How to Do Research Before Starting a Business

Pursuing your passion may not be always a good idea. Well, maybe for small stakes like choosing beer in the supermarket or clothes in a department store it is ok.

But for starting a business enterprise, passion isn’t enough.

A recent article from the University of Stanford shared the findings of three researchers — Paul O’Keefe, Carol Dweck, and Gregory Walton. They explained that while “find your passion” is well-intended advice, it might not be good advice.

“Mantras like ‘find your passion’ carry hidden implications… they imply that once an interest resonates, pursuing it will be easy. But, the research found that when people encounter inevitable challenges, that mindset makes it more likely people will surrender their newfound interest. And the idea that passions are found fully formed implies that the number of interests a person has is limited. That can cause people to narrow their focus and neglect other areas.”

Allow me to digress: I am not saying it is a great idea to start a company in a place you hate. Nevertheless, if you want a profitable business abroad, there are important factors to analyze before investing.

Overview: Universal factors to consider

Demand: Is it enough to generate profit? Can I create additional demand through innovation? How can my firm satisfy customers’ needs?

Offer: How heavy is the competition? Are they profitable? What are their differentials? Which competitive advantages I should have against them?

Government and Private Incentives: What funding lines are available? Is affordable credit easily obtainable? Are there tax-exceptions for new businesses or sectorial incentives?

Bureaucracy — How clear are the regulatory demands? What are the risks of the legal framework delay my project?

Infrastructure — Are the transport, telecommunications, and other infrastructure resources suitable to my business now, and for future expansions?

Location and Distance from Major Markets

Those are universal factors because you should consider and analyze them independently of where you establish your firm. Certain places can have additional elements to take into account. For example, the geopolitical risks of middle-eastern countries, or safety issues in Brazil or Colombia.

The understanding of the demand (your potential customers) and offer (your competitors) is critical to entrepreneurs far from home. A common mistake is to analyze only the successful competitors, ignoring what you may learn with examples of failure.

But here, the concept of Via Negativa from Nassim Taleb is relevant: to learn what you should not do is easier than learning exactly what you should do.

Government Incentives

One common mistake entrepreneurs (including me) do when planning the funding (or capital-raising) phase is to neglect government incentives for starting firms.

I made this mistake because — after saving for years — I had money enough to fund my project. I never checked the incentives from the local government for the tourism industry (my company was a hostel for backpackers). I did not take advantage of some favorable financing lines from the regional development bank and left cheap money on the table. Money that later could make the difference in acquiring competitive advantages. In the case of a hostel for backpackers, this could mean stylish furniture or a better-equipped lounge.

If you do not take advantage of inexpensive credit lines from subsided banks, or sectorial tax exemptions, you will be already in a competitive disadvantage against your opponents that explored these possibilities. They will have the financial shield to do better business than you or survive a crisis that you would not survive.

Yes, it is great that you saved enough to finance your venture, but it is even better when you have cheap credit if needed — by cheap I mean way below your business rate of return — and use it as an airbag for any eventual crisis, or future opportunities. Mega-Investors like Warren Buffett keep money ready to invest and buy good companies for low prices during economic turmoils.

Even if you have cash enough to start your firm, do not ignore governmental and international funding possibilities and tax exemptions. Later on, this financial backup will make your firm more robust. It will also guarantee your survival during a crisis and allow you to acquire other promising businesses and assets.

Government bureaucracy (and the two first professionals you should hire)

If the previous paragraph was about not neglecting government incentives, here I assure you to not ignore how the same government can complicate every step for an entrepreneurial project.

The word bureaucracy is often related to multitudes of regulations and mandatory paperwork. Form-filling mania that slows down innovation and decision-making. Startups should not have this problem internally, since they are agile and verdicts are quick. New companies, however, suffer from external bureaucracy, originated in governmental offices and regulatory agencies.

While big corporations have plenty of lobbyists and a massive legal department, smaller businesses do not have the same advantage.

The good news? This is not a major problem everywhere. The Index of Economic Freedom (IEF), published every year by The Heritage Foundation, is a good measure of how bad is bureaucracy in a country.

If your destination is on the top of the ranking — places like Singapore, Hong Kong, or New Zealand — government bureaucracy will not be such a big obstacle.

Born and raised in Brazil (144th place in the IFE ranking) in a family of entrepreneurs, I was acquainted early with the complications from legal barriers and volatile regulations. After moving to Poland (44th in the IFE ranking), I felt a certain relief, even though the Polish business environment is considered one of the most bureaucratic in Europe.

It is a common sight Brazilian corporate branches have more lawyers and accountants than their headquarters in the USA or Europe, just to solve legal entanglements. When I left this behind and arrived in Poland, I saw how it was comparatively easier was to start an enterprise. I decided to save on legal assistance, not renewing the contract with my lawyer after the company was established.

