The other day I was asked if a person’s idea would make a good business. Unfortunately, I had to tell them that it would not be a good idea for them to pursue. While the idea might have been a novel and been a successful venture in the right hands, they didn’t have access to the level of capital it would require making the business a success.
I’m often frustrated because I have to give this message over and over again to counteract the misconception that to be successful you need to have a new idea or invention. In fact, I’m sure I could write a book on assumptions that people have about a business that is just not good advice. If you want to be a successful entrepreneur, I often recommend three things.
1. Choose a well established and perhaps antiquated industry
This is a direct contradiction to most people’s thinking that the business needs to be in a new industry no one has thought of yet.
The unfortunate reality, as I learned with my Invisible Fencing business, is that a business based on a new technology or service requires that you educate the customer, an extraordinarily expensive undertaking. Unless you have access to a huge pool of investment capital, you are best served to stay with a product or service people know and understand.
2. Pick an industry that relies on old technology or old thinking.
When a new idea for a product or service is introduced, lots of companies try to compete for the customer mindshare and educate the masses. As a few leaders begin to emerge, they acquire some of their competitors and the leadership that was initially responsible for the innovation is replaced by managers.
The innovative leader is replaced by managers whose primary goal is to segment and organize the business into departments so it can become more efficient. However, when efficiency rises, it is at the expense of creativity. Over time these businesses grow and create internal systems that make it impossible to adopt new technology.
For example, IBM was a mainframe company and built its system around the sale and service of mainframe computers. When the mini-computer came about, IBM could not make the shift without cannibalizing this revenue engine and Digital Equipment Corporation (DEC) emerged as the mini-computer leader. When the personal computer came about, DEC could not make the shift without cannibalizing its revenue engine, making Microsoft and Intel the next set of leaders.
3. Find an unexploited niche where you can charge a premium based on your value to create a business with higher gross margins
Rather than subscribe to the thinking “I need a brand new technology or service to make a successful business,” you will have substantially less risk and a higher probability of success if you look at starting a business in a well-established industry that has lived through consolidation. These businesses are focused on efficiency and as a result are less creative. However, you can exploit a niche that the big players are ill-prepared to capitalize on.
Still not convinced? Look at the makeup of Fortune 500 companies.
Do you still subscribe to the narrative that to create a successful business you have to have a unique product or service or are you focused on looking for ways to exploit niche markets in well establishes industries?
