Fail Fast or Win Big: The Start-Up Plan for Starting Now (2015)

CHAPTER EIGHT

Opportunity Is Here and Everywhere

In addition to teaching entrepreneurship courses at San Diego State University, I am a director in the Lavin Entrepreneurship Center on campus and I participate actively in the local start-up community. So I am approached often by students and entrepreneurs (or would-be entrepreneurs) seeking my advice. More often than not, I am not interested in their idea per se. Instead, I ask about the marketplace, the industry, key trends, and their initial target segment. Most of the time, they don’t have all the answers and I send them off to acquire more information about their prospective opportunity. In this chapter, we look at opportunity from different perspectives and determine what an entrepreneur can do to prepare for such an opportunity. In particular, we’ll cover the following:

• The Entrepreneur’s Epiphany

• Targeting a Market

• Why Marketplaces Matter

• Types of Opportunities

• Key Elements in Finding Opportunities

“The entrepreneur always searches for change,
responds to it, and exploits it as an opportunity.”

—Peter Drucker, management guru

CAN YOU “CREATE” AN EPIPHANY?

In his book Myths of Innovation, Scott Berkum says that most people do not understand how entrepreneurs create new companies. He describes the myth of the “epiphany,” that light bulb that goes on in the head of an entrepreneur in the middle of the night. He reminds us of the expertise rule: that we begin to become experts in a given field only after we spend at least 10,000 hours (an average of 7-10 years) working on that craft or industry; at that point we begin to see things clearly and, especially, more opportunistically.

The epiphany is that sudden realization of a relationship, that merger of dissimilar thoughts. But as Berkum points out, it usually comes only after many years of familiarity with a subject. So, how can an entrepreneur increase the chances of having an epiphany that could potentially yield a new idea? Here are a few ways:

• Become an expert in your area of expertise. Berkum highlights several inventors or entrepreneurs who worked for years to solve a problem or to create a product. The 10,000 hours to become an expert sounds like a big number, but it’s only 7-10 years, assuming a normal work year. That time is probably less for would-be entrepreneurs, since they don’t have normal work years. But regardless of the time involved, use your expertise to leverage that knowledge and experience to create a new type of product or service.

• Look for emerging or disrupting trends. When Jeff Bezos observed the emergence of the Internet, he saw the potential for a new distribution platform for selling products. He just needed to validate that enough customers would exist in this new marketplace. He initially sold books to build a loyal set of customers so that he could then sell them everything else as well.

• Surround yourself with different people. If you want to generate ideas, don’t hang around with people who are exactly like you. If you have a business background, seek out film makers, artists, programmers, and designers. Look for common passions and share ideas with them. Different perspectives on the same subjects can create a robust environment for discovering what’s next.

TARGET A MARKETPLACE

So, you are a would-be entrepreneur but you don’t have an amazing idea for a start-up. Here is a thought. Rather than straining to come up with an idea, examine a large and/or growing marketplace thoroughly; get to know its workings so well that you might well surface a problem or opportunity. Only then should you try to create that new product or service. Sound backwards? I don’t think so.

The best example of this happened recently, when Nick, a former student of mine, walked into the Entrepreneurship Center to talk to me about creating a company. Here are the highlights of our conversation, from his point of view:

“So, I want to create a company and I remember what you said about focusing on a growing or changing industry, a large customer segment, and some key trends that were driving change either in the industry or with customers. So, I recently bought a dog. I like dogs. Out of curiosity, I did some research on the pet industry, and here are some facts I discovered. There are more than 70 million dogs in the United States. The size of the pet industry in the United States is over $50 billion; and it has had about 4 to 6 percent annual compound growth over the past 20 years, and is forecasted to continue growing at that rate into the foreseeable future.

“It seems that the baby boomers, 78 million of them, are replacing their college-age children with pets when the kids go off to college. According to the latest research and people I have been talking to, the baby boomers are treating these pets as family members. So, correspondingly, they are spending more dollars on better pet food and health-care costs for their pets. I have visited more than 10 pet stores in the past two months, and the one thing I have noticed is that no major brands dominate the stores. It appears that the pet stores carry a lot of products and product categories seem fragmented, with no dominant market-share leader. So, based on everything I have learned, and I am not sure about the specific product or service yet, but I am going to create a company that will exist in the pet industry.”

