Between 1998 and 2005, two-thirds of new small businesses survived their first two years, according to the U.S. Bureau of Labor Statistics.Between 1998 and 2005, two-thirds of new small businesses survived their first two years, according to the U.S. Bureau of Labor Statistics. (iStock)

In late 2005, while working as a sales associate for a software company in Southampton, U.K., Neil Moodley came up with what he thought was a real moneymaker. The idea: a financial Web site that served up the names of top executives, public financial information and a brief summary of what a business is and does.

"We were trying to find businesses that would want to buy our software, but it was hard to get new leads," says Moodley, 36. He figured other sales organizations would be willing to pay $30 a month to drum up new business through his site, which would offer more targeted information than, say, mainly free sites hosted by Bloomberg and Schwab.

Good idea, terrible timing. About four months later, after plowing $2,500 and putting hundreds of hours into a prototype, Moodley watched in horror as Google launched its own finance site, called Google Finance. "It literally looked exactly like my site," says Moodley. "I had a sinking feeling in my stomach as I clicked around and realized that their site was completely free, and I was planning to charge for the same information."

Moodley's mistake is all too common, says Toby Stuart, professor of entrepreneurial management at the Harvard Business School, who warns would-be small-business owners not to "overestimate their originality." In other words: If you've thought of it, chances are someone else has too.

We've all been in there: drinking our morning coffee, reading the business section, zoning out at work, when an idea for a new gadget or service that's going to change the world comes crashing home. But before you liquidate what's left of your retirement plan or hit up friends and family for start-up capital, step back and figure whether your "great idea" is a viable business concept.

The first question you should always ask yourself: Do I have a compelling value proposition? It might seem obvious, but it bears repeating: A great idea is only a great business idea if it has an obvious and compelling value proposition — meaning that enough people are willing to pay for your product or service at a price above your cost to deliver it.

It doesn't take a 90-page business plan to convey a value proposition. In fact you should be able to blurt it in a few sentences. If you can't figure out why someone needs what you're selling, chances are your customers won't be able to, either.

'Define and dominate ... That's the secret sauce.'—John De Puy, Oaktree Ventures

Next question: Is there a viable market for your product or service? Even if your business is likely to turn a profit, professional investors won't line up to fund an operation with limited growth potential. Also, don't expect to create a new market — if one doesn't already exist, there's probably a reason.

Markets come in different shapes and sizes, and your strategy should coincide with the opportunity. For example, rather than trying to capture 1 per cent to 2 per cent of a giant global market, maybe it's better to aim for 25 per cent to 40 per cent of a niche market, advises John De Puy, chief executive of Oaktree Ventures, a San Diego-based venture capital firm. "Define and dominate," he says. "That's the secret sauce."

Your business won't last without a sustainable competitive advantage. What's yours? If it's technology, can you patent it? If you're selling a commodity, can you brand it? You could license your nascent technology and let someone else worry about how to wring profits from it — then again, you could end up just torching a pile of cash.

If you still believe you have the next iPod in your hands, ask yourself one last question: How hard are you willing to work? Between 1998 and 2005, just two-thirds of new small businesses survived their first two years, while only 44 per cent made it past the four-year mark, according to the Bureau of Labor Statistics — and that's just survival, not success. Launching in a recession only shrinks your chances for success, so beware of all the things that can trip you up.

Bottom line: If you're not ready to give everything (and then some) to your new baby, it won't matter how great your great idea is.