Two weeks ago I found myself watching a Ustream broadcast about entrepreneurship and starting businesses.  (The video is located here, and the specific question I am addressing is asked at 17:30 – by the way, the guys hosting the broadcast are great and doing great things – I just think they missed the mark with this one).  During the course of the broadcast a viewer asked the question:

What differentiates a good idea from a profitable idea?

I happened to think this was an excellent question.  However, I managed to be extremely disappointed by the answer which went something like:

A profitable idea is one you execute on, and you believe it in for more than one second.  Good ideas you get excited about, but after you work out the details for a few minutes they seem less amazing.  Profitable ideas are ones which you stay excited and passionate about even weeks after you had it.

Seriously?  Not the answer I was expecting.  However, before they moved on the hosts did manage to redeem themselves a bit as they continued:

It comes down to doing your due diligence.  Do the research, tell people about it, make a plan, and see if it works.

I understand the broadcasters were live and had to do a little bit of thinking on their feet, but their answer was just a bit to shaky for me.  The words good and profitable are quite broad and are certainly not mutually exclusive, but within this context it is reasonable to assume that not all good ideas are profitable ideas, and certainly not all executed ideas are profitable (Segway anyone?).  Therefore, it is seems fair to conclude that what the inquisitive viewer really meant to ask was – “What differentiates a seemingly good [business] idea from one which is actionable and will be positively received by customers to a point where I can turn a profit?“  To which I would answer:

Ideas are a dime a dozen.  Good ideas are a dime a dozen.  Profitable ideas are a dime a dozen, which we can see by the sheer number of profitable businesses that exist.  The main point of differentiation between good ideas and profitable ones is numbers and metrics.  Profitable ideas have little to do with such things as passion, excitement, and execution, although these three things are certainly important factors for creating something sustainable.

Basic principles of accounting show that profitability occurs when the value of the total revenue is greater than the sum of all of the expenses.  It is a simple numbers game – but not so simple to get to the point of profitability.  As the Ustream hosts suggested, the due diligence must be done.  Extensive research into your industry of choice is helpful.  You ought to know the numbers.  Find out what is at stake, i.e. how much $$$ your targeted industry pulls in each year.  Making projected sales, cash flow, and P&L statements is a good start as well.  Don’t overlook the academics because it is boring.  (After all, entrepreneurship is largely academic).  If you must, shove the task on someone else.  Devise a marketing strategy and estimate project the reach you will have.  From there, analyze your statistics.  Determine whether or not you are satisfied with the projected results.  If your business is only going to make $12,000 per year, you may want to keep your day job.  If your business is projected to make $75,000 you have a shot at going full time with it.

At the end of the day the determiner of what is good vs. what is profitable is good old fashioned mathematics.  Passion, excitement, social jabber – it’s all important.  Yet it is all fickle, and is no concrete predictor of profitability.

All good ideas may bot be profitable, but all profitable ideas are good.