I wanted to reach across the table and hug him. He is following his curiosity and instinct and getting to know the marketplace. He is studying the customer and understanding key trends. He is becoming familiar with the possible changes coming in the pet industry. Whether those changes are new types of organic dog food, using technology to track lost pets, or providing health-care services that improve the health of pets, he is doing the due diligence required to explore an opportunity.

Quite often, it’s this pursuit of information about a market that is lacking in potential of newly minted entrepreneurs. The serial entrepreneurs, though, seem to have figured it out.

IDEAS COUNT, MARKETPLACES MATTER

People pitch me ideas all the time. In my role as Director of Programs at the Lavin Entrepreneurship Center, I listen to students pitch me their ideas. So, I get to hear lots of interesting ideas. As I discussed in Chapter Three, for a new idea to work, you need to have identified the niche segment of your target market that would care about your product or service.

I am a big fan of large, emerging, or disrupted marketplaces. The notion that entrepreneurs just need to come up with new ideas to create a successful company may work sometimes but I have learned that it’s the marketplace that matters most. You can have an amazing idea, but if there is no clear market opportunity, it might just as well be worthless. The worst thing you can come up with is a great idea that only 1,000 people can buy or utilize (works if you are SpaceX). So, a better way to look at entrepreneurship is to start with the marketplace, then follow with the idea, usually a solution to a problem customers are having.

It sounds backwards, but follow my logic. Imagine Larry Page (co-founder of Google) doing his thesis on the relative value of accurate online search results. He studies how many people search each day (millions), and he realizes that this number is only going to get bigger. Now he has a big marketplace in mind (people who use search engines) and he wants to solve the problem of getting better organic search results. Remember: Big marketplace, Big idea.

More than 70 million dogs in the United States.
78 million baby boomers. More than $50 billion in
annual industry revenue … see any opportunity?

For instance, consider Nick’s story mentioned earlier. He described the size of the pet industry in the United States. That it was consistently growing at between 4 and 6 percent annually, and that there were more than 70 million dogs in American households. That’s a big marketplace for pet products. If you were to note the emerging trends, like upscale urban kennels, better-quality pet food, GPS technology for locating lost pets, and so on, you could probably identify several opportunities worth pursuing. They would all need to be market-tested and examined as viable business models, but it’s a better methodology for creating a start-up than thinking you are going to have an epiphany in the middle of the night.

If you have an idea, look at the potential market. How many people could buy your product or service? Is that market growing? Or, has it been disrupted by some new development? What are the key trends driving buying preferences? If you have no ideas today, that’s okay. Pick a market or industry you are passionate about, and do your homework. Identify the industry and get to know the market so well that you can “see” the existing problems and the opportunities. Then craft an idea or two out of that analysis and test it with potential customers via a prototype. Based on the results, you evolve, pivot, or abandon the idea. Welcome to the world of entrepreneurship.

MARKETS, MARKETS, MARKETS

If you have ideas for new products and services, consider them in the context of their market. Markets, or marketplaces, can be a group of companies that make up an industry, a physical place like a mall, or a large group of customers. So when you think of a potentially great product or service, or perhaps a solution to a current problem, put that idea into a marketplace. Here are some simple questions to ask yourself:

• Can I easily test my idea in the marketplace?

• Is the market easily defined?

• Can I reach people in the marketplace easily?

• Is the market growing?

• Is the marketplace being disrupted?

• Is the marketplace fragmented?

With the LeanModel Framework in mind, target a favorable market or come up with a low-risk strategy in a potentially unfavorable market. You really can’t put together a business strategy on an idea unless you understand the marketplace and its potential customers. The more you examine that potential marketplace, the more you will learn. You will then spot something that you can test with a LeanModel Framework, and you’ll either fail fast or potentially win big.