It was a mistake. The fact that the beginning is simple, does not mean there are no traps on the way. One year after starting my hospitality business, we accidentally disrespected a regulation by not filling a legal form. This resulted in a fine far higher than what we would pay before for a lawyer.

This mistake is common among entrepreneurial expats in networking events and contact circles. People ignoring regulatory particularities because the locals say it is not complicated. Maybe it is not for them, born and used to the same regulations that later can haunt you.

When I asked Ernest W. Adams — an American game design consultant that moved to England — what was the first professional he hired after moving out, he answered:

Tax accountant. I suddenly needed to file in two different countries and my income sources were complicated.

If you are allocating years of savings — or money from people that trusted and invested in you — and moved to start a new venture, the stakes are too high to save on legal and tax assistance.

Lawyer up. A local lawyer and an accountant are two of the first professionals any entrepreneur should seek abroad.

Infrastructure

The infrastructure analysis is often on a second plan when long-term ambitions are neglected in the planning phase. The need to put the company to work shadow the need to visualize a time-spam of multiple years ahead, and the future bottlenecks.

Yes, long-term planning is difficult, and seldom it will materialize. This leads people to think they are unnecessary.

My answer to that is to quote Winston Churchill — Plans are of little importance, but planning is essential.

While long-term plans are not precise, they are vital to dimension your perspectives, measure your future needs and detect beforehand any obstacle that may arise.

For example, in 2019, while planning to open my second hostel, I found a nice building to adapt and start it there. The facility had the possibility of expansion, so in less than a year, we could double the number of rooms and the size of our business, becoming one of the biggest tourist hostels in Warsaw.

All went well except for one thing. With the expansion, our internet service did not have bandwidth enough to serve properly all guests, therefore we decided to upgrade from LTE to a faster fiber-optic connection.

At this moment we discovered that this was one of the few regions in the city still without a fiber-optics network. We never checked it before because, for a smaller hostel, LTE was just enough, but with the double of the size, we needed more bandwidth. Since the provider had no plans to install fiber-optics in our region, we needed to provide two independent LTE connections, doubling our telecommunications expenses and investments in equipment.

This is just one example, but there are others more harmful, as the case of a competitor hostel whose electricity consumption in the summer was too high for the local grid, causing frequent shortages if everyone used air-conditioners at the same time. This was a result of planning without considering longer (and hotter) summer peaks. Somehow, I understand them, since it is difficult to link East Europe and Hot Summer Peaks together.

Structural obstacles are not easy to remove. Therefore, when planning your business, do not only check if communications and physical infrastructures are suitable for your current needs but confirm if they are enough even for the most optimistic scenario.

Location and Distance from Major Markets

In an era where remote work is a trend and outsourcing is widespread, looks archaic to point geographical distance as a problem.

However, videoconferences and calls not always are enough to conquer a client. Dr. Albert Mehrabian, from the University of California, concluded in his research that only 7% of our communication is verbal, with 38% by voice tone and 55% dependent on facial expressions and gestures.

Consequently, the possibility of a competitor having more face-to-face meetings than you can be the difference between their success and your failure.

Melving Wong, a serial entrepreneur and founder of FanXt (sold in 2016), answered me why he moved his company — focused on reselling event tickets — to Europe:

In my case, my startup was chosen to open/run our business in Paris at Station F [a startup business incubator].

I applied for their Founders Program in early 2019 without hope of being selected. I was applying to some startup programs overseas because of my plan to move my startup abroad. So happened that they chose us.

I wanted to move my startup abroad because I feel would do much better overseas (US or EU) than in South Korea at that time. South Korea was too isolated from the rest of the world in the secondary ticketing industry and the overall Asian market is relatively small — compared to the US and EU.

Besides the professional obstacles from distance and location, there is a question on the personal side: the time zone. Expatriates underestimated how few hours of difference to everyone you know complicate contact attempts. In my first book, Moving Out, Working Abroad, and Keeping Your Sanity, I related how this is one of the factors collaborating for the expatriate feel of detachment. There are other relevant non-business factors to consider, but this will be a subject for another article.

Final thoughts

You can never know too much about your market, but often, entrepreneurs know too little.

The business plan is the very first document I recommend you to do when venturing far away. It is there where you will analyze if your guts are right and if the business is viable. Do not be afraid to change your opinion, location, or even economic activity.

At the planning phase you still invested near nothing, so to discover something wrong and fix it has a minimal cost. The same cannot be said when your business is already running. Do a good business plan to discover, quickly, any incorrect assumption.

We have your back.

Levi Borba is CEO of expatriateconsultancy.com, creator of the channel Small Business Hacks, and best-selling author. You can check his books here, his other articles here, or his Linkedin here.