’s a positive one. The girl shows potential and loves music, so she could become a musician or a dancer. Now, what is the difference between the three pictures I drew of the children?

* The first—completely unpredictable; lots of possibilities and potential, but no inkling of when, how and what; yet, the most exciting
* The second—boring; not much potential
* The third—normal; possibility of musical leanings; quite exciting

This is the point I am trying to make. A business idea is great if it has potential and possibilities, but by this very nature, it cannot be predictable. And that’s what business plans and  break-even calculations are meant to do—define a predictable outcome. But if you can only define a predictable outcome, you are boring. So, if you have the potential, it isn’t a problem if you are unpredictable. The problem occurs if and when you lose sight of that potential and then dress it up into one predictable outcome.

So, the only thing that matters—to start with—is whether your business idea has possibilities. If your answer is no, do not proceed. Find something else to do. If your answer is yes, then go ahead.  But what should you do when you do have an exciting idea, given that your investor is looking for a predictable yet exciting business plan that shows how the money will grow? How do you do that without compromising your idea? There is a solution, but that will come at a later date.

JOE FERNANDES is part of the Indian Angel Network, India’s largest group of angel investors. The investors are keen to invest in startups and early-stage ventures that have the potential to create disproportionate value. They provide financial investment with high quality mentoring, and also leverage their vast networks. For more details, please visit www.indianangelnetwork.com.

©Entrepreneur June 2010

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