ITERATION, EVOLUTION, OR REVOLUTION?

Too many entrepreneurs think that, to have a successful start-up, they need to create something the world has never seen before. So, they spend a large amount of time thinking of solutions in search of problems or marketplaces. It would be better if they focused on large markets (customers), trends, or the disruption of a marketplace caused by an early leader or a technology shift. Then they could direct their energies toward solving both existing and future problems in that marketplace.

Let me put it into perspective. As I’ve mentioned before, Google was not the first search engine. Apple did not launch the world’s first MP3 player, smartphone, or tablet. Facebook was not the first social media company. Chipotle was not the first restaurant to serve Mexican food. Kashi did not invent cereal. Starbucks did not create the first café. But they all have something in common. They all iterated or evolved a product or service beyond its current state. They added improvements that the marketplace both wanted and needed.

It takes something pretty amazing and insightful (or years of research and effort) to create a revolutionary product or service. Revolutionary products do create or change entire marketplaces and new ecosystems evolve. Examples of such revolutionary products include the refrigerator, the typewriter, the cellphone, the personal computer, the Internet, and so on. Probably only a few thousand products in the history of mankind have been truly revolutionary. Yet we have millions of products. So why do so many entrepreneurs think they have to create something revolutionary? Is there a “myth of creativity” that says entrepreneurs have to create something the world has never seen before in order to be successful? Entrepreneurs: Consider iterating an existing product or service in a large marketplace. More often than not, that is what drives most successful start-ups.

Figure 8.1 Innovation Outcome Paths for Recognizing Growth Opportunities

Take a look at Figure 8.1. It shows the best path for start-ups as examining opportunities with existing products and existing customers, and looking for “problems” that customers are currently tolerating in that marketplace. It forces you to understand the marketplace and its customers and the existing problems; only then do you begin to examine potential improvements or enhancements.

For example, you look at Myspace and the social media trend to make improvements to a potential Facebook; that’s evolutionary. You examine the many complex and bulky MP3 players for sale in a growing digital music marketplace and you make an iPod. If you’re successful, then you can grow that marketplace and attract even more customers.

Revolution in the marketplace is a bit harder to accomplish. You are wandering into a region of either creating a new product or creating “new” customers for a product or service that did not exist before. Is this where we would put Amazon.com? Prior to its appearance, books were sold in brick-and-mortar establishments or through book clubs. So, selling books was not new; selling them online was new. Ordering them via the Internet and having them delivered to your door was what was new. While the Internet was revolutionary, Amazon.com was an evolutionary start-up that leveraged the Internet and a new e-commerce and distribution system to deliver an existing product.

If you are a potential or current entrepreneur, your next opportunity is probably not going to come from an epiphany. It will come from examining large, emerging, or disrupted marketplaces. It will come from understanding the trends and defining the problems that customers are having with the existing situation. These are the kinds of questions you should be asking yourself, especially in regard to today’s trends:

• Will people continue to shop using their smartphones?

• Is the $50 billion pet industry in the United States going to continue to grow?

• Will renting things hourly (i.e., cars, services, homes) continue to grow?

• Is eating organic health food going to continue as a preference?

• What other products can leverage GPS technology?

• What else will the 14- to 18-year-olds consume via social media?

• What is the impact of more than 1 billion photos being uploaded to the Internet every day?

• What services will baby boomers need in the next 10 years?

• Do young people understand and grasp the importance of financial investing?

• What is the effect of multimedia technology on e-books?

• What is the future of online education?

• What needs to be improved regarding online dating services?

• What fitness trends will evolve and which ones are emerging now?

You can see what I am suggesting. Whatever you are passionate about, focus on the existing markets and customers, and look to solve their problems by iterating a current product or service. Then test that product or service via a rapid prototype using real customers. That investigation may yield a solid start-up opportunity. Perhaps, just by walking “down the corridor” of a product or service iteration, you may create something evolutionary—or perhaps even revolutionary.

KEY ELEMENTS IN FINDING OPPORTUNITIES

To provide some guidance in your quest for defining opportunities, here are some perspectives, tools, and resources. These should help you find, define, and perhaps position your opportunity as a new start-up in the marketplace.

Trends—Do You See Them?

Invariably, conversations about entrepreneurship turn to the subject of trends. How is it possible to identify and track so many trends in multiple industries and across so many customer segments? Well, you do need to be insanely curious. It helps if you live long enough; age and experience lend perspective to anyone’s point of view. Seriously, though, my passion for and curiosity about trends (versus fads, which come and go in short periods) comes out of my branding and marketing experience.

For most of my career, clients rewarded me and my marketing agencies for leading them through their current marketplace toward where the market was going. In quite a few cases, we spotted early trends and helped create new marketplaces. In other cases, we repositioned the product or service to meet changing customer wants or needs. I learned over time to create multiple streams of information from different sources to better help me “see” trends forming. And when the information coalesced, I followed the trend for one or two years to see how it could change the industry. It is still beyond me that Blockbuster could not see the trend of watching movies online— did they never spend time with younger customers?

Look at what you and your friends, and the people around you, are reading, using, consuming, and wearing. Your sources could be the following:

• Daily/National Newspapers

• Industry Publications

• Your Professional and Personal Networks

• Retail/Online Environments

• Industry Reports on Key Vertical Industries

• Books on Emerging Trends

• Talking to People (always)

• Trade Shows and Key Events

• Online Resources Like TrendHunter

• Google Alerts and Google Trends

Bringing the Trend Information to You

I hear what you are saying: “I can’t possibly do everything you just mentioned.” Yes, you can. The question is whether you are curious or passionate enough to change an industry—or even just a neighborhood. Nothing happens by accident. You design your luck. Guess what? Being an entrepreneur usually involves hard work and perseverance.

Okay, let’s assume we are all very busy. How can we leverage technology to bring information to us, or at least condense it? One of the things I recommend is routinely visiting websites that either cover trends or provide insights into major customer segments or industries. I visit their website and subscribe to their email newsletter TrendHunter. It tracks trends and offers perspectives on trends, as well as showcases new products. In addition, you can obtain trend reports on quite a few trends; in fact, they track hundreds of trends. Other online usage industry reports/websites, like ComScore, also give insights into what people are doing online or on their mobile phones. The sources are out there. Find them.

I don’t know exactly how I became aware of it, but about five years ago I discovered Google Alerts. This amazing service sends a summary email of a subject term you have established via their simple registration tool. I get Google Alerts weekly on more than 20 subjects that I am tracking. They include general subjects like entrepreneurship, online marketing, and branding, as well as broad subjects at an industry level (i.e., pet industry, mobile applications) and niche subjects (e.g., GPS pet tracking). The beauty of it is that this service is free.

Because you can choose the type of information that comes to you (I just choose articles), you can quickly read what you are interested in and then discard the email. Then the next week, there’s a fresh batch of Google Alerts in your interest areas that appeared online in just the last week. By the way, this selection of news is a trend in the making; in a few years, we will probably no longer search the Internet and troll websites for content, it will be brought to us. Websites as we know them now will become less valuable and “custom” content distribution will be the norm. Probably all new interfaces that will involve audio and video. I am sure there are several entrepreneurs working on this type of solution right now.

Another online tool I find useful and fascinating is Google Trends. Being the dominant search engine, Google has its privileges and they know what people are searching for all the time. Google Trends allows you to type in a search term and see how many times that search term has been entered by others into the Google search engine. The search data is by year, since 2004, as well as by country and by region. Oh, and you can compare two search terms to see the relative comparison in online searches. While online search terms are not 100 percent indicative or reliable as regards market trends, it does give some insight into what people are looking for. And if you monitor those searches, you might get an indication of a trend forming.

As an example, let’s look at a Google Trends search comparison between Netflix and Blockbuster. The time period is 2004 to late 2013. If you had been tracking these two companies (based on consumer search terms” Blockbuster” versus “Netflix”) between 2004 and 2006, while also looking at the trend of people watching movies on their computers, you would have observed the classic “hockey stick” trend line forming and taking off in 2007. In that year, Netflix search terms crossed the Blockbuster “line” for the first time in terms of search volume.

What does this mean? Well, everyone thinks Netflix just appeared yesterday. But the significant trends can take time to grow. And while Netflix started with very early technology adopters, little did they know that their real customer base would be 16- to 30-year-old individuals and mass-market folks who were getting fed up with their cable fees. The major competitor to Netflix used to be Blockbuster. But with Blockbuster gone, the industry has changed. Now Netflix has to innovate to keep up. By the way, I hope the cable industry has a back-up plan. Matter of fact, that probably includes the entire traditional entertainment industry as we know it today.

Understanding the Entire Marketplace

Even though we coach entrepreneurs and teach students to look for niche customer segments in an industry when they are looking to launch a start-up, I love to study large marketplaces. My definition of a marketplace is pretty loosely defined; it extends to a large group of similar customers or a group of companies that form a large industry. Invariably, both customers and industries go through change. So, usually when one new product or service invades an industry or customers adopt a new product or service, there are multiple effects. You have to step back, look at the bigger picture, and see what might happen inside the entire marketplace.

When you first saw a smartphone, did you
“see” mobile applications and accessories too?

Let’s assume it’s the year 2000 and the first smartphones have appeared in the market, touted by early adopters as the next best thing ever. We would have been looking at either a Blackberry or a Nokia, for the most part. And while we were fascinated, the price point was high and the relative speed of data over the telephone networks was still relatively slow. But history tells us two things. Prices always come down. And according to Moore’s law, technology speeds double every two years.

So if we fast-forward to 2005, we start to see smartphones coming into the broader marketplace. Are they getting wider adoption? Who is buying them now? But what about the whole marketplace? At this point, did you see the mobile applications and accessories that followed in their wake—or how large those markets would become? Mobile applications did over $12 billion in business in 2012, while the smartphone accessories market was estimated at over $20 billion that year. I wish I had created Angry Birds. Or designed a smartphone case by 2008, in time to see the market really take off with the launch of the Apple iPhone.

If we had looked at smartphone searches via Google Trends in 2007, we would have seen the beginning of the upward curve that indicates tremendous consumer interest. It’s not authoritative by itself, but when that is combined with all the other data and research, and discussions with customers and industry professionals, we would have seen it coming. Then we could have decided what kind of company we could create to leverage this new “ecosystem” called the smartphone.

Know the Major Customer Groups

Do you look at large customer segments? Do you even know who they are? Millennials will number more than 80 million by 2025 in the United States; that’s three out of every four employees in the workplace. And I mentioned earlier that there are about 78 million baby boomers, and they feel they are not going to die. They will, of course, but in the meantime, this large customer segment is changing and helping to create several new industries. Whether its fitness, health food, financial services, automotive luxuries, technology, or home automation/monitoring, they are having a huge impact on several marketplaces right now. And they will continue to do so for the next 10 to 15 years. What do you know about them? If you spent some time studying either the baby boomers or the millennials, you will begin to see trends forming across this customer segment and into several industries. Then you can begin to analyze what new products or services these groups are going to want to consume. Do yourself a favor and gather enough information so as to determine the major trends here. Then ask yourself what opportunities exist for a start-up company to leverage one or two of those key trends. You just might win big.

Industries Changing and Emerging

For an entrepreneur, there is always opportunity. You just need to look at something hard enough. But as you look for opportunity, you need to look for gaps in the marketplace. One of the tools I have found useful is a simple marketplace quadrant chart. It uses two key attributes (important to the customer, not you). You plot the current market competitors, perhaps even your own company if you are in the marketplace. Then you look for major gaps where one of two things might be happening: (1) the marketplace is shifting due to industry players; or (2) customer wants are changing and no one is noticing just yet.

Creating a chart like this seems really simple, and it is, but it serves well as a visual reference for where companies in an industry are positioned. Unless you create a chart like this that everyone on your entrepreneurial team can agree on, you’ll just have a lot of opinions from everyone.

As an example of how it works, let’s look at the restaurant industry and examine the segment called “fast casual.” As customers become more health conscious and want higher quality, this segment has grown rapidly and is now highly competitive. Imagine if you were a start-up and were looking at this marketplace. You would not want to position yourself in the market right next to or in the same place as your key competition. You need to look for an area of the market that has a gap, a place you can call your own in the customer’s mind.

Imagine that you are a start-up called Chipotle. You know what the competition looks like: Rubios. Baja Fresh. Taco Bell. You notice that customers want something healthier, slightly higher quality, and they want it fast. So, you target an area in the market with a slightly higher price point and slightly higher quality. Then you develop a solid business model with a competitive edge via a smaller retail footprint, smaller menu, fewer ingredients, less labor to prepare, and a culture that rewards managers. I don’t know if you can even recall how long Chipotle has been around, but the chain just passed $3 billion in annual revenue. For a company that was started via one location in 1993, that’s pretty good. Figure 8.2 shows the chart we’ve been discussing.

When you see a new product enter the marketplace, look beyond the initial product and ask yourself what accessories, add-ons, applications, and complementary products or services might be driven by this core product. As I suggested earlier, if you had noticed smartphones in the early 2000s, would you have seen those icons on the displays? Would you have stared at those icons and said, “What are mobile applications?” Would you have noticed the early, clumsylooking protective cases?

Figure 8.2 Initial Target Marketplace Chart for Start-Up

For that matter, would you have guessed that people might someday do their daily fitness run with a device strapped to their arms? Today, there are a large number of wearable fitness devices that measure the distance run and calories burned.

You can apply this type of analysis or thinking to every new product or service you see enter a marketplace that you might care about. Almost all new products or services will have a relatively small impact at first (even the first Apple iPod was not considered to be successful in its first year). But some of these products will create entirely new industry segments—and therein lies tremendous opportunity.

The Perfect Storm…Trends Crossing Customers and Industries

The holy grail of entrepreneurship opportunity is uncovered when a major shift occurs across a large target population and simultaneously that same trend is changing or impacting a large industry. For example, think of the demographic of 16- to 30-year-olds consuming content on their laptop computers and at the same time the distribution of content is dramatically shifting.

Think of those previously mentioned 78 million baby boomers buying pets to replace their college-age children and the simultaneous changes to the pet industry—pet health insurance, pet-tracking devices, organic FDA-approved dog food, dog-walking/sitting services for condo owners, new types of kennel services. These are times when customer developments and industry changes coincide. The trend/industry “intersection” line is there, can you see it?; see Figure 8.3.

All kinds of opportunities exist for a host of new companies. Consider that next largest segment of the U.S. population, the 18- to 35-year-olds, the millennials. Look at the trends they are shaping or are being affected by. Whether it’s music, fashion, technology, food, or entertainment, they are disruptors. If the current companies in these marketplaces don’t step up and listen to this large group of customers, don’t really understand the impact of their potential on forthcoming trends, then they will be rendered irrelevant. That’s an opportunity for entrepreneurship.

Figure 8.3 Perfect startup scenario: When trends cross target customers and industry in the same marketplace.

ENTREPRENEUR INSIGHT

Sometimes there is a price to be paid for not seeing trends correctly. In early 1997, our marketing agency was in the middle of “blowing” up Amazon.com via the perfect intersection, albeit early, of customers, industry, and a trend called e-commerce. I attended a major book publishing trade show event to get a better understanding of how traditional competitors were looking at this new online world. After taking in a variety of workshops and events, as well as visiting company booths and listening to speakers, I found it apparent that the industry was ignoring the online sales potential. I stood next to the CEO of a major company and asked his opinion about the nascent online book industry. He replied, “We know what the customers want and we are building 25,000-square-foot stores to accommodate them.” Then the CEO of Border’s walked away.

KEY TAKEAWAY

There is opportunity all around you. Examine the marketplaces that are emerging, growing, or being disrupted. Couple your curiosity with passion and gather as much information as possible on customer segments so as to see the opportunity clearly. Then act on